Dodd-Frank to Change Investment Adviser Registration Requirements

By Craig Foster

Are you an investment adviser currently registered with the Securities and Exchange Commission (“SEC”)? If so, you may have to de-register with the SEC and register instead with one or more states, as required by the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

New Requirements. Currently, advisers with less than $25 million of assets under management (“AUM”) register at the state level, and advisers with $25 million or more of AUM register with the SEC. Dodd-Frank generally raises the AUM threshold for SEC registration, replacing the current registration scheme with the following requirements:

Adviser AUM Registration Requirements
Less than $25 million Register with the applicable state(s).
At least $25 million but less than $100 million Register with the applicable state(s), unless the adviser:

(a) serves as an adviser to a registered investment company or business development company;

(b) would be required to register in 15 or more states; or

(c) is not required to register in the state in which the adviser maintains its principal office and place of business.

If (a), (b) or (c) applies, register with the SEC.

$100 million or more Register with the SEC.

Threshold for Private Fund Advisers. Under Dodd-Frank, advisers with only “private funds” as clients and at least $150 million of AUM will be required to register with the SEC. Otherwise, such advisers are subject to the laws of the applicable state(s). A “private fund” is an issuer that would be an investment company required to register under the Investment Company Act of 1940 but for the exemptions from registration available under Sections 3(c)(1) and 3(c)(7) of that act. We will address Dodd-Frank requirements applicable to private fund advisers in a future Tonkon Tip.

Transition Concerns. The Dodd-Frank registration requirements will be effective on July 21, 2011. The SEC plans to propose transition implementation rules by the end of this year, and Oregon’s Division of Finance and Corporate Securities (“DFCS”) is expected to issue transition rules in early 2011. To date, DFCS has not indicated that it plans to modify Oregon’s registration requirements for SEC registrants transitioning to state registration (i.e., a surety bond, financial statements and proposed client contracts will still be required in addition to other Oregon requirements). An SEC registrant transitioning to state registration will not, however, need to update a representative’s Form U4 due to the transition, as the adviser’s Investment Adviser Registration Depository number associated with that representative will not change.

Practical Tips. Since the transition from the SEC to state registration will require a significant amount of work, each SEC-registered adviser transitioning to state registration should begin the transition work as soon as possible to ensure its successful completion by the compliance deadlines. Specifically, each transitioning SEC-registered adviser should:

  • Determine those states where registration is required. When applicable transition rules are issued, de-register with the SEC and apply for state registration in all such states. To avoid paying multiple renewal fees, consider making such application(s) after January 1, 2011. Note that while each state has somewhat different requirements, most states do not require registration if the adviser has no place of business in the state and fewer than six clients in the state.
  • Revise marketing materials and website content to remove references to being an SEC-registered or federal investment adviser.
  • Review all contracts (including with vendors and clients) for clauses that contain covenants or other provisions that require the adviser to maintain effective SEC registration.
  • Discuss with key service providers, such as broker-dealers and custodians, whether a transition to state registration will affect the services the adviser receives.
  • Address with any provider of errors and omissions insurance whether a transfer to state registration will affect current coverage or premium payments.

The North American Securities Administrators Association has established a resource center related to the state transitioning of advisers under Dodd-Frank, available by clicking here. While providing helpful general guidance on the transition, users of the resource center should be aware that all registration requirements should be verified with the applicable state(s).

Future Tip on Advisers to Private Investment Funds. A significant number of private investment fund advisers rely on an exemption from federal registration requirements available to advisers with fewer than 15 U.S. clients (each private investment fund is counted as a single “client” under federal rules) if the adviser meets certain criteria. Dodd-Frank eliminates that exemption effective July 21, 2011. As a result, many such advisers will be required to register with the SEC or with the applicable state(s), unless they meet the criteria for one of the new fund adviser exemptions created by Dodd-Frank. We will discuss Dodd-Frank’s impact on advisers of private investment funds in a future Tonkon Tip.

For further questions concerning Dodd-Frank and its impact on investment adviser registration requirements, please contact our Financial Services practice group.

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