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Banking and Finance

Amending the Reporting Requirements of Form ADV & Modifying Pay to Play Rule

by Marc Mehrespand and Joshua O'Melia

Various companion releases implementing various provisions of the Dodd-Frank Act. Form ADV amendments, Rule 206(4)-5, and registration requirements for private funds.


In much anticipated companion releases implementing various provisions of the Dodd-Frank Act, the U.S. Securities and Exchange Commission (the "SEC") adopted several new rules under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). Among other matters, the new rules implement the registration requirements of advisers to hedge funds and other private funds with the SEC, enunciate new reporting requirements for such advisers, as well as reporting requirements for "exempted advisers" ("Exempt Reporting Advisers"), reallocate regulatory responsibility and define exemptions for advisers to venture capital funds, private fund advisers with less than $150 million under management and foreign private advisers.

The SEC also took the opportunity in the Adopting Releases to adopt substantial changes to Part 1A and Schedule D of Form ADV, requiring advisers to provide additional information on three areas of their operations:

  • the private funds they advise;
  • the data that advisers provide about their advisory business; and
  • advisers' non-advisory activities and their financial industry affiliations.

In sum, the changes dramatically increase the amount of information that SEC-registered investment advisers - and particularly advisers to private funds - must disclose on their Form ADV.
The SEC also adopted certain amendments to the "pay to play rule," Rule 206(4)-5.

Private Fund Reporting (Item 7.B. of Form ADV, Part 1A)

The SEC made significant changes to Item 7.B. of Part 1A of Form ADV, which now requires an adviser to complete Section 7.B. of Schedule D for each "private fund" that the adviser (and not a related person) advises. As a result, the SEC no longer will require an adviser to report on funds that are advised by affiliates, which likely will reduce, in some cases, numerous pages of unilluminating disclosure. Second, to avoid multiple reporting for each private fund, Item 7 permits a subadviser to provide less information about a private fund for which an adviser already is reporting on its Schedule D, and permits an adviser sponsoring a master-feeder arrangement to submit a single Schedule D for the master fund and all of the feeder funds that otherwise would be submitting substantially identical data. Finally, the SEC is modifying Item 7, as proposed, to permit an adviser with a principal office and place of business outside the United States to omit a Schedule D for a private fund that is not organized in the United States and that is not offered to, or owned by, United States persons.

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Marc Mehrespand is a partner at K&L Gates LLP. He represents investment advisers, banks, broker-dealers and other participants in the financial services industry in a practice that encompasses the major federal securities and commodities laws as well as general corporate law. In particular, Mr. Mehrespand regularly works with clients to form and operate U.S. and offshore private investment funds.

Joshua O'Melia is an associate at K&L Gates LLP. He concentrates his work in the investment management practice, with a particular emphasis on hedge funds, private equity funds and compliance-related matters involving investment advisers and broker-dealers.