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Asher Bearman

As a result of the new rules under the Investment Advisers Act of 1940, even fund managers that are exempt from registration will need to file annual reports with the SEC.  Exempt reporting advisers (“Exempted Advisers”), including fund managers that rely on either the venture capital fund exemption or the private fund adviser exemption, will be subject to SEC oversight as “exempt reporting advisers” and must complete and periodically update a portion of Form ADV, the same form used by registered advisers.  This filing obligation becomes mandatory for Exempted Advisers beginning in the first quarter of 2012.  Form ADV is being further amended to reflect other changes pursuant to the Dodd-Frank Act, but those other changes are technical changes applicable to registered investment advisers and are beyond the scope of this discussion, which focuses on Exempted Advisers.

An Exempted Adviser does not need to report any of this information to the SEC until March 30, 2012, but should plan to file their completed Form ADV (Parts 1 and 2) no later than February 14, 2012 to ensure compliance by the deadline (since it can take up to 45 days for initial applications to be approved).  Form ADV filings are made electronically with the SEC through the Investment Adviser Registration Depository.  Generally, these filings are made at least annually, within 90 days of the end of the adviser’s fiscal year, and more frequently in certain cases.  All information filed on Form ADV is publicly available.

What information must be provided?

Exempted Advisers will need to complete the following sections of Part 1A of Form ADV:

  • Identifying information about the Exempted Adviser, including its name, address, contact information, form of organization, the identity of its owners and affiliates (Items 1, 3, & 10)
  • A statement of the exemption(s) the Exempted Adviser is relying on to avoid registration, including assets under management in private funds for those relying on the private fund adviser (under $150M AUM exemption) (Item 2.C)
  • Information regarding the investment adviser’s form of organization (Item 3)
  • Certain other business activities of the investment adviser that the investment adviser and its affiliates are engaged in that present conflicts of interest that may create significant risk to clients (Item 6)
  • Private fund information for each private fund the Exempted Adviser manages (Item 7)
  • Information regarding control persons (Item 10)
  • The disciplinary history of the investment adviser and its employees (Item 11)
  • Schedules A, B, C or D of Part 1A, as applicable.

Private Fund Information to be Reported (Item 7.B. of Form ADV)

Fund managers, including Exempted Advisers, will need to provide detailed information about each private fund they advise by completing a separate Section 7.B. of Schedule D for each.  I expect this to be one of the more controversial reporting obligations, as it has the risk of requiring funds to provide information that historically has been guarded as confidential by many fund managers.

Fund information that must be disclosed includes, for each private fund:

  • Identifying information about the fund, including the name and identification number of the fund, the state or country where the private fund is organized, and the name of its general partner and its directors (or persons occupying similar positions).
  • Organizational structure of the fund, such as whether the fund is affiliated with other funds, is a fund of funds, etc.
  • The gross asset value.  Unlike the proposed rules, the final rules do not require Exempted Advisers to report a private fund’s assets or liabilities under GAAP or the percentage of each fund owned by particular types of beneficial owners. It remains to be seen whether this information remains exempt for all fund managers in the future – the SEC has reserved the right to make these disclosures part of the new proposed Form PF.
  • Aggregate capital commitments to the fund
  • Information about the fund’s investors, including the approximate number of beneficial owners of the fund and the approximate percentage of the fund beneficially owned by the adviser and its related persons, funds of funds and non-U.S. persons; and the extent to which clients of the adviser are solicited to invest, and have invested in the fund.
  • Identification of third parties providing certain key services to the fund (such as auditors, administrators, custodians etc.) i.e., auditors, prime brokers, custodians, administrators and marketers), including their identity, location and relation to the adviser.
  • Regulatory status of the fund, including whether and which exemption the fund relies upon for purposes of the Investment Company Act, whether the fund is subject to the jurisdiction of a foreign regulatory authority, and whether the fund relies on an exemption from registration under the Securities Act of 1933 with respect to its securities such as Regulation D;
  • The investment strategy employed by the fund, such as whether the fund is a venture capital fund, private equity fund, hedge fund, real estate fund, etc.

Fund managers also do not yet need to report fund performance; however, that also may change in the future, in the SEC’s discretion.

This post is part of a series of recent posts on the new investment adviser rules issued by the SEC pursuant to the Dodd-Frank Act:

  1. Venture Capital Fund Exemption (and grandfather rules for existing VC funds)
  2. Private Fund Advisers Exemption (Having Less Than $150 Million in Assets Under Management)
  3. Foreign Private Adviser Exemption
  4. Family Office Exemption
  5. Reporting Requirements of Exempt Fund Managers and Related Rules