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SEC Officially Adopts New Exemptive Rules Under Dodd-Frank Wall Street Reform and Consumer Protection Act - Guidance on the Newly Adopted "Private Fund Advisor Exemption"and SEC Reporting Requirements

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") amends the Investment Advisers Act of 1940 (the "Advisers Act") to remove the so-called "private adviser exemption"1 commonly relied upon by many investment advisers to avoid registration as a registered investment adviser with the Securities and Exchange Commission ("SEC"). In its place, the SEC has recently adopted newly-formulated Rule 203(m)-1, the "Private Fund Adviser Exemption," which exempts from registration any investment advisor who solely advises qualifying funds2 and who has less then $150 million in assets under management ("AUM"). Such exempted advisers ("Private Fund Advisers") will remain exempt from registration with the SEC but will now be subject to certain reporting requirements under newly-adopted Advisers Act Rule 204-4. Rule 204-4 also subjects Private Fund Advisers to potential SEC examination. Additionally, the Dodd-Frank Act defines a new class of advisers, "Mid-Sized Advisers," who, prior to the enactment of the Act, were, barring exemption, required to be registered with the SEC. Regulation of these Mid-Sized Advisors has now been reallocated to the various states, giving rise to, for some advisers, the need to transition from SEC registration to state registration.

The Private Fund Adviser Exemption. To qualify as an Exempted Private Fund Adviser, an investment adviser must (1) advise only qualifying funds and (2) have less than $150 million AUM. An investment adviser seeking to avail itself of this exemption from registration cannot act as adviser to any client that is not a qualifying fund, as defined, regardless of whether such client is based in the United States or in a foreign jurisdiction. However, a U.S.-based adviser can advise an unlimited amount of qualifying funds, so long as the adviser's total AUM, calculated in accordance with guidelines promulgated by the SEC and set forth in its newly-amended Form ADV3, is less then $150 million.

Although Private Fund Advisers will not be required to register with the SEC, they will nevertheless be required to complete and submit certain portions of revised Form ADV and annual updating amendments thereto designed to capture certain information about, among other things (see below), whether the adviser's AUM has exceeded$150 million. If an adviser submits an annual updating amendment indicating that its AUM has exceeded this amount, and assuming all other of its reporting requirements have been complied with, such adviser will have a 90 day "transition period" following the submission of such annual updating amendment during which it may continue to advise private fund clients before it must file a final report and apply for registration with the SEC. Fluctuations in AUM that occur between the submissions of annual updating amendments will not affect the availability of the exemption to the advisor, and thus do not trigger the need to register with the SEC.

New Reporting Requirements Under Rule 204-4. As aforementioned, Private Fund Advisers are required pursuant to Rule 204-4 to complete and submit certain portions of the newly-revised Form ADV Part 1A to the SEC through the Investment Advisor Registration Depository ("IARD"). Each Private Fund Adviser's submission will be available to the public through the SEC's Investment Advisor Public Disclosure website. The subset of revised Form ADV items Private Fund Advisers will be required to respond to will entail disclosure of, among other things, basic identification information (as contained in Items 1, 2.B. 3, and 10), industry activities and affiliations (as contained in Items 6 and 7.A.), disciplinary history (as contained in Item 11), and other details concerning the private funds to which the Private Fund Adviser provides services (as contained in Item 7.B.). These details will include, without limitation, gross assets of the advised fund or funds, investment strategy of such fund or funds, and certain limited details regarding such fund's or funds' investors. Exempt reporting advisers will not be required to complete any of the remaining Items of new Form ADV or any portion of Form ADV Part 2A or 2B.

Private Fund Advisers may file their initial report on revised Form ADV beginning January 1, 2012 and must file the initial report on or before March 30, 2012. For Private Fund Advisers formed after March 30, 2012, the initial report must be submitted within 60 days of relying on the Private Fund Adviser Exemption. Thereafter, all exempt reporting advisers must amend such reports at least annually, within 90 days of the end of the advisor's fiscal year (or more frequently, as may be required by the instructions to revised Form ADV).

Rules Applying to Certain Mid-sized Advisers. Prior to the enactment of Dodd-Frank, investment advisers generally, with a limited number of exceptions, could not apply for SEC registration until reaching an AUM threshold of $25 million; at $30 million advisers not already registered with the SEC or not otherwise exempt from registering with the SEC (including those availing themselves of the now defunct private adviser exemption) were required to register with the SEC. Accordingly, for many advisers already registered with a state or states' securities authority or authorities, reaching the $25 to $30 million AUM "zone" entailed transitioning from state to federal registration.

Section 410 of the Dodd-Frank Act augmented the operation of the $25/$30 million threshold by specifically creating a class of advisers with AUMs between $25 million and $100 million called Mid-Sized Advisers. Prior to the enactment of the Dodd-Frank, such advisers would (barring exemption) be required to be registered with the SEC. The Dodd-Frank Act, however, reallocated regulatory authority over Mid-Sized Advisers from the SEC to state securities authorities. Consequently, Mid-Sized Advisers now generally may not register with the SEC and are instead subject to state registration, obviating for Mid-Sized Advisers transitions from state to federal registration (and vice-versa, where a Mid-Sized Adviser's AUM drops below $25 million), while already SEC-registered Mid-Sized Advisers will be required to transition to state registration. Those Mid-Sized Advisers who were previously registered with SEC will have until March 30, 2012 to disclose to the SEC their AUM as of 90 days prior to the filing and until June 28, 2012 to withdraw their federal registration and register with applicable states.

Notwithstanding the foregoing, however, certain Mid-Sized Advisers will still be required to register with the SEC upon reaching the lower end of the Mid-Sized Advisor AUM range (i.e., $25 million). Such Mid-Sized Advisers required to register at $25 million include (1) those advisers who are not required to be registered as an investment advisor with the securities commissioner (or equivalent regulator) in the state in which it maintains its principal office and place of business and (2) those advisers who, even if registered, are not subject to examination as an investment advisor by their state securities commissioner (or equivalent state regulator). The former category includes advisers with principal offices and places of business in Wyoming (where all advisers located within the state are required to be registered with the SEC as Wyoming has not enacted an investment), while the latter includes advisers with principal offices and places of business in Minnesota and New York (states which do not, or have not indicated to the SEC, they subject registered investment advisers in their jurisdictions to examination). However, those Mid-Sized Advisors in Wyoming, Minnesota, and New York may still avoid SEC registration upon reaching $25 million AUM by availing themselves of some other exemption from SEC registration available to them, such as the Private Fund Adviser Exemption.


1 Advisers Act Rule 203(b)(3) provided an exemption from registration for investment advisers who, during the course of the preceding 12 months, had fewer than 15 clients and who neither held himself 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 or to a company that had elected to be a business development company under the Investment Company Act.

2 A “qualifying fund” means any fund that qualifies for an exclusion from the definition of an investment company as defined in Section 3 of the Investment Company Act of 1940 (“Investment Company Act”), in addition to any fund that qualifies for an exclusion under Section 3(c)(1) or 3(c)(7) of the same. A qualifying fund cannot be registered under the Investment Company Act or have elected to be treated as a business development company under the same.

3 To determine whether an adviser has reached the various dollar thresholds described herein, AUM is determined by “calculating the securities portfolios with respect to which an investment adviser provides continuous and regular supervisory or management services as reported on the investment adviser’s Form ADV.” (See Advisers Act Rule 275.203A-3.)

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