SEC Registration Issues

SEC Registration Issues

New Fund Manager Registration Requirement - under the Dodd-Frank Act, the previous exemption from registration for fund managers was eliminated.  This generally means that hedge fund and private equity fund managers will be required to register as investment advisers with the SEC.  Recently the SEC has proposed rules with respect to the new registration requirement.  Broadly this means:

  • investment managers with less than $100MM AUM will need to register with the state securities commission unless an exemption from registration applies;
  • investment managers with more than $100MM AUM will need to register with the SEC unless another exemption applies; and
  • investment managers only to hedge funds or private funds (i.e. no separately managed accounts) with less than $150MM AUM will not need to register with the SEC, but may need to register with the state securities commission.

The SEC has proposed transition rules for managers who are moving to or from SEC registration.

The comment period on the proposed regulations closed recently and we expect to see final regulations promulgated within the next couple of months.  Even if exempt from adviser registration, fund managers may fall into a new reporting category called "exempt reporting advisers."

Exempt Reporting Advisers - under proposed Rule 204-4, there is a new category of advisers called "exempt reporting advisers" ("ERAs") which are generally advisers (i) only to venture capital funds or (ii) to private funds (hedge funds and private equity funds) with less than $150MM of AUM combined.  These ERAs will still be required to report certain information on Form ADV including information about the firm, its clients, and its owners.  ERAs would be required to make annual and periodic updates and be subject to a filing fee.

New Form ADV Part 2

In 2010 the SEC created a new and completely different Form ADV Part 2.  The old form included "check the box" representations and longer explanations in Schedule F.  The old form has now been replaced by a long form plain English discussion of the adviser's business.  While the basic type of information provided to customers/investors remains essentially the same, the new format adds a significant amount of length to the brochure.  In addition to the firm part of the brochure, managers will also need to complete a supplement for each of the firm's IA representatives who meet certain activity requirements.   The changes to new Form ADV Part 2 are fairly significant and we recommend that firms allocate plenty of time to update the form.

Managers should also note that the SEC has estimated it will cost managers between $3,000 and $5,000 to complete the new form.  Based on a couple of revisions we have already completed, we feel this is an accurate estimate for many private fund managers.  

Form PF

As part of the Dodd-Frank Act, investment advisers will be required to file reports containing information on their businesses for the assessment of systemic risk.  Accordingly, the SEC, in conjunction with the CFTC, recently proposed a new Form PF which SEC registered investment advisers will be required to file on either a quarterly or annual basis, depending on AUM.  The form as currently proposed requires managers to provide detailed information on their investment strategies and positions.  There is likely to be significant pushback from the investment management community and reporting requirements may change when the final form and regulations are promulgated.

CFTC Proposals

Just recently the CFTC proposed to rescind the current 4.13(a)(3) and 4.13(a)(4) exemptions from CPO registration.  Rescission of these widely used exemptions means that more investment managers would be required to register with the CFTC.  The CFTC also proposed rescinding the 4.5 exemption (applicable to mutual fund managers).  

Additionally, CPOs and CTAs would be required to file Form PF (if also registered with the SEC) as well as new Form CPO-PQR and Form CTA-PR.

Yearly Updating

Annual ADV Update for IA Firms - most registered IA firms (state and SEC) will be required to submit an annual update of Form ADV by March 31.  Most of these firms will also be required to submit the new Form ADV Part 2 which, as discussed above, is more time consuming to prepare.  We recommend that registered IA firms begin the updating process with their law firm or compliance consultant by the end of this month.

CFTC & NFA Annual Compliance - the beginning of the year means CFTC registered firms will need to focus on quarterly and annual compliance matters.  Major items include: quarterly CPO reporting, quarterly email review (if applicable under the firm's compliance program), yearly review of compliance manual and procedures, NFA self-examination checklist, privacy policy review and delivery to clients, ethics training, annual reports and audit (CPOs), and bunched orders allocation procedure review (CTA).  Note: some CPOs may be able to apply for exemptive relief from the annual audit requirement.

 Other Items

SEC Releases Two Studies - the Dodd-Frank Act required the SEC to produce two studies which were released in late January.  In the SEC study on Uniform Fiduciary Duty for Broker Dealers, the SEC staff recommended that the SEC should apply a uniform fiduciary duty with respect to both IA and BD firms which provide personalized investment advice with respect to securities to retail customers.  The staff also recommended harmonizing a number of regulations which should be applied consistently to similarly situated BDs and IAs.

In the SEC study on Enhancing IA Examinations, the SEC staff dealt with the issue of the SEC's limited budget and how the Commission should deal with IA examinations in light of insufficient resources.  The staff recommended that Congress direct the SEC to take one of three courses of action: (i) impose user fees on SEC registered investment advisers, (ii) authorize FINRA or another SRO to examine SEC registered investment advisers, and/or (iii) authorize FINRA to examine dual registrants (firms registered as both an IA and BD).  We are likely to hear much more on this issue in the coming months.

State IA Exemption for Hedge Fund Managers - NASAA, the organization generally representing the state securities divisions, recommends that states should amend their investment adviser regulations to exempt from registration only those managers who provide investment advice solely to Section 3(c)(7) hedge funds.  If adopted by any state, this would increase the number of firms required to register with the state as investment advisers.  Because the states are already having difficulties with their budgets and maintaining appropriate staffing levels for the current amount of registered firms, it is unlikely that many (if any) states will adopt the recommended model rule.

Other - the CFTC recently provided additional guidance to managers on disclosures for performance fees.

For assistance with any compliance, registration, or planning issues with respect to any of the above topics, please contact Bart Mallon of Mallon P.C. ( at 415-868-5345 or  Mallon P.C. is a law firm with a national client base and is focused on the investment management industry.  Our clients include hedge fund managers, investment advisers, commodity advisors, and other investment managers.  We also provide general business and start up legal advice and have an emerging practice in real estate and cleantech. 

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