SEC Likely to Delay until 1Q 2012 Registration of Hedge Fund and Private Equity Fund Advisers, and Mid-Size Advisers Switching to State Regulation

An SEC senior official indicated that, while the Commission will issue final rules under Dodd-Frank mandating hedge fund and private equity fund registration in advance of July 21, the SEC will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012. In a letter to David Massey, Deputy Securities Administrator of the North Carolina Securities Division, and President of the North American Securities Administrators Association, Robert Plaze, Associate Director in the Division of Investment Management said that the delay, if it occurs, will be intended to give hedge fund and private equity fund advisers the time they need to register and come fully into compliance with the obligations applicable to them once they are registered with the Commission. Section 403 of the Dodd-Frank Act repeals, as of July 21,2011, the private adviser exemption in section 203(b)(3) of the Investment Advisers Act and will require advisers relying on that exemption, including advisers to many hedge funds and other private funds, to register with the SEC. In addition, Dodd-Frank provides some new exemptions, such as for advisers to venture capital funds and advisers to private funds with less than $150 million in assets under management in the United States. In the letter to the NASAA president, Mr. Plaze said the Commission will also consider extending the date by which many mid-sized advisers must transition to state regulation such that all SEC-registered advisers would be required to report their eligibility for registration with the Commission in the first quarter of 2012.Those no longer eligible for Commission registration, such as mid-sized advisers, would have a grace period providing them time to register with the appropriate state regulators and come into compliance with state law before withdrawing their SEC registration. Under Section 410 of Dodd-Frank, mid-sized advisers with up to $100 million of assets under management will have to withdraw from registration with the Commission and register with one or more states pursuant to state law. Once the Commission adopts the implementing rulemaking, noted the SEC official, the Investment Adviser Registration Depository system (lARD) will require re-programming to accept advisers' transition filings. The expected grace period for mid-sized advisers is based on the SEC's understanding that the re-programming process will take until the end of the year to complete. Section 410 raised the assets under management trigger from $25 million to $100 million for investment adviser state registration. The $25 million trigger for state regulation was set by the National Securities Markets Improvement Act of 1996. In NSMIA, Congress employed the principle that the SEC should regulate larger investment advisers, while the states should oversee smaller advisers.

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