More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
The year of “the switch” is upon us – regulators and investment advisers alike – and 2011 also promises to have other changes in store for IAs.
With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, most investment advisers with assets under management (AUM) of less than $100 million will switch from federal to state oversight. The law becomes effective on July 21, 2011.
To help facilitate the regulatory switch of approximately 4,000 IAs, the Securities and Exchange Commission recently released its proposed transition schedule:
- Confirming SEC eligibility: Each IA registered with the SEC on July 21, 2011 will file an amendment to its ADV by August 20, 2011 to report its AUM as determined within 30 days of the amendment filing.
- Terminating SEC registration: IAs no longer eligible for SEC registration must file ADV-W by October 19, 2011.
The switch schedule is one of the many topics outlined in two recent releases issued by the SEC mapping out the changes required under Dodd-Frank for investment advisers. Both releases – IA 3110 and IA 3111 – can be found on the SEC's website here.
In addition to expanding the states’ oversight of investment advisers, Dodd-Frank made substantial changes to the regulation of investment advisers to hedge funds and other private funds.
For example, Title IV of Dodd-Frank, known as the “Private Fund Investment Advisers Registration Act of 2010,” eliminated the “private adviser exemption” previously found in Section 203(b)(3) of the IAA.
This exemption allowed investment advisers to private funds to operate without federal regulatory oversight. The elimination of this provision was accompanied by the creation of a new registration and reporting regime designed to bring transparency and oversight to private fund advisers.
Under this new regulatory framework, advisers to certain private funds will be subject to SEC registration while others will be exempt from registration but required to submit reports to the SEC. In some instances, private fund advisers may also be required to register with one or more states.
Specifically, Dodd-Frank amended the Investment Adviser Act and added Section 202(a)(29) to include a definition of “private fund.” Under this provision, a private fund is defined as an issuer that would be an investment company under Section 3 of the Investment Company Act of 1940 (ICA) but for the exceptions contained in Sections Section 3(c)(1) or 3(c)(7) of the ICA.
Prior to Dodd-Frank’s passage, advisers to these private funds generally were exempt from registration with the SEC by virtue of the number of clients they served and the wealth/sophistication of these clients.
Along with deleting the “private adviser exemption,” Dodd-Frank established new exemptions from SEC registration for advisers to private funds, including exemptions for advisers to venture capital funds and advisers to private funds with less than $150 million in assets under management.
Given the changes to the regulatory requirements of these advisers at the federal level, NASAA is considering whether to adopt a model rule that would, in many respects, mirror at the state level the treatment of private fund advisers at the federal level.
NASAA’s model rule would provide the basis for an exemption from state registration for advisers only to 3(c)(7) funds, including venture capital funds formed under Section 3(c)(7). The model rule is limited to this category given the level of wealth required to invest in these funds.
Under the proposed NASAA model rule, an investment adviser solely to one or more private funds would be exempt from state registration requirements if the adviser satisfies the following conditions:
- The adviser cannot be subject to a disqualification.
- The adviser’s clients must be limited to private funds that are subject to the exclusion under 3(c)(7) of the Investment Company Act. Advisers to 3(c)(1) funds will not qualify for the exemption.
- The exempt reporting adviser must file with the state the report required by the SEC for exempt reporting advisers.
- The exempt reporting adviser must pay the fees specified by the state.
The proposed exemption does not apply to an investment adviser registered with the SEC. These advisers must comply with state notice filing requirements applicable to all SEC-registered investment advisers. Investment adviser representatives associated with the exempt reporting advisers would be exempt from state registration.
NASAA is seeking comments on the proposed rule and is particularly interested in comments about the rule’s scope. Should other categories of advisers to private funds be included or excluded from the exemption? For example, should advisers to 3(c)(1) funds be exempted from registration? Should all advisers to venture capital funds as defined by the SEC be excluded from registration?
We’d like to hear from you. Comments should be submitted electronically to firstname.lastname@example.org. The deadline for submission of comments is January 24, 2011. Written comments may be mailed to NASAA, Attn. Joseph Brady, 750 First Street, NE, Suite 1140, Washington, DC, 20002.