There has been a lot of focus on the effect of Dodd-Frank
on private fund managers. Many had relied on the small adviser exception from
registration. If you had fewer than 15 clients (funds) you were exempt from
regulation. With the loss of that exclusion, the industry has been looking to
other ways to fall outside the requirements of registration.
One may be to take another look at the definition of
investment adviser and see if it really applies to what your fund does.
of the Advisers Act defines an "investment adviser" as
"any person who, for compensation, engages in the
business of advising others, either directly or through publications or
writings, as to the value of securities or as to the advisability of investing
in, purchasing, or selling securities, or who, for compensation and as part of
a regular business, issues or promulgates analyses or reports concerning
Let's break it down into its three components:
A person or firm must satisfy all three elements and not
fall into one of the half dozen statutory exclusions to be regulated under the
For fund managers, the "compensation" is easily
fund manager is giving advice to its funds. Presumably, they are not doing
it for free.
The term "securities"
is very broadly defined in Section 202(a)(18)
of the Investment Advisers Act.
Whether a person providing financially related services
is an "investment adviser" is a facts and circumstances test. In Release IA-1092
(.pdf) the SEC took a look at whether financial planners are investment
advisers and provided some ways to look at whether you are in "engaged in the
business" of "providing advice about securities."
Here are some activities that the SEC believes falls into
"Engaging in the business" of providing investment advice
is a little trickier. Giving advice need not be the principal business
activity. "The Giving of advice need only be done on such a basis that it
constitutes a business activity occurring with some regularity. The frequency
of the activity is a factor, but it is not determinative."
It comes down to how often a fund manager gives advice to
the fund about securities as part of the fund's operations and investment
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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