SEC Rulemaking Agenda for Hedge Fund Registration
Timeline for Proposed & Final Manager Registration Rules Released
The Dodd-Frank bill requires the SEC and CFTC to propose and promulgate final rules with respect to a number of important areas for investment managers. As we have seen, significant time has already been devoted to trying to develop a framework for OTC derivatives clearing. Over the next couple of months, however, hedge fund and private equity fund managers will begin to see how the registration and hedge fund compliance process will proceed under the new laws and regulations.
The SEC has released a timeline for implementing the provisions under Dodd-Frank. While the SEC discusses a number of the major rule making initiatives, below we have only reprinted the items relating to investment adviser registration. We have also provided some of our thoughts on these items. [Note: section numbers reference the Dodd-Frank act.]
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October
§409: Propose rules defining “family office”
This definition will be important because “family offices” are not required to register as investment advisers with the SEC. Family offices which manage the assets of numerous families will need to pay special attention to the proposed rule because it is possible that the SEC may not provide such offices with an exemption or exclusion from the registration provisions.
Novemeber - December 2010 (planned)
§§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds
Private equity fund advisers are going to be carefully reviewing this provision to see if there is any way to escape SEC registration. Depending on the scope of the definition of “venture capital,” managers to private equity funds may be able to find a way to fall outside of registration.
§410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act
This will be an important provision for a number of managers who are currently registered with the SEC. Both the SEC and the states want to see an easy and seemless transition from SEC to state registration and there will need to be significant coordination between the SEC, NASAA, the states and FINRA (which runs the investment adviser registration depository).
§418: Propose rules to adjust the threshold for “qualified client”
Changes to the definition of “qualified client” will require hedge fund managers to revise their fund offering documents. Additionally, currently unregistered private equity fund managers should note that they will be subject to the qualified client regulations (i.e. performance fees or the carried interest may be charged only to an investors who fall within the definiton of qualified client). Accordingly, private equity fund managers may need to start thinking about revising their offering documents and/or begin requesting more information from their investors with respect to net worth.
§413: Propose rules to revise the “accredited investor” standard
The SEC has already promulgated guidance with respect to the accredited investor standard which states that an investor’s equity in a primary residence does not count toward the net worth requirement. It is likely that the proposed rules will mirror the guidance.
§926: Propose rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated
NASAA has lobbied hard to have the ability to have greater control over Regulation D offerings if the promoters of the offerings have previous been subject to certain regulatory or criminal proceedings. Any proposed provision would likely limit the ability of such promoters to offer securities to investors without first going through a rigourous process with each of the states where the securities are sold.
§§404 and 406: Propose (jointly with the CFTC for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk
Investment managers with a large amount of AUM will likely be subject to increased reporting requirements to the SEC
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Tags: client, equity, investment adviser registration, private equity fund, private equity funds, Propose
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