The following are some frequently asked questions concerning the requirement that private fund advisers register as investment advisers with the U.S. Securities and Exchange Commission (“SEC”). The information presented here is general in nature and not a substitute for consulting with an investment compliance professional regarding the SEC’s requirements and your unique circumstances. These Frequently Asked Questions do not cover any possible state requirements. This webpage is not intended to be an all-inclusive analysis of the private fund adviser registration requirements, and you should not rely solely on its contents.
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Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) eliminated the private adviser exemption previously available under the Investment Advisers Act of 1940 (“Advisers Act”) and required the SEC to establish Rules requiring advisers to “private funds” to register under the Advisers Act.
An issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act.
The new rules were effective July 21, 2011. However, firms which are required to register with the SEC had until March 30, 2012 to do so. If your firm was subject to the registration requirements prior to March 30, 2012 and did not register, immediate action must be taken to comply with the registration requirements.
Yes, there are several exemptions to registration requirements but for purposes of this FAQ, we are assuming the private fund adviser is not required to register at the state level and focusing on the three passed in connection with the private fund adviser requirement: (1) venture capital fund advisers, (2) foreign private advisers, and (3) private fund advisers with less than $150 million in assets under management.
To qualify for the venture capital fund exemption, a private fund must (1) hold no more than 20 percent of the fund’s capital in commitments obtained on the secondary market (other than short-term holdings); (2) limit leverage to short-term borrowing; (3) not offer redemption or other liquidation rights to investors; (4) hold itself out as pursuing a venture capital strategy; and (5) not currently be registered under the Investment Company Act of 1940 and not have elected to be traded as a business development company. There is also a grandfathering provision that exempts any pre-existing fund as a venture capital fund if the fund represents itself as one that pursues venture capital strategies, has sold securities to one or more investors before December 31, 2010, and has accepted all capital commitments by July 21, 2011.
Investment advisers qualify for the foreign private adviser exemption if the adviser has no place of business in the U.S., has fewer than 15 clients who are residents of the U.S. or are investors in the U.S. in private funds advised by the adviser, has less than $25 million in total assets under management from U.S. clients and investors, and does not hold itself out generally to the public in the United States as an investment adviser nor act as an investment adviser to a registered investment company or as a business development company.
To qualify for the private fund adviser with less than $150 million in assets under management exemption, an adviser may advise an unlimited number of qualifying private funds so long as the total value of the assets under management is less than $150 million. Qualifying private fund means any private fund that is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a–8) and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a–53). For purposes of this section, an investment adviser may treat as a private fund an issuer that qualifies for an exclusion from the definition of an “investment company,” as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3), in addition to those provided by section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a–3(c)(1) or 15 U.S.C. 80a–3(c)(7)), provided that the investment adviser treats the issuer as a private fund under the Act (15 U.S.C. 80b) and the rules thereunder for all purposes. However, if an adviser has one or more clients that are not private funds, then they are not eligible for this exemption. This exemption is available to foreign advisers if all of the adviser’s U.S. clients are private funds and the amount of funds it manages for U.S. clients is less than $150 million.
No, a firm that is exempt from registration can still register (or remain registered) with the SEC if they choose to do so, assuming the firm meets the requirements of Section 203A of the Advisers Act (more than $100 million in assets under management or qualifies for an exception to the prohibition from registering with the SEC). Investment advisers must also consider state registration requirements. A firm that is exempt from SEC registration may not necessarily be exempt from state registration and thus required to register directly with one or more state securities divisions.
Advisers to private funds are required to complete Section 7.B. of Form ADV Part 1A. This section has approximately 25 questions designed to require specific information about the fund’s organization and operation structure as well as identification of service providers (i.e. auditors, custodians, etc.) who perform important roles for the fund. In addition, advisers to funds with more than $150 million of assets must file Form PF and the due date for form PF varies depending on the size and classification of the investment adviser.
Investment advisers must file a Form PF if registered or required to register with the SEC as an investment adviser; or if registered or required to register with the CFTC as a CPO or CTA and also registered or required to register with the SEC as an investment adviser; and manage one or more private funds and; you and your related persons, collectively, had at least $150 million in private fund assets under management as of the last day of your most recently completed fiscal year. The due date for Form PF varies depending on the classification and size of the investment adviser. Many private fund advisers meeting these criteria will be required to complete only Section 1 of Form PF and will need to file only on an annual basis. Large private fund advisers, however, will be required to provide additional data, and large hedge fund advisers and large liquidity fund advisers will need to file every quarter.
The SEC adopted a threshold of $2 billion in private equity fund assets under management for large private equity fund advisers. Large private equity fund advisers and smaller private equity fund advisers have 120 days from the end of their fiscal years to file Form PF but large private equity fund advisers must provide more information than small private fund advisers. Form PF defines “private equity fund” as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course.
The SEC adopted a threshold of $1.5 billion in hedge fund assets under management for large hedge fund adviser reporting. Large hedge fund advisers have 60 days from the end of each fiscal quarter to file Form PF. Form PF defines hedge fund generally to include any private fund having any one of three common characteristics of a hedge fund: (a) A performance fee that takes into account market value (instead of only realized gains); (b) high leverage; or (c) short selling.
The SEC adopted a threshold of $1 billion for liquidity funds. Large liquidity fund advisers have 15 days from the end of each fiscal quarter to file Form PF. Form PF defines liquidity fund as any private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.
Advisers that rely on the venture capital exemption and the private fund with less than $150 million in assets under management exemption are considered “exempt reporting advisers,” are still subject to certain reporting requirements and may be subject to state reporting requirements. These advisers will be required to file the same registration form (i.e. Form ADV Part 1) as registered investment advisers. However, they will not be required to complete the entire Form ADV Part 1. Rather, they will have to provide basic identifying information, information about the fund and any conflicts of interest that could present risks to the fundâ€™s clients, and include any disciplinary history. These reports will need to be filed through the SEC’s Investment Adviser Registration Depository (IARD). The first report was due in the first quarter of 2012.
All advisers that do not qualify for the registration exemptions are subject to the same requirements as other SEC-registered investment advisers. So yes, firms will need written compliance manuals.
FINRA charges a fee to file using the IARD system. The fee for filing under the IARD for exempt advisers is $150. The fee for nonexempt investment advisers to register is $225 and to file quarterly and annual reports is $150.
No, individuals do not necessarily need to register as investment adviser representatives. Registering the organization as a corporation or limited liability company is the most common option but individuals can establish the investment adviser as a sole proprietor.
The amount of time needed to register varies depending on the size of the firm. RIA Compliance Consultants estimates that it takes several weeks to a month to prepare all forms and up to 45 days for the SEC to approve or deny the registration request.
*The information contained in this Frequently Asked Questions webpage is general in nature and intended for educational purposes only and is not intended to be a comprehensive analysis of the securities regulations applicable to registered investment advisers. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures.
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