Dodd-Frank Act Amendments to Investment Advisers Act
In June 2011, the Securities and Exchange Commission (SEC) adopted the Dodd-Frank Act Amendments to the Investment Advisers Act, which SEC Chairman Mary L. Schapiro insists “will fill a key gap in the regulatory landscape” by providing transparency in the work of hedge fund and other private fund managers – who operated to this point “under the radar and outside the vision of regulators.” The new rules require hedge fund advisers to register with the SEC. They also create new registration and reporting exemptions for some advisers. The rules also reapportion oversight of hedge fund advisers between the SEC and state governments.
Before the amendments to the IAA, private fund advisers with fewer than 15 clients did not need to register with the SEC. Also, the law defined a client as a fund, not as the people investing in the fund. Thus, even though an adviser might be overseeing hundreds of millions of dollars worth of investments within relatively few private funds, the adviser had no SEC oversight. The amendments eliminate this exemption. These advisers are now obligated to register with the SEC and fall under the SEC’s oversight in the same manner as advisers who previously had to register.
Reporting to the SEC
In addition to requiring that private fund advisers register with the SEC, the new amendments also mandate that the advisers report certain information to the SEC, in order to assist the SEC in its regulatory and oversight mission. The advisers registered with the SEC must disclose basic organizational information of each fund they manage, including: the type of fund it is, the size of the fund, the ownership of the fund and the adviser’s activities with the fund. The adviser will also need to identify five individuals or entities that serve “gatekeeper” functions for the funds they manage: auditor, prime broker, custodian, administrator and marketer.
Advisers must also disclose the types of clients they advise, information regarding their employees and the nature of their advisory activities. Perhaps most importantly, advisers must also disclose any business practices that may constitute a conflict of interest, such as client referral compensation agreements or use of affiliated brokers. Finally, advisers must also disclose their non-advisory business activities and financial industry affiliations so that the SEC may monitor for possible conflicts of interests and threats to investors.
The amendments create three new categories of advisers who are exempt from the general reporting requirements to the SEC:
- Those who advise solely to venture capital funds
- Those who advise solely to funds with less than $150 million in assets in the U.S.
- Some foreign advisers without a place of business in the U.S.
Advisers in these categories will still be required to report to the SEC periodically, using an abbreviated form on which the adviser will inform the SEC about the adviser’s owner and affiliates, as well as information about the funds the adviser manages and any business activities that might pose a conflict of interest and suggest a significant risk to clients. Finally these advisers must report any disciplinary history of employees that may reflect negatively on the firm.
The overall goal of the amendments is to protect investors from adviser misconduct and reduce the possibility of fraud by introducing more transparency and oversight. To this end, the SEC has had little knowledge of private fund advisers and the new rules aim to rectify that situation.