This flow chart is designed to answer general questions that you may have about whether the Private Fund Investment Adviser Act of 2010 (“Private Fund Act”) will force you to register your advisory firm with the Securities and Exchange Commission (“SEC”). The Private Fund Act is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has been passed by Congress and is awaiting President Obama’s signature.
Your particular circumstances may need more analysis and, therefore, you are advised to contact Jeffrey Wittenberg at 877-352-2010, or seek other legal counsel to determine your status under the new regime. In addition, this flow chart does not discuss the rules and regulations promulgated under the Investors advisers Act other than the new amendments enacted under the Private Fund Act. This flow chart is not intended as legal advice.
The new rules go into effect one year after enactment, which will be the day that President Obama executes the Dodd-Frank legislation. This means that you will have less than one year to file your application for registration.
1. To date, have I advised investment companies that have relied on Section 3(c)(1) or 3(c)(7) of the Investment Company Act to claim an exemption from registration as an investment adviser under the Investment Advisers Act with the SEC?
a. If yes, then you advise a “private fund” and must continue.
b. If no, then the Private Fund Act probably does not impact you.
2. Do I advise a registered investment company?
a. If yes, then you must register with the SEC.
b. If no, then continue.
3. Do I (i) have a place of business only outside of the U.S., (ii) advise fewer than 15 U.S. investors in my private funds, (iii) have less than $25 million in assets under management attributable to U.S. investors and (iv) not hold myself out generally to the public in the U.S. as an investment adviser?
a. If yes, then you are exempt from registration as a Foreign Private Adviser (unless you advise a registered investment company or business development company).
b. If no, then continue.
4. Am I registered with the Commodity Futures Trading Commission as a commodity trading advisor and advise a private fund?
a. If yes, then you are exempt from registration with the SEC unless my business becomes “predominately” the provision of securities-related advice. Note that “predominately” has not been defined by the SEC.
b. If no, then continue.
5. Do I advise solely one or more “venture capital funds”?
a. If yes, then you are exempt from registration with the SEC. Note that “venture capital fund” is not yet defined, but the SEC is responsible for defining the term no later than one year following the enactment date of the Private Fund Act.
b. If no, then continue.
6. Do I advise solely one or more “family offices”?
a. “Family office” is not yet defined, but the SEC will define this term. If you fit into the definition of “family office,” then you will be exempt from registration with the SEC. There is no deadline for the SEC to define “family office.”
b. Note, however, that advisers to family offices will be subject to the antifraud provisions of the Investment Advisers Act.
c. If not, then continue.
7. Do I advise solely clients that are small business investment companies licensed under the Small Business Investment Act of 1958?
a. If yes, then you are exempt from registration with the SEC.
b. If no, then continue.
8. Do I (i) advise solely clients who are all residents of the State within which I maintain my principal office and place of business, and (ii) not furnish advice or issue analyses or reports with respect to securities listed or admitted to unlisted trading privileges on any national securities exchange?
a. If yes, then you are exempt from registration unless one of your clients is a private fund.
b. If no, then continue.
9. Do I advise solely private funds and have assets under management in the United States of $150 million or more?
a. If yes, then you must register with the SEC.
b. If no, they you probably have to register with the State authorities in which you do business.
10. Can I register with the SEC if I advise solely private funds having assets of less than $150 million?
a. $100 million to less than $150 million assets under management (“AUM”) (meaning securities portfolios with respect to which an investment adviser provides continuous and regular supervisory or management services). You may, but are not required to, register with the SEC, if you advise solely private funds, but you may still need to register with the State authorities. If you advise clients other than private funds, then you are required to register with the SEC.
b. $25 to $100 million AUM. If you manage between $25 and $100 million dollars and are required to register in 15 or more states, then you may register with the SEC. If you do not meet both of the aforementioned requirements, then you most likely are required to register with the State authorities.
11. If I want or need to register with the SEC, how long will it take to become registered?
a. Preparing the application can take days or weeks depending on several factors in the control of the investment adviser.
b. Once the application is filed, the SEC has 45 days to grant such registration or institute proceedings to determine whether registration should be denied.
12. Once registered, what are the recordkeeping requirements?
a. For the time being, the Private Fund Act adds the following information to the records and reporting requirement of the Investment Advisers Act:
i. Amount of assets under management and use of leverage, including off balance sheet leverage.
ii. Counterparty credit risk exposure.
iii. Trading and investment positions.
iv. Valuation policies and practices.
v. Types of assets held.
vi. Any side arrangements or side letters whereby certain private fund investors obtain more favorable rights than other investors.
vii. Trading practices.
b. Note that the above records are required to be maintained, but not necessarily filed with the SEC.
c. The SEC, in consultation with the Financial Stability Oversight Council, has authority to require that private funds maintain additional records, and has authority to establish different reporting requirements for different classes of fund advisers, based on the type or size of the private fund being advised.
d. The SEC, by rule, will specify the exact content of the required reports and the time periods for which private funds must maintain the related records.
13. Once registered, will I be subject to an SEC examination, and, if so, when?
a. Yes, the SEC is required to conduct periodic examinations of the records maintained by the private fund adviser for its private fund clients and authorizes the SEC to conduct such additional or special examinations as it deems appropriate.
b. The SEC is authorized to determine the inspection schedule.
c. In addition, each private fund adviser is obligated to provide, upon SEC request, any copies or extracts from such records that may be prepared without undue effort, expense or delay.
14. Will my records be kept confidential?
a. Yes, the SEC is required to keep confidential any records, reports or other information supplied to it by a private fund adviser pursuant to the Private Fund Act. As such, this information will not be subject to compelled disclosure under the Freedom of Information Act. But, the SEC is permitted to share this information with the Financial Stability Oversight Council and, upon an agreement of confidentiality, with Congress. Also, the SEC is permitted to comply with information requests from other U.S. government departments or agencies and disclosure orders issued by a U.S. court in an action brought by the U.S. or SEC.
b. Proprietary information, defined as sensitive, non-public information regarding the adviser’s investment or trading practices, analytical or research methodologies, trading data, computer hardware or software containing intellectual property, and any other information that the SEC determines to be proprietary, is protected from public disclosure as well. Proprietary information may be disclosed only in a public hearing held by the SEC or pursuant to a court proceeding brought to enjoin a violation of the Investment Advisers Act or certain other specific situations.
15. Will I be required to disclose information about my clients?
a. Yes, but only for a limited purpose. The SEC may require disclosure about a private adviser’s clients as needed for purposes of assessment of potential systemic risk.
