by Joseph Magnas
The Dodd-Frank Wall Street
Reform and Consumer Protection Act (the "Dodd-Frank Act") contains
numerous mandates for rulemaking and studies by the Securities and Exchange
Commission (the "SEC") and other governmental agencies. Accordingly,
many of the implications of the Dodd-Frank Act have yet to be realized.
One mandate relates to venture capital funds. Consistent with past legislative
and regulatory efforts to increase federal oversight over hedge funds and their
advisers, the Dodd-Frank Act repealed Section 203(b)(3) of the Investment
Advisers Act of 1940 (the "Advisers Act"). Prior to its repeal,
Section 203(b)(3) provided an exemption from the Advisers Act for certain fund
advisers, generally based on the number of clients of the adviser and whether
the adviser holds itself out to the public as an investment adviser. Advisers
that meet the conditions of Section 203(b)(3) are exempt from the onerous
recordkeeping requirements of the Advisers Act and are not subject to
examination by the SEC staff. Section 203(b)(3) is commonly referred to as the
private advisers' exemption.
Advisers of privately held hedge funds, private equity funds, venture capital
funds and other similar funds historically have relied on the private advisers'
exemption to avoid being subject to the Advisers Act. Since the credit crisis
of 2008, there have been a number of legislative and regulatory efforts to
regulate hedge funds; these efforts are intended to address any systemic risk
posed by hedge funds or other unregistered funds that form part of the
"shadow banking system." The need for increased regulation of hedge
funds is a matter that is subject to reasonable debate. However, efforts to
regulate hedge funds have threatened to affect other types of funds, funds that
do not pose the same systemic risks. The repeal of the private advisers'
exemption will result in many private funds becoming subject to the Advisers
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