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:
- Private Fund Adviser Exemption
- Venture Capital Fund Adviser Exemption
- Foreign Private Adviser Exemption
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.
- Since the Private Fund Adviser Exemption is available to advisers that only have private funds as clients, an adviser that has one or more clients that are not private funds is not eligible for the exemption and must register under the Advisers Act unless another exemption is available.
- An adviser may advise an unlimited number of private funds and still qualify for the Private Adviser Exemption, provided that the aggregate value of the private funds' regulatory assets under management ("AUM") is less than $150 million.
- Rule 203(m)-1 provides for a bifurcated treatment of U.S. advisers and non-U.S. advisers. A U.S. adviser must include the assets of all private funds it advises worldwide - a non-U.S. adviser must count only assets of private funds it manages from a place of business in the U.S. In this Tip, we refer to the assets of these private funds as "included private funds."
- Rule 203(m)-1 requires an adviser to aggregate the value of all assets of its included private funds to determine if the adviser remains below the $150 million threshold. The calculation is done at "market value" or if market value does not exist then at "fair value."
- Revised Form ADV requires accrued but unpaid liabilities and uncalled capital commitments of included private funds the adviser manages to be included in the calculation of the adviser's AUM.
- An adviser relying on the Private Fund Adviser Exemption must annually calculate the amount of assets in the included private funds it advises and report the amount in its annual updating amendment to its Form ADV.
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:
- Immediately after the acquisition of any asset, other than "qualifying investments" or "short-term holdings," holds no more than 20% of the fund's aggregate capital contributions and uncalled capital in non-qualifying investments ("non-qualifying basket") (other than short-term holdings) valued at cost or fair value as consistently applied by the fund.
- Does not incur leverage in excess of 15% of the fund's aggregate capital contributions and uncalled capital, and subject to an exception for guarantees of portfolio company indebtedness up to the value of the investment in the portfolio company, any such leverage is for a non-renewable term of no longer than 120 calendar days.
- Does not offer redemption or similar liquidity rights to investors except under extraordinary circumstances.
- Is not registered under the Investment Company Act and has not elected to be treated as a business development company under the Investment Company Act.
- Holds itself out to investors and prospective investors as pursuing a venture capital strategy.
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:
- Basic organizational and operational information about each fund, such as the type of private fund that it is (e.g., hedge fund or private equity fund), general information about the size and ownership of the fund, general fund data, and the adviser's services to the fund.
- Identification of five categories of "gatekeepers" that perform critical roles for the adviser and the private funds it manages (i.e., auditors, prime brokers, custodians, administrators and marketers).
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)