SEC Adopts Regulations Requiring Registration of Hedge Fund and Private Fund Advisers; Defines Venture Capital Fund

The SEC has adopted regulations facilitating the registration of advisers to hedge funds and other private funds as required by the Dodd-Frank Act, which ended the statutory exemption for advisers with fewer than 15 clients. As a result, many of these private fund advisers will now, not only register with the Commission, but be subject to its rules, its regulatory oversight and its examination program. In order to facilitate an orderly transition and enable private fund advisers to come into compliance with the new regime, advisers will not be required to comply with these registration requirements until the first quarter of 2012. To provide these advisers with a window to meet their new obligations, the transition provisions the Commission adopted require these advisers to be registered with the Commission by March 30, 2012. The new registration regime will provide the SEC and the public with information about the business operations of these advisers, as well as information about their conflicts of interest, disciplinary history and investment strategies. The regulations will also require these advisers to detail the size and strategy of their hedge funds and other private funds, as well as the identities of critical gatekeepers such as auditors and prime brokers that provide services to these funds. According to SEC Chair Mary Schapiro, the registration and reporting requirements are designed to obtain a meaningful collection of data that would aid investors and assist SEC regulatory and examination efforts, without requiring any disclosure that could inadvertently harm the interests of private fund investors. While imposing new registration responsibilities upon advisers to hedge funds and many other private funds, Dodd-Frank exempted from registration advisers solely to venture capital funds and advisers solely to private funds with less than $150 million in assets in the United States. But Congress mandated that these advisers be subject to certain reporting requirements. The SEC followed a balancing approach in developing a reporting regime for want Chairman Schapiro called "exempt but reporting advisers." The Commission seeks information on key census data about the firm, its private funds and any disciplinary information, noted the Chair, but decided not to require the full panoply of information, including the ADV, Part 2 client-oriented narrative disclosure that would be required of a registered investment adviser. Since this is the SEC's first time developing a reporting a regime for advisers that are exempt from registration, noted Chairman Schapiro, it is important that the Commission assess the reporting requirements for these advisers once it has experience receiving the information and can fine-tune the information collected at that point. Thus, Chairman Schapiro directed the staff to reconsider the information collected from "exempt but reporting advisers" after assessing the first year's filings. In her view, this will enable the Commission to make necessary adjustments if it is not receiving sufficient information from these advisers.A Although the law enables the Commission to examine these "exempt but reporting advisers," observed the Chair, the SEC does not intend to conduct routine examinations of them. The Commission will use its scarce resources to the advisers that are actually registered which, sad the Chair, is where the investing public expects the agency to be focused. The SEC defined venture capital funds in a way that distinguishes them from hedge funds and private equity funds by focusing on the lack of leverage of venture capital funds and the non-public, start-up nature of the companies in which they invest. The regulation focuses on the provision of capital for the operating and expansion of start-up businesses, rather than buying out prior investors. In crafting the definition of venture capital fund, the goal was to develop an accurate and legitimate definition without including loopholes that could be inappropriately exploited down the road. The definition flexibly provides a 20 percent basket that would be outside the strict venture capital-oriented investment parameters imposed on the remaining 80 percent of the fund. This 20 percent basket would enable legitimate one-off investments and flexibility while maintaining a fund's core venture capital nature. Chairman Schapiro added that the Commission will supplement the new regulations with consideration of adoption of new Form PF. As proposed earlier this year, Form PF would provide additional information from private fund advisers that would be reported on a non-public basis pursuant to the Dodd-Frank Act. The information would be used to inform the SEC and the Financial Stability Oversight Council about the systemic risk profile of private fund advisers and the private funds they manage. The Dodd-Frank Act provided for an exemption from registration for foreign advisers that do not have a place of business in the United States, and have less than $25 million in aggregate assets under management from U.S. clients and private fund investors and fewer than 15 U.S. clients and private fund investors. The Commission is adopting rules to define certain terms included in the statutory definition of "foreign private adviser" in order to clarify the application of the exemption and reduce the potential burdens for advisers that seek to rely on it.

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