Changes to SEC Registration Requirements for Private Investment Advisers


By: Michael Capellupo

Most investment advisers – essentially anyone that advises on investing in, purchasing, or selling securities for compensation – are required to register with the SEC and provide information about their trades and portfolios. In the past, investment advisers that had fewer than fifteen clients and acted in a private capacity were not required to register. On July 21, 2010, Congress changed that with the passage of The Dodd-Frank Wall Street Reform and Consumer Protection Act. Congress amended the statute that regulates the registration of investment advisers, 15 U.S.C. §80b-3, to require private investment advisers to register as of July 21, 2011. Nevertheless, due to administrative difficulties, the SEC will not be able to implement the change until at least the first quarter of 2012.

Because most private investment funds were treated as a single “client” under the old regime, many hedge funds and private equity advisers took advantage of the private investment advisor exemption and advised multiple funds, regardless of the number of fund investors, without registering with the SEC. Because these advisers will now have to register with the SEC, they may also have to register with state regulatory authorities if their state exemption was based on federal securities law.

As the change has yet to be implemented, it would be prudent for private investment advisers to review their accounts and ensure that they are prepared to comply with SEC regulations for registered investment advisers. The requirement include adopting and implementing written policies and procedures to maintain compliance, making annual updates to the registration form, providing a written disclosure statement to clients and prospective clients, maintaining a code of ethics, and keeping detailed books and records.

Once implemented, this change will have a noticeable impact on the management fees that previously exempt private investment advisers charge their clients or extract from funds. Researching and implementing compliance requirements for registered advisers will be costly and time-consuming. Advisers will also have to review compliance procedures for state authorities if their state exemption was based on a federal exemption. Advisers likely will pass at least some of these costs on to their clients through higher fees.

The prudent investor should determine whether his investment adviser is currently registered with the SEC. If he is not because he qualified under the private investment adviser exemption, the investor should realize that his fee will probably increase with the adoption of new SEC procedures in 2012. As newly registered investment advisers evaluate their compliance costs, their fees will fluctuate until the market levels out. Therefore, the proactive investor may want to consider switching to an investment adviser that has already been registered for several years in order to maintain stability.

The full impact of Dodd-Frank’s elimination of the private investment adviser exemption will soon become apparent as the SEC implements the amendment. However, advisers that are currently doing business under that exemption and will soon need to register should act now to ensure as smooth a transition as possible for both themselves and their clients.


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Fordham Journal of Corporate & Financial Law