Barclay Damon
Barclay Damon

Legal Alert

Changes Coming for Investment Advisers

The Securities and Exchange Commission (“SEC”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) will impose new rules on investment advisers.

First, the SEC has changed its Rule 204-3, sometimes called the “brochure rule,” applicable to Federally-registered investment advisers. The brochure rule requires each investment adviser to deliver to each prospective client a brochure containing the information called for by Part II of Form ADV, and to update the brochure annually. Under former law, the brochure is not required to be filed with the SEC. Effective October 12, 2010, the SEC will require the brochure to be written in narrative form and filed with the SEC. Investment advisers whose fiscal year ends on December 31, 2010 or later must comply with the new brochure rule when they file the annual update of their Form ADV with the SEC.

Second, the Dodd-Frank bill, signed into law by President Obama on July 21 of this year, contains new rules regulating investment advisers, including:

  • For hedge fund managers, registration as an investment adviser will be mandatory rather than discretionary.
  • The threshold at which federal registration of an investment adviser replaces state registration will be raised to $100,000,000.

The Dodd-Frank changes to investment adviser registration will become effective on July 21, 2011.

Brochure rule changes.
Under SEC Rule 204-3 before the amendments, brochures consisted principally of multiple-choice questions and blanks to be completed. In most cases. narrative description in the brochure was kept to a minimum or not even required. The Rule prior to the amendments required that investment advisers update the brochure no less often than annually but there was no requirement to file the brochures with the SEC.

One week after the President signed Dodd-Frank into law, the SEC in an unrelated rulemaking proceeding adopted amendments to Part II of Form ADV so that, after the effective date of October 12, 2010, Part II will be answered in narrative form. Some time over the next year (roughly), each SEC-registered investment adviser must revise its Form ADV so that the adviser will be ready to file the new narrative Part II to Form ADV by the deadline. The new Part II consists of a description of an investment adviser's business that discloses all material information and does not mislead the investor by exaggerating the truth or understating problems.

Under the new rule, Part II (the brochure) must be filed with the SEC and will be publicly available at the Investment Adviser Registration Depository (IARD) on the SEC's website.

Effectiveness. These changes to Form ADV are effective on October 12, 2010; however, an investment adviser that is currently registered with the SEC will not need to comply with the new rule until it amends its Form ADV for a fiscal year that ends on December 31, 2010, or after.

Dodd-Frank changes.
Registration of hedge fund managers. Prior to Dodd-Frank, an investment adviser with fewer than 15 clients over the course of any 12-month period was generally not required to register with the SEC, with some exceptions. A hedge fund (a private investment fund that is not registered with the SEC) is considered to be one client, even though it may have dozens of investors. Accordingly, the manager of a hedge fund did not, prior to the effectiveness of Dodd-Frank, have to register with the SEC as an investment adviser.

Dodd-Frank amends existing law by eliminating the exemption from registration for investment advisers with fewer than 15 clients so that an adviser with only one client might be required to register as an investment adviser. This amendment will require the typical hedge fund manager to register as an investment adviser. Dodd-Frank directs the SEC to provide an exemption from registration for a hedge fund manager who acts solely as an adviser to hedge funds and has assets under management in the U.S. of less than $150,000,000.

Dodd-Frank exempts venture capital fund advisers, family offices and foreign private advisers from the registration requirement and directs the SEC to adopt Rules defining the terms “venture capital fund” and “family office” by the effective date of the new registration requirements, July 21, 2011. To be exempt from registration, a “foreign private adviser” must have no place of business in the United States, fewer than 15 clients and investors from the United States, and less than $25 million of assets attributable to U.S. clients and investors under management. The Dodd-Frank amendments count each U.S. investor in any hedge fund managed by the foreign private adviser toward the limit of 15 U.S. clients and investors. Investment advisers in the above exempt categories remain subject, like registered investment advisers, to the federal anti-fraud rules under the Investment Advisers Act.

Higher Federal threshold. Every state has an investment adviser registration statute and, prior to Dodd-Frank, investment advisers who had assets under management of less than $25,000,000 were required to register with one or more states. Investment advisers who had assets under management of $30,000,000 or more were required to register with the SEC rather than one or more states. Investment advisers who had assets under management of at least $25,000,000, but less than $30,000,000, had the option of registration with the SEC or with state authorities.

Under Dodd-Frank, the Federal threshold will be at least $100,000,000. The SEC has rulemaking authority to raise the Federal threshold beyond that amount. However, if an investment adviser is required by this new rule to register with 15 or more states, then the investment adviser may elect to register with the SEC instead of the states.

Effectiveness. The new Dodd-Frank registration requirements become effective on July 21, 2011. An investment adviser who was exempt from registration with the SEC under prior law but who will become subject to SEC registration may elect to register earlier.

For assistance complying with the new investment adviser requirements, please contact Christopher J. Bonner, (315) 425-2708 or e-mail cbonner@hblaw.com, at Hiscock & Barclay, LLP.