The Dodd-Frank Wall Street Reform and Consumer Protection Act radically changed requirements for PE fund managers to register as investment advisers. If a fund manager is required to register, then it becomes subject to periodic examination by the SEC, and numerous additional regulations, including having written compliance policies and procedures.
State Versus Federal Registration: Which applies: State, or federal law? Under Dodd-Frank, fund managers with under $25 million in assets under management (“AUM”) are still solely subject to the adviser registration requirements under state laws. Dodd-Frank changed the requirements for fund managers with AUM of between $25 million and $100 million, who are now required to register with the state in which they maintain their principal office and place of business, provided that (i) the state requires the adviser to be registered (i.e., no state exemption applies), and (ii) the adviser is subject to examination as an adviser by the state. Many states still have a number of exemptions that would be applicable to fund managers. Accordingly, if a manager with between $25 million and $100 million AUM is exempt from registration in its state, than the fund manager must determine if it fits within a federal exemption, or otherwise would need to register with the SEC. Fund managers with over $100 million AUM must fit within a federal exemption, or otherwise need to register with the SEC.
Calculation of AUM: Dodd-Frank includes a new determination of AUM for all regulatory purposes. Under the new rules, regulatory AUM must be calculated on a gross basis, so that amounts borrowed are included. In addition, regulatory AUM includes all uncalled capital commitments. Thus, for private equity fund managers, regulatory AUM must be calculated by adding the amount of uncalled capital commitments to the market value of outstanding investments.
The “Private Fund Adviser” Exemption: The exemption under Dodd-Frank that will be applicable to most private equity fund managers is the “private fund adviser” exemption. Importantly, this exemption requires that the adviser file Part 1 of Form ADV with the SEC in order to claim the exemption. The exemption applies to advisers that (i) advise only “qualifying private funds” and (ii) have assets under management in the U.S. of less than $150 million. Note that this exemption only applies to an adviser that advises private funds. However, the fund manager who has even a single managed account, or any clients other than the funds it manages, cannot rely on this exemption (except that the rules for non-U.S. based fund managers are different, as explained below).
The definition of “qualifying private fund” includes any fund that qualifies for an exclusion from the definition of an investment company under Section 3 of the Investment Company Act of 1940, as amended (the “Investment Company Act”). That definition expands the universe of types of fund managers that can rely on this exclusion beyond funds that rely on Investment Company Act Sections 3(c)(1) (100 investor limit) and 3(c)(7) (qualified purchasers).
Only assets that are managed “in the U.S.” must be included. The rules treat advisers with their principal office and place of business in the U.S. differently from non-U.S. based advisers. A U.S-based adviser must count toward the $150 million AUM limit the assets of all of the funds it advises, regardless of whether those funds are organized offshore. In contrast, an adviser with its principal office and place of business outside of the United States need only count toward the $150 million limit any funds that are managed from the U.S. Thus, a non-U.S. based adviser could manage funds with total assets over $150 million, even if those funds have U.S. investors, as long as the funds are not managed by anyone in the U.S.
The Foreign Private Adviser Exemption: Dodd-Frank created a new exemption from registration for “foreign private advisers.” If a fund manager does not hold itself out generally to the U.S. public as an investment adviser, it will not need to register with the SEC so long as it has:
No place of business in the U.S.;
Fewer than a total of 15 clients and investors in the U.S. in private funds advised by the manager; and
Aggregate AUM attributable to clients in the U.S., and to investors in the U.S. in private funds advised by the manager, of less than $25 million.
A manager that does not qualify as a Foreign Private Adviser may still be able to meet another exemption, such as the private fund adviser exemption. Unlike the private fund adviser exemption, the foreign private adviser exemption does not require any filing with the SEC.
The “Venture Capital Funds” Exemption: Dodd-Frank also created a new exemption for managers who solely manage “venture capital funds.” As with the private fund adviser exemption, the venture capital fund exemption requires that the fund manager file Part 1 of Form ADV with the SEC in order to claim the exemption. Most private equity fund managers will not meet the requirements, which include that each fund represents to investors that it pursues a “venture capital strategy” and restrictions on leverage and the types of investments that qualify.
Form ADV Requirement for Certain Exempt Advisers: In order to take advantage of the Private Fund Adviser exemption and the Venture Capital Funds exemption, the fund manager must file with the SEC Part 1 of Form ADV. (There is no requirement to file Form ADV Part 2.) Although only certain sections of Form ADV are required to be completed, the required sections can still be onerous, as they include detailed information as to significant direct and indirect owners of the adviser, disclosure of any significant disciplinary and regulatory issues, and detailed information about the funds managed by the adviser. All of this information will be publicly available on the SEC’s website. The names of the funds’ investors are not required to be listed. The form must be updated on an annual basis, as well as on an immediate basis when certain material changes occur.
Adam Gale is a Partner in the New York office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., where he is the Co-Chair of the Investment Funds Group.
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