Most private fund managers and registered investment advisers who advise funds based in the United States will be affected by the revisions to the Investment Advisers Act of 1940 contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July 2010. The major impact will be felt by funds, fund managers and advisers in the form of new registration requirements and different, more highly defined, exemptions from registration. Dodd-Frank also mandates increased compliance obligations for those required to register, enhanced record-keeping requirements for both registered and exempt managers and funds, and, in some cases, a requirement to file reports detailing information necessary to assess systemic risks.
The most direct impact of Dodd-Frank is the elimination of the exemption for registration for an investment adviser with "fewer than fifteen" clients. This broad stroke eliminates the basis upon which hedge fund managers have traditionally been exempt from investment adviser registration. In place of the "fewer than fifteen" client exemption, Dodd-Frank carves out exemptions for investment advisers based upon either assets under management or the type of fund advised.
The most significant exemptions are:
1. Investment advisers with assets under management of less than $25 Million are not permitted to register with the SEC. Any investment adviser that previously registered must de-register if the asset under management test is not met. An adviser may still have to register under state law.
2. Managers with assets between $100 Million and $150 Million who solely advise private funds and do not advise any investor-driven investment accounts are exempt and may choose to remain unregistered or de-register if already registered.
3. Foreign hedge fund managers are exempt if they meet a number of other specific criteria.
4. Venture capital fund advisers are exempt. These are defined in a SEC final order as being those who invest only in equity securities of private operating companies where they acquired at least 80% of the equity, do not employ long term leverage, do not permit redemption of the interest of pool participants except in certain specified circumstances, hold themselves out as a venture capital fund, do not advise mutual funds or business development companies, and do not employ certain specified levels of leverage.
5. A family office, defined by final SEC Order as a company that has no clients other than family clients, is wholly owned and controlled by family members, and does not hold itself out to the public as an investment adviser, is exempt.
Of course, fund managers required to register for the first time by virtue of Dodd-Frank are subject to the SEC requirements regarding the establishment and maintenance of a compliance program, including the designation of a chief compliance officer and the adoption and review of written supervisory procedures. Additionally, both registered and unregistered advisers who manage funds must retain general records including assets under management, types of assets held, valuation policies, historical trading data, investment positions, side letters or other collateral arrangements, counter-party risks, and use of leverage.