New Investment Adviser and Swap Rules Proposed

November 19, 2010

The SEC proposed a series of rules that would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), including requiring certain advisers to hedge funds and other private funds to register with the SEC, requiring reporting by certain advisers that are exempt from SEC registration, increasing the asset threshold for advisers to register with the SEC and defining “foreign private adviser” and "venture capital fund."

Consistent with the Dodd-Frank Act, investment advisers with $100 million or more assets under management would have to register with the SEC.  Advisers below that threshold would have to register with the appropriate state(s), except for certain "mid-sized advisers." A mid-sized adviser meeting the following criteria would register with the appropriate state(s):

  • Manages between $25 million and $100 million for its clients;
  • Is required to be registered in the state where it maintains its principal office and place of business; and
  • Would be subject to examination by that state, if required to register.

Mid-level advisers not meeting each of these criteria would register with the SEC.

Advisers to private funds would be required to provide additional information including:

  • Basic organizational and operational information about the hedge funds they manage, including information about the amount of assets held by the fund, the types of investors in the fund and the adviser's services to the fund.
  • Identification of five categories of "gatekeepers" that perform key roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).

The following types of advisers will not have to register with the SEC:

  • Advisers solely to venture capital funds;
  • Advisers solely to private funds with less than $150 million in assets under management in the U.S; and
  • Certain foreign advisers without a place of business in the U.S.

The SEC proposed definitions of “foreign private fund” and “venture capital fund.”  Certain defining characteristics of a “venture capital fund” include only representing itself to investors as being a venture capital fund, not leveraging and not borrowing in connection with the fund’s investments, offering a high level of managerial assistance to companies and not offering redemption rights to investors.

The SEC has the authority to impose certain reporting requirements upon advisers relying upon either of the first two of these exemptions noted above ("exempt reporting advisers").  Under proposed rules, the SEC under this authority would require exempt reporting advisers to file, and periodically update, reports with the SEC, using the same registration form as registered advisers.  Rather than completing all of items on the form, exempt reporting advisers would fill out a limited subset of items, including:

  • Basic identifying information for the adviser and the identity of its owners and affiliates.
  • Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
  • The disciplinary history of the adviser and its employees that may reflect on their integrity.

Exempt reporting advisers would file reports on the SEC's investment adviser electronic filing system (IARD).

There will be a 45-day comment period, after which SEC staff will review feedback before a final vote is taken.  The SEC is required by Dodd-Frank to have the rules adopted by July 2011, but Chairman Schapiro at the open meeting proposing the rules stated that she hopes for the SEC to approve the rules well in advance of the deadline.

Click here and here for releases about the proposed invested adviser-related rules.

The SEC also proposed rules on security-based swap reporting and repositories:

Click here to access the release proposing security-based swap reporting rules.

Click here to access the release proposing security-based swap repository rule.


Investment Advisers, Regulatory