Bagnall on Private Fund Registration

Proposed legislation would require managers of private investment funds to register with the SEC as investment advisers under the Investment Advisers Act. Currently, most private fund managers rely on the so-called private adviser exemption. The new legislation would eliminate the exemption and require the registration of managers of hedge funds, private equity funds, venture capital funds, and other privately placed asset-backed instruments. In this Analysis, Robert G. Bagnall discusses what adviser registration will mean for private investment fund managers. He writes:
Requirements Applicable to Registered Advisers
     Fund managers that are required to register would become subject to a host of regulatory requirements and prohibitions that are specifically applicable to advisers that are registered or required to register. The key requirements are summarized below.
     Registration of Adviser. An investment adviser that meets the criteria for registration with the SEC (as opposed to the states) must register with the SEC as an investment adviser under Section 203A of the Advisers Act using Form ADV (17 C.F.R. 279.1). For federally registered advisers, Form ADV has two relevant parts: Part 1A, which must be filed electronically with the SEC through the Investment Adviser Registration Depository (IARD); and Part II, which currently may be, but need not be, filed electronically. The IARD filing process also accomplishes required notice filings at the state level by SEC-registered advisers. Advisers that do not file Part II electronically are "deemed" to have filed it so long as they complete the form and maintain a copy in their records.
     Deciding Which Firm to Register. Identification of the adviser entity to be registered can be complicated with firms that manage multiple private investment funds. Typically, each fund has a separate general partner or managing member, which has legal authority to manage the investment activities of that fund, but a separate management firm provides the personnel and support for each general partner or managing member. In the case of hedge funds, the SEC staff has already indicated that the main management firm that services all of the general partners or managing members could register, without separate registration of each general partner or managing member; this position was subject to the conditions that each general partner or managing member and its personnel were subject to SEC inspection, complied with the Advisers Act, and were subject to the adviser's supervision and control.
     Compliance Programs. Rule 206(4)-7 (17 C.F.R. § 275.206(4)-7) under the Advisers Act requires every registered adviser to adopt a compliance program satisfying four main requirements.
  • Written Compliance Policies and Procedures. Each registered adviser must adopt written policies and procedures reasonably designed to prevent and detect violations of the Federal securities laws. The specific details that go in each firm's policies and procedures can and should differ from firm to firm because of the individual demands and conflicts of their businesses. For example, those of private equity fund managers can differ in several respects from those for hedge fund managers.
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