Now that the effective date of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) has arrived and the SEC has adopted rules implementing changes to the investment adviser registration regime, the landscape can be relatively confusing. For investment advisers currently registered either with the state in which it maintains its principal office or with the SEC, the new rules are fairly easy to apply, particularly in light of the transition rules adopted on June 22, 2011 by the SEC as explained in Page Perry's previous post. For others, however, the application of the new rules will prove more complicated, particularly for those advisers whose principal office and place of business are in states that have unusual registration or regulatory provisions.
Take, for example, Wyoming. Since that state does not provide for investment adviser registration, it has always been somewhat of an anomaly, even before Dodd-Frank. Section 203A(a)(1) of the Investment Advisers Act only prohibits registration with the SEC of investment advisers who have assets under management of less than $25 million and are "regulated or required to be regulated as an investment adviser in the State in which it maintains its principal office and place of business." Wyoming-based advisers must therefore register with the SEC regardless of their assets under management, unless otherwise exempt from registration under the Investment Advisers Act or a private adviser able to rely upon the transition rule provided in 203-1(e).
Another interesting example, and one affecting far more advisers, is New York. As of July 21, 2011, the date upon which Dodd-Frank went into effect, any investment adviser whose principal office and place of business is located in New York and which has assets under management of between $25 million and $100 million must now register with the SEC. This results from the operation of new Section 203A(2)(B) of the Investment Adviser's Act, which precludes registration by mid-sized investment advisers (those with assets under management between $25 million and $100 million), only if they are required to be registered by their home state and "would be subject to examination" in that state. Because New York requires registration but does not subject registrants to examination, mid-sized advisers must register (or remain registered) with the SEC. Once again, advisers may be able to rely upon the private adviser transition rule provided in Rule 203-1(e) or, if currently registered with the State of New York, the transition rule contained in Rule 203A-1(b)(1), which gives the adviser 90 days after the filing of its annual updating amendment to switch to SEC registration.
Minnesota presents another interesting situation. Originally, its securities division failed to report to the SEC whether or not it examined advisers, leading the SEC to tentatively conclude that the result would be the same as described for New York. Then there was a shutdown of parts of the state government, during which time it was not even possible to reach the securities division by telephone. Just before Dodd-Frank took effect, however, and even while the shutdown was still in effect, Minnesota advised the SEC that it does examine registered advisers. This kind of uncertainty suggests a thorny interpretation issue that could arise if Minnesota or any other state that is experiencing budget cuts actually stops examining advisers, even though they have the right to do so in theory. Under those circumstances, are those advisers "subject to examination" within the meaning of Dodd-Frank?
Assuming the answer is yes, or alternatively assuming Minnesota actually does examine advisers and continues doing so, the result in Minnesota is the same as for most jurisdictions: an investment adviser with its principal office and place of business in Minnesota and assets under management of less than $25 million may not register with the SEC. If it has assets under management between $25 million and $100 million, it may not register with the SEC unless at least one of the following conditions exist, any one of which requires registration with the SEC unless a separate federal exemption exists:
(a) It is exempt from registration in Minnesota under the Minnesota Securities Act;
(b) It advises investment companies registered under the Investment Company Act; or
(c) It advises business development companies filing elections under Section 54 of the Investment Company Act.
Note that private advisers may rely upon the Private Adviser Transition Rule found at Rule 203-1(e) and current Minnesota registered advisers may rely upon the transition rule at 203A-1(b)(1) to delay registrations until March 30, 2012.
Finally, of course, any state-registered adviser who would be subject to registration with fifteen or more states may choose to register with the SEC, so long as it has assets under management of $25 million or more. Private advisers in any state should remain aware that while they may rely upon 203-1(e) to delay registration with the SEC until March 30, 2012, that rule does not provide any relief from applicable state registration requirements. The result is that, until March 30, 2012, private advisers must either register with the states, find an applicable state law exemption, or rely upon the national de minimis exemption provided for in Section 222(d) of the Investment Adviser's Act, if applicable.