The Dodd-Frank Act is far-reaching, and it would take a significantly longer time than this blog allows to explain it all. We recently hosted a webinar, however, to take a look at Dodd-Frank specifically as it relates to investment adviser registration as well as technology requirements for hedge funds.
Below is a short summary of the legal requirements of Dodd-Frank presented during our webinar by Mimi Gross, Counsel at Bingham McCutchen.
Dodd-Frank Overview and History
The Dodd-Frank Wall Street Reform and Consumer Protection Act was set in motion in July 2010 as a fairly broad legislative action aimed to address a number of different risk and systemic issues within the financial markets. We’re heard rumors that the deadline for registration will be pushed back to Q1 2012, but we’ve yet to hear word on a specific date.*
According to Dodd-Frank, an investment adviser is “any person who engages in the business of advising others or providing analyses or reports concerning securities for compensation,” which includes both hedge fund and private equity advisers.
Prior to Dodd-Frank, some investment advisers were required to register with the SEC under the Investment Advisers Act of 1940. Many private fund advisers, however, fell under a private adviser exemption and were, therefore, not required to register. Dodd-Frank has essentially abolished and replaced this legislation and will require far more firms to register with the SEC than before.
Who is Required to Register Under Dodd-Frank?
The following firms and individuals will be required to register with the SEC under the Dodd-Frank Act:
Advisers solely to private funds, if AUM is over $150mm
Advisers to private funds and other accounts, if AUM is over $100mm
Advisers to private funds and other accounts must register with state if AUM is between $25-100mm. may be alternatively required to register with SEC if:
o Adviser is not required to register with the state securities regulator as an investment adviser, or
o Adviser is required to register with the state securities regulator, but the adviser is not subject to examination as an investment adviser by the state.
Advisers to registered investment companies and business development companies (regardless of assets)
In addition to federal SEC requirements, there are individual state registration requirements, including notice filings and registration of specific investment adviser representatives.
Who is Exempt Under Dodd-Frank?
The following investment advisers fall under exemptions within the Dodd-Frank regulation:
Advisers to venture capital firms only
Registered commodity trading advisers
Exempt reporting advisers*
*Exempt reporting advisers will still be required to meet certain reporting requirements and will still be subject to examination by the SEC.
Registering with the SEC
The key to the registration process – aside from the logistical requirements, such as completing Form ADV – is creating, maintaining and monitoring a compliance infrastructure. This includes hiring a Chief Compliance Officer (CCO) and aligning your firm’s policies and procedures to your specific business practices, clients, etc. while, at the same time, complying with all of the necessary requirements set forth by the SEC.
Code of Ethics
Per the SEC, registered investment advisers are required to have a Code of Ethics in place to reinforce fiduciary principles that govern the conduct of the advisers and the firm. A Code of Ethics needs to include:
An annual holdings report
Quarterly transaction reports
Pre-approval for IPOs and limited offerings
Insider trading policies
*Since this article was published, the SEC has announced private advisers will be required to register by March 31, 2012.
**The above information was originally presented during the "Dodd-Frank Update: Legal & Technology Requirements for Firms" webinar on June 9, 2011. Disclaimer: This information is not intended to provide legal advice addressed to a particular situation, nor does it constitute advice as to any particular set of facts.**