New rules adopted by the Securities and Exchange Commission have changed registration and reporting requirements for investment advisers – and some real estate investment advisers may be affected by the changes.
The rules, adopted by the Securities and Exchange Commission on June 22, implement provisions of the Dodd-Frank Act and provide guidance on exemptions from adviser registration, changes in reporting requirements for exempt and registered advisers, and implementation timelines. One big change eliminated the private adviser exemption from registration under the Investment Advisers Act. This exemption applied to investment advisers with fewer than 15 clients and was widely relied on by private fund investment advisers.
Congress was concerned that the private adviser exemption allowed the advisers of too many large private funds – including hedge funds, private equity funds and certain other pooled investment vehicles – to avoid registering with the SEC. The new legislation replaced the private adviser exemption with three more limited exemptions for advisers to venture capital funds, advisers to private funds where the adviser has less than $150 million in assets under management, and to foreign private advisers. However, the new legislation creates annual SEC reporting requirements that apply even to certain exempt advisers:
Venture capital exemption. The Dodd-Frank Act created a new exemption from registration for certain advisers that advise only venture capital funds. The SEC now defines a venture capital fund as a private fund that holds no more than 20 percent of the fund’s capital commitments in non-qualifying investments (other than short-term holdings); does not borrow or otherwise incur leverage, other than limited short-term borrowing; does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; represents itself as pursuing a venture capital strategy to its investors and prospective investors; and is not registered under the Investment Company Act and has not elected to be treated as a business development company.
Private fund adviser exemption. The SEC also adopted a rule affecting exemption for advisers that solely advise private funds that have less than $150 million in assets under management in the United States. Assets in the $150 million cap include the fund assets, valued at market value or fair value, and uncalled capital commitments, as well as the adviser’s proprietary assets and assets managed without compensation.
Foreign private advisers exemption. Foreign advisers are exempt from registration if they, among other things, don’t have a place of business in the United States, don’t hold themselves out as advisers to U.S. investors, have fewer than 15 U.S. clients and have less than $25 million in assets under management in the U.S.
Another Dodd-Frank provision of interest to real estate investors excluded family offices from the definition of investment adviser, exempting them from registration under the Advisers Act. The new SEC rule says a family office is a company that has no clients other than family clients, is wholly owned by family clients and controlled by family members or family entities and doesn’t hold itself out as an investment adviser. The rule also includes definitions for the terms family clients, family members, and other key terms of the rule.
State Registrations Required
The new law affects mid-size advisers and will require new state registrations. Prior to the Dodd-Frank Act, any adviser with assets under management of at least $25 million was entitled to register with the SEC on a federal level. The new law raised the threshold required for registration to $100 million. As a result, mid-sized advisers that manage between $25 million and $100 million in assets must register in the state where they are located, provided that the adviser is required to register in that state and is subject to examination in that state.
Alan Bell is a partner in the corporate group; and Layne Smith and Bryan Jenkins are associates in the corporate group of international law firm Dorsey & Whitney.
