Alert June 22, 2011

SEC Adopts Rules Creating Adviser Registration Exemptions and Implementing Certain Dodd-Frank Provisions

Who Could Potentially Be Affected?

A wide range of investment advisers, including managers of hedge, venture capital, private equity, real estate and other privately offered funds. Special exemptions also apply to family offices.

Summary

At an open meeting held today, the Securities and Exchange Commission adopted new rules under the Investment Advisers Act of 1940.  Based on the descriptions at the meeting, the new rules would:

  • Delay the registration/reporting deadline for new Advisers Act registrants and “exempt reporting advisers” until March 30, 2012. To facilitate transition, previously exempt private advisers will not be required to register until March 30, 2012. All advisers will be required to make a filing in the first quarter of 2012 and those previously registered advisers who no longer qualify for SEC registration will be required to withdraw by June 28, 2012.
  • Define “Venture Capital Funds.” The definition of a “venture capital fund” will include five conditions, including requirements that (1) investments be limited to direct equity investments in qualifying portfolio companies (subject to the basket described below), (2) borrowing be limited to 15% (we believe, of committed capital) and outstanding for no more than 120 days (with certain exceptions), (3) the fund not offer redemption/liquidity except in extraordinary circumstances, (4) the fund be held out as a “venture capital” fund, and (5) the fund not be registered as an investment company or business development company under the Investment Company Act of 1940.
  • Create a 20% “Basket” for Venture Capital Funds.  In addition to the previously proposed requirements, venture capital funds would be allowed a “basket” of 20% of capital commitments for non-conforming investments. The Staff indicated that the single basket of 20% was adopted in lieu of a more complex series of special exceptions.
  • Allow “Grandfathering” for Advisers to Certain Venture Capital Funds. The SEC adopted the rule on grandfathering substantially as proposed in November, with the three conditions that the fund had been represented to be a “venture capital fund,” that the first closing was prior to December 31, 2010 and that no new capital commitments are made after July 21, 2011.
  • Adopt “Private Fund Adviser” Exemption. The “private fund adviser” exemption for advisers whose only clients are “private funds” and that manage less than $150 million in the United States, was adopted substantially as proposed.
  • Allow Unibanco No-Action Position to Remain Effective.  The Staff noted that the SEC guidance provided in the Unibanco interpretation for “participating affiliates” of SEC-registered advisers should remain in effect, which we expect to be addressed in the releases. This eliminates an uncertainty for organizations with unregistered non-U.S. advisory entities that was created by some of the statements in the proposing release.
  • Impose Requirements on "Exempt Reporting Advisers".  The SEC adopted exempt reporting adviser reporting requirements, including the requirement for “exempt reporting advisers” to file portions of Part 1 of Form ADV.  Commissioner Schapiro noted that there was no current intention to subject exempt reporting advisers to routine examinations, while also noting that the SEC retains the authority to examine those advisers in its discretion.  The Staff noted that the Form ADV will include a uniform calculation for “assets under management.”
  • Adopt a "Family Office" Registration Exemption.  The Staff indicated this exemption would be consistent with no-action relief previously provided and the corresponding proposed rule, with some expansion from the earlier proposal particularly to address a broader universe of permitted “family clients” and to allow for a longer transition period (through December 31, 2013) for the termination of relationships with charitable entities that were not exclusively funded by the family.

Background

For additional background information on the disclosure, operational and SEC examination obligations imposed upon new Advisers Act registrants and “exempt reporting advisers” under the previously proposed rules, please see our Alerts dated November 19, 2010 and November 24, 2010.

Next Steps

This Alert is based solely upon verbal comments made at today’s open meeting.  We will issue a more detailed, follow-up Alert after the SEC releases the text of the newly adopted rules (which may occur later today).  In the interim, please feel free to contact your Goodwin Procter LLP attorney with any questions or concerns.