Hedge funds were a key subject of debate during the
passage of Dodd-Frank. While the funds were not tied to the causes of the
market crisis, they do represent large pools of assets which can impact the
market. Regulators frequently note that they have inadequate information about
the funds. Accordingly, the financial reform bill contains provisions focused
on registration of the funds and record keeping.
For registration, the legislation sets a minimum asset
threshold for state regulated investment advisers is $100 million. If however,
the adviser is not subject to registration and examination in their home state,
or would be otherwise required to register with fifteen or more states, the
minimum is $25 million. The Act eliminates the private investment adviser
exemption. It also eliminates the intrastate exemption for advisers with any
private fund client.
All registered investment advisers will be required to
appoint a chief compliance officer and establish compliance programs. In
addition, they must adopt a code of ethics.
The burdens of registration and inspection may be eased
for mid-sized registrants. The legislation requires the SEC to issue
regulations to take into account the size, governance and investment strategy
of these funds. The assessment is to focus on whether these funds pose a
systemic risk. The registration and examination procedures are to be designed to
reflect the results of the risk assessment. Mid-sized private funds is not a
The new legislation contains a number of exemptions from
registration. These include:
The legislation gives the SEC authority to conduct
periodic inspections of private funds and review all of their records. The
Commission is also authorized to conduct special examinations as it deems
necessary. In addition, advisers are required to maintain specific records
including those regarding: 1) the amount of assets under management, 2) the
type of assets held; 3) the use of leverage; 4) counterparty exposure; 5)
trading and investment positions; 6) valuation policies and practices; and 7) those
deemed necessary by the SEC in consultation with the Counsel created by the
Act. The Act requires certain information to be shared with the Council,
although proprietary information is subject to enhanced confidentiality
The SEC is required to report to Congress annually on the
uses made of the data collected from registered advisers to monitor the markets
for the protection of investors and the markets. The SEC and CFTC are also
required, within one year, to have consulted with the Council and jointly issue
rules regarding the form and content of reports to be filed with each agency by
advisers registered with each. The provisions of this section of the Act are
generally effective within one year.
Finally, as in other sections of the legislation, it
directs that four studies be undertaken:
Yesterday's article on the latest Dell settlements states that neither settling
defendant relinquished his right to appear and practice before the Commission.
Yesterday, the Commission posted the litigation release related to the two settlements (dated
last Friday) which notes that Messrs. Davis and Imhoff agreed to be prohibited
from practicing before the Commission as accountants in related administrative
proceedings which will be filed. Mr. Davis has a right to apply for
reinstatement after five years while Mr. Imhoff will have that right after
three years. An
addendum was added to yesterday's article noting this important part of the
settlement after I was notified about it by the staff. Thank you to the staff
for the notification.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.