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SEC Sets New Rules For Hedge Fund Advisers

by Glen Shapiro,, New York

23 November 2010

The United States Securities and Exchange Commission (SEC) has proposed new rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and strengthen its oversight of investment advisers to hedge funds and other private funds.

The SEC pointed out that a large number of individuals and institutions invest a significant amount of assets in private funds, such as hedge funds and private equity funds. However, until the passage of the Dodd-Frank Act, advisers managing those assets were subject to little regulatory oversight. With the Dodd-Frank Act, the US Congress closed this regulatory gap by generally extending the registration requirements under the Investment Advisers Act to the advisers of these funds.

Advisers to private funds were able to avoid registering with the SEC because of an exemption that applied to advisers with fewer than 15 clients - an exemption that counted each fund as a client, as opposed to each investor in a fund. As a result, some advisers to those funds remained outside of the SEC's regulatory oversight even though those advisers could be managing large sums of money for the benefit of hundreds of investors.

The Dodd-Frank Act eliminated this private adviser exemption. Consequently, many previously unregistered advisers, particularly those to hedge funds and private equity funds, will have to register with the SEC and be subject to its regulatory oversight, rules and examination. These advisers will be subject to the same requirements that apply to other SEC-registered investment advisers.

Under the proposed rules, advisers to private funds would, for example, have to provide basic organizational and operational information about the funds they manage, such as information about the amount of assets held by the fund, the types of investors in the fund, and the adviser's services to the fund.

In addition, the SEC has proposed other amendments to the adviser registration form to improve its regulatory program. These amendments would require all registered advisers to provide more information about their advisory business, including information about the types of clients they advise, their employees, and their advisory activities, and their business practices that may present significant conflicts of interest.

While many private fund advisers will be required to register, some of those advisers may not need to if they are able to rely on one of the new exemptions from registration under the Dodd-Frank Act, including: exemptions for advisers solely to venture capital funds; advisers solely to private funds with less than USD150m in assets under management in the US; and certain foreign advisers without a place of business in the US.

Under proposed rules, however, exempt reporting advisers would nonetheless be required to file, and periodically update, reports with the SEC, using the same registration form as registered advisers. Rather than completing all of items on the form, exempt reporting advisers would fill out a limited subset of items, including basic identifying information for the adviser and the identity of its owners and affiliates; and information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: investment | private equity | law | hedge funds | venture capital | United States | regulation

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