Reminder of New SEC Registration Rules and Related Worksheet for Investment Advisers
January 31, 2012
James S. "Jay" Crenshaw- Orlando
Scott R. MacLeod- Orlando
Christopher P. "Chris" McHugh- Washington
Amy R. Rigdon- Orlando
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) impacted many investment advisers who previously were not registered. Among many changes affecting investment advisers, the following are important requirements effective March 30, 2012:
- If you manage ANY separately managed accounts and have assets under management (AUM) in excess of $100 million, then you MUST register with the SEC (even if you only have one account /client).
- If you have separate accounts and AUM of $25 million - $100 million, then you MUST register with your home state unless exempt under such state law (or in New York or Wyoming), in which case you MUST register with the SEC.
- If your only clients are private investment funds and you have AUM of more than $150 million, then you MUST register with the SEC.
- If you are a non-U.S. adviser with any separate accounts, or with private investment fund assets over $150 million, then you generally MUST register with the SEC UNLESS you have (1) no place of business in the U.S.; (2) less than $25 million in AUM from U.S. clients and U.S. fund investors; (3) fewer than 15 U.S. clients and U.S. fund investors; and (4) do not hold yourself out generally to the public in the U.S. as an adviser.
- However, if you are a non-U.S. adviser you may be exempt from SEC registration if your only U.S. clients are private funds even if you have clients outside the U.S. that are not private funds and even if you have a place of business in the U.S. - so long as the private funds you manage from a place of business in the U.S. have AUM LESS than $150 million.
- IF you have AUM of less than $25 million or are exempt from SEC registration, then you must be registered or find an exemption in any state where you have a place of business or more than five clients.
- IF you are a “family office” or an adviser solely to one or more “venture capital funds” as those terms are narrowly defined, then you are exempt from SEC registration.
Exempt Adviser Filing
Advisers who are exempt based on managing solely private investment funds with less than $150 million total AUM or based on advising solely venture capital funds (an “exempt reporting adviser”), even if not required to register in their home state, must make certain filings with the SEC. An exempt reporting adviser is required to file and periodically update reports with the SEC using the same Form ADV registration document as fully registered advisers. Unlike registered advisers who must complete the entire Form ADV, exempt reporting advisers will have to fill out a subset of items from Part 1 (and none of the narrative Part 2). The filings will be publicly available on the SEC website. See immediately below for the timing requirement of such initial filing. After that, an exempt reporting adviser must calculate its AUM annually at calendar year end and, if it exceeds $150 million, will have 90 days to register with the SEC as an investment adviser.
Registered advisers face a host of filing and other requirements, some new this year, including but not limited to Form PF. Supplemental materials describing some of those requirements will be sent in future alerts and more will be available upon request.
Timing
The March 30 deadline means if you are required to register with the SEC under the new rules, you must file by February 14, 2012, to be registered by the March 30 effective date. Exempt reporting advisers must file by March 30, 2012. Before you can make such a filing, you need to establish an account in the SEC’s electronic filing system (IARD) and prepare the Form ADV application. In some cases, your personnel may require licensure and passing grades on one or more industry exams. Accordingly, NOW is the time to address these issues.
SEC-registered advisers who will be ineligible or exempt from SEC registration under the new rules generally have until June 28 to deregister in which case you MAY need to register in your home state or any state where you have more than five clients. This registration/deregistration should be done without a gap.
Worksheet
Click here to access a worksheet designed to help assess your firm’s status under the new rules. You may find it useful for internal analysis. Please feel free to fill it out and send it to us or call to discuss any questions or concerns.
Please see the following definitions section for an explanation of certain defined terms used in this alert.
Definitions
Assets Under Managements (AUM) - With respect to the new “regulatory assets under management” determination, an adviser: (1) will no longer be able to choose to exclude proprietary assets, assets managed without receiving remuneration or assets of non-U.S. clients; (2) may not deduct any outstanding indebtedness and other accrued, but unpaid, liabilities; (3) must include the AUM for any private fund clients in its total AUM calculation, regardless of the type of assets held by the fund; (4) may, if acting as a sub-adviser to a private fund, include only the portion of the fund’s assets over which it provides advisory services; (5) must include any uncalled capital commitments in the calculation of its regulatory assets under management; and (6) must value assets of private fund clients at market value, or if the market value is unavailable, at fair value.
Family Office - A family office must have no clients other than “family clients.” The family office must be wholly owned by family clients and be exclusively controlled (directly or indirectly) by one or more family members and/or entities - all from a single family. The family office cannot hold itself out to the public as an investment adviser. Family clients include among others: current and former family members; certain employees of the family office; charities funded exclusively by family clients; trusts existing for the sole current benefit of family clients; revocable trusts funded solely by family clients; certain key employee trusts; and, with certain exceptions, companies wholly-owned exclusively by, and operated for the sole benefit of, family clients.
A family may define itself by reference to a common ancestor (who need not be living) and then define “family members” based on the degree of lineal kinship to the common ancestor, up to a limit of 10 generations between the referenced ancestor and the youngest generation.
Principal Place of Business - This is defined as the executive office of the investment adviser from which the officers, partners, or managers of the adviser direct, control and coordinate the activities of the adviser, even if the day-to-day management of “client accounts” may take place at another location.
Private Funds - Those that would be investment companies 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 SEC has clarified that an adviser to a fund that is exempt from registration as an investment company pursuant to Section 3(c)(1) or 3(c)(7) of the Investment Company Act would not lose the right to rely on the private fund adviser exemption just because the fund also qualifies as an exempt real estate fund under Section 3(c)(5)(C) of the Investment Company Act and could still be a “private fund” for purposes of the private adviser exemption. The adviser must, however, treat the fund as a private fund for all purposes, including Form ADV reporting.A private fund that holds no more than 20 percent of the fund’s capital commitments in “non-qualifying investments” (other than short-term holdings), with “qualifying investments” generally consisting of equity securities of private, standalone, unleveraged operating companies that are generally directly acquired by the fund (and not on the secondary market). It is generally not leveraged (other than limited short-term borrowing), excluding certain guarantees of qualifying portfolio company obligations by the fund. It does not offer investors redemption or other similar liquidity rights except in extraordinary circumstances. It represents to its investors and prospective investors that it carries out a venture capital strategy. It is not registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company.
Venture Capital Fund - A private fund that holds no more than 20 percent of the fund’s capital commitments in “non-qualifying investments” (other than short-term holdings), with “qualifying investments” generally consisting of equity securities of private, standalone, unleveraged operating companies that are generally directly acquired by the fund (and not on the secondary market). It is generally not leveraged (other than limited short-term borrowing), excluding certain guarantees of qualifying portfolio company obligations by the fund. It does not offer investors redemption or other similar liquidity rights except in extraordinary circumstances. It represents to its investors and prospective investors that it carries out a venture capital strategy. It is not registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company.
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