Private Investment Advisers May Get More Time to Register Under Dodd-Frank

The Dodd-Frank Wall Street Reform and Consumer Protection Act, all 800+ pages, was signed into law July 21, 2010. This is a sweeping change to US financial regulation and represents a significant change in the American financial regulatory environment. It affects all federal financial regulatory agencies and almost every aspect of the nation's financial services industry. The focus of the Dodd-Frank Act is to improve accountability and transparency in the financial services industry.

One aspect of Dodd-Frank is the registration of private security funds and the elimination of an exemption for private investment advisors. In the past, an investment advisor was not required to register with the Securities and Exchange Commission (SEC) if the investment advisor had fewer than 15 clients during the previous 12 months and did not hold itself out generally to the public as an investment adviser. Historically, many sponsors of hedge funds and private equity funds have used this exemption because they advise 15 or fewer funds, each of which, under the Advisers Act, constituted a single client.

The lack of regulation and reporting obligations related to private investment advisers has been an area of regulatory concern for years. According to the Act, advisors with between $25 and $100 in assets under management, and hedge fund and private-equity advisors are now required to register within one year of the law’s passage (July 21, 2011). It has been estimated that one-third of all private investment advisory firms over $1 billion have still not registered.

Registration will subject these investment advisers to numerous fiduciary, reporting and compliance burdens. For example, an adviser registered under the Advisers Act is required to act solely in the best interests of their clients, produce regular reports and adhere to strict record keeping requirements. They are also subject to SEC audits. Even these requirements are somewhat vague, as the final rules have been left to the SEC and have not yet been issued.

Rob McCabe, AMS senior consultant, Financial Services, points out, “With the final rules not yet issued, a majority of private investment firms obviously still need to work on compliance. Firms can get a head start on the project by reviewing the proposed rules.” (See proposed rules online.)

McCabe continues, “While all indications are that the deadline will be extended, and we hope it will be, it is not a good idea to wait on tackling your firm’s compliance through updates of policy and procedure.”

In a letter written on April 8, 2011 by SEC Associate Director Robert E. Plaze to David Massey, president of the North American Securities Administrators Association (NASAA), Plaze indicated that the SEC will consider extending the deadline for “private funds” to register with the SEC.

Plaze wrote, “...we anticipate that the Commission will issue those final rules (Dodd-Frank) in advance of July 21. However, given the time needed for advisers to register and come fully into compliance with the obligations applicable to them once they are registered, we expect that the Commission will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”

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