SEC Adopts New Reporting Requirements for All Investment Advisers

July 11, 2011

The Securities and Exchange Commission (SEC) recently adopted new rules imposing registration and reporting requirements on advisers to hedge funds and other private funds. These rules implement the core provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is meant to increase transparency in financial institutions. Previously exempt advisers, such as hedge fund and private equity fund advisers, must now register with the SEC and file annual reports.

The new rules subject many previously unregistered advisers to SEC regulatory oversight, rules and examination. Most private fund advisers are now required to provide basic organizational and operational information about each firm it manages, identify independent contractors it utilizes in managing the fund, and identify business practices that may present significant conflicts of interest. While all private fund advisers are required to file annual reports with the SEC, the new rules exempt certain advisers from the more stringent registration and reporting requirements.

Certain Advisers Exempt From Stringent Reporting Requirements
The SEC recognizes that registration and reporting requirements are burdensome to certain groups of advisers. As such, the reporting rules specifically exempt advisers solely to venture capital firms, certain foreign advisers without a place of business in the United States, and advisers solely to private funds with less than $150 million in assets under management in the United States.

Advisers can claim this last exemption if they can demonstrate that their principal place of business is in the United States, that they advise solely private funds, and that the aggregate value of all assets under management are less than $150 million. The new rules require an adviser to file a Form ADV and annual amendments to demonstrate that they qualify for the exemption.

Advisers considered “exempt advisers” will not be required to register with the SEC, but will still be required to file an annual Form ADV. Instead of completing the Form ADV in its entirety, exempt advisers are only required to provide basic identifying information and information about the private funds the adviser manages. More specifically, exempt advisers are only required to provide:

  • Identifying Information: Location, type of business and contact information
  • Reporting by Exempt Reporting Advisers: Information that demonstrates that the adviser is eligible for the reporting exemption
  • Form of Organization: Responses that provide the SEC with information regarding the adviser’s business structure and the laws that govern it
  • Other Business Activities: Limited information about its business activities outside of investment advice
  • Financial Industry Affiliations and Private Fund Reporting: Identification of any related persons that they share clients or advisory services with
  • Control Persons: Identification of every person that directly or indirectly controls or manages them
  • Disclosure Information: Information about the adviser’s disciplinary history and the disciplinary history of advisory affiliates

These exempt advisers will be relieved of filling out the remainder of the Form ADV, including providing information about each client and creating a client brochure. Non-exempt advisers, on the other hand, will still be required to distribute an annual client brochure that includes their fee and compensation structure, their methods of analysis, investment strategies, risk of loss, as well as details of their brokerage packages.

All advisers, even those that are exempt, must file an initial Form ADV between January 1, 2012 and March 30, 2012. Exempt advisers must continue to file an annual Form ADV to retain their exempt reporting status. However, exempt advisers will not have to comply with the burdensome registration and reporting requirements the new SEC rules impose on most private advisers.

To subscribe to email alerts from Axley Law Firm, click here.