Private funds - like hedge funds and private equity funds - manage billions for individuals and institutions, and yet are relatively free of regulatory oversight.  Until now, or at least until early 2012.  That's when new registration requirements kick in.  For those advisers to private funds that will not have to register, the SEC will require them to file reports about their business activities.

And, because the SEC is taking on new responsibilities for private fund advisers, regulatory responsibility for certain mid-sized investment advisers will be passed along to state regulatory authorities.

Private Fund Advisers and Commission Registration.   Advisers to private funds avoided SEC registration because they advised fewer than 15 clients – an exemption permitted them to count each fund as a client, rather that each investor in a fund.  Dodd-Frank eliminated this private adviser exemption and formed the basis for yesterday's newly adopted SEC rules.  These advisers will be subject to the same registration requirements, regulatory oversight, and other requirements that apply to other SEC-registered investment advisers.  They will have to register with the SEC by 3/30/12 - a 9-month grace to ease the transition.

Registration forms will ask advisers for additional information about the private funds they manage.  Under the amended adviser registration form, advisers to private funds will have to provide:

• Basic organizational and operational information about each fund they manage - e.g., type of private fund that it is (such as hedge, private equity or liquidity fund), general information about the size and ownership of the fund, general fund data, and the adviser's services to the fund.
• Identification of 5 categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage - i.e., auditors, prime brokers, custodians, administrators and marketers.

Other amendments to the adviser registration form relate to an adviser's advisory business, including: 

• Types of clients they advise, employees, and advisory activities.
• Business practices that may present significant conflicts of interest - e.g., use of affiliated brokers, soft dollar arrangements and compensation for client referrals.

Advisers will also have to provide additional information about their non-advisory activities and financial industry affiliations.

Reporting Requirements for Exempt Advisers.   Three new exemptions from registration are offered:

• Advisers solely to venture capital funds.
• Advisers solely to private funds with <$150 million in assets under management ("AUM") in the U.S.
• Certain foreign advisers without a place of business in the U.S.

The SEC can still impose certain reporting requirements upon advisers relying upon either of the first 2 of these exemptions (“exempt reporting advisers”).  And, they will be required to file, and periodically update, reports with the Commission, using the same registration form as registered advisers.  However, rather than completing all items on the form, exempt reporting advisers will fill out a limited subset of items, including:

• Basic identifying information for the adviser and the identity of its owners and affiliates.
• Info about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
• Disciplinary history, if any, of the adviser and its employees that may reflect on the integrity of the firm. 

Exempt reporting advisers will file reports on the Commission’s IARD filing system with the first reports due in Q1 of 2012.

Reallocation of Regulatory Responsibility.   Since 1996, the SEC and states have divided responsibility for regulating advisers.  The existing cutoff is $25 million - over that amount, an adviser registers with the SEC;  those under stay 'local'. The new threshold for SEC registration will now be $100 million.  Those advisers that manage between $25mn and $100mn will be called "mid-sized advisers" - and generally may not register with the SEC;  instead, they'll be subject to state registration.

This amendment to the IA Act 0f 1940 will affect 3,200 of the 11,500 advisers currently registered with the SEC.  To facilitate the transition of advisers between federal and state registration, SEC-registered advisers will have to declare that they are permitted to remain registered in a filing in Q1 of 2012;  those no longer eligible for SEC-registration will have until 6/28/12 to complete the switch to state registration.

Foreign Private Adviser.  Foreign advisers that do not have a place of business in the U.S., and have <$25mn in aggregate assets under management from U.S. clients and private fund investors, as well as fewer than 15 U.S. clients and private fund investors will be exempt from SEC-registration.  The new SEC rules define certain terms included in the statutory definition of “foreign private adviser” in order to clarify the application of the foreign private adviser exemption and reduce the potential burdens for advisers that seek to rely on it.  The rule incorporates definitions set forth in other Commission rules, all of which are likely to be familiar to foreign advisers active in the U.S. capital markets.

For further details, go to:   [SEC PR 11-133, 6/22/11]