Elimination of the Private Adviser Exemption and Creation of New Exemptions
Previously, Section203(b)(3) of the Investment Advisers Act of 1940 (the "Advisers Act") exempted from registration an adviser who, during the course of the preceding 12 months, had fewer than 15 clients and who neither held itself out generally to the public as an investment adviser nor acted as an investment adviser to any investment company registered under the Investment Company Act of 1940 (the "Investment Company Act") or to any business development company. Many advisers to hedge funds and other pooled investment vehicles relied on this so-called "private adviser exemption" to avoid the SEC's registration requirement.
Effective July 21, 2011, Dodd-Frank eliminated the private adviser exemption and replaced it with three more limited exemptions from registration under the Advisers Act:
On June 22, 2011, the SEC adopted new rules and rule amendments to the Advisers Act to implement these new exemptions.
Private Fund Adviser Exemption
New Section 203(m) of the Advisers Act directs the SEC to provide an exemption from registration to any investment adviser that only advises qualifying private funds and has assets under management of less than $150 million. Rule203(m)-1 defines a "qualifying private fund" as a fund that would be an investment company as defined in section 3 of the Investment Company Act, but is not because the fund qualifies for an exclusion from that definition provided by section3(c)(1) or 3(c)(7) of that act. Under Rule 203(m)-1, the fact that the fund may also qualify for an additional exclusion (such as that provided by section 3(c)(5)) will not prevent the fund from being a qualifying private fund.
Venture Capital Fund Adviser Exemption
New Section 203(l) of the Advisers Act provides for an exemption from registration for investment advisers who provide advice solely to "venture capital funds." New Rule203(l)-1 defines a "venture capital fund" as a private fund that:
New Reporting Requirements
For Advisers Relying on the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption
New Rule 204-4 requires advisers that are relying on either the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption ("Exempt Reporting Advisers") to annually file with the SEC the following items of Part 1A of Form ADV: Item1 (Identifying Information); Item2.B (SEC Reporting by Exempt Reporting Advisers); Item3 (Form of Organization); Item6 (Other Business Activities); Item7 (Financial Industry Affiliations and Private Fund Reporting); Item10 (Control Persons); Item11 (Disclosure Information), as well as all corresponding Schedules. All filed information will be publicly available on the SEC's website. These advisers need not complete or file Form ADV Part 2A (firm brochure) or Part 2B (brochure supplements).
An Exempt Reporting Adviser must submit its initial Form ADV within 60 days of first relying on the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption, with the first such filing required to be made between January 1, 2012 and March 30, 2012, and then annually thereafter (subject to amendment requirements).
For All SEC-Registered Advisers Who Advise Private Funds
Commencing January 1, 2012, each registered adviser who advises a private fund will provide more information about the fund than is currently required. The additional information includes:
Foreign Private Adviser Exemption
The Foreign Private Adviser Exemption applies to an investment adviser that: (a)has no place of business in the U.S.; (b)has, in total, fewer than 15 clients in the U.S. and investors in the U.S. in private funds advised by the adviser; (c)has assets under management attributable to such clients and private fund investors of less than $25million; and (d)neither holds itself out generally to the public in the U.S. as an investment adviser nor acts as an investment adviser to a registered investment company or business development company.
For further information concerning investment adviser regulation under Dodd-Frank, please contact our Financial Services practice group.
 Rule 203(l)-1(c)