On July 15, 2010, the United States Senate passed the House-approved Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed by President Obama on July 21, 2010.
Venture Capital Adviser Exemption
The Private Fund Act includes a new exemption from registration for any investment adviser that acts as an adviser solely to one or more venture capital funds. Significantly, the Private Fund Act does not define what constitutes a “venture capital fund,” but rather mandates that the SEC issue final rules within one year of the passage of the Private Fund Act that define the term “venture capital fund.” The rules to be issued by the SEC with respect to advisers to venture capital funds must include provisions requiring the maintenance of certain records and the provision of certain reports by advisers to venture capital funds who are relying upon this exemption from registration.
Exclusion for Family Offices
The SEC has excluded “family offices” from the definition of an investment adviser through a series of no-action letters since the Advisers Act was passed in 1940. The Private Fund Act now specifically excludes “family offices” from the definition of an investment adviser. However, it requires that the SEC adopt rules to define the term “family office.” The rules must provide an exclusion for family offices that is consistent with the previous policies and orders issued by the SEC and must take into account the range of organizational and employment structures used by family offices. In addition, the rules must include a grandfathering provision that would exclude anyone who was not registered or required to be registered on January 1, 2010, solely because it provides investment advice to (and was so engaged before
January 1, 2010):
- Natural persons who are officers, directors or employees of the family office who have invested with the family office before January 1, 2010, and are “accredited Investors” under Regulation D.
- Any company owned exclusively and controlled by members of the family of the family office, or as the SEC may prescribe by rule.
- Any SEC-registered investment adviser that provides advice and identifies investment opportunities to the family office, invests in these opportunities on the same terms as the family office, and whose assets as to which the family office directly or indirectly provides investment advice represent no more than 5 percent of the value of the total assets as to which the family office provides investment advice.
Significantly, any family office that would not fall within the SEC’s definition but for the grandfathering provision would still be an investment adviser for purposes of the anti-fraud provisions of the Advisers Act.
Exemption for Private Fund Advisers with Managed Assets of $150 Million or Less
The Private Fund Act also calls for the SEC to provide an exemption from registration to any investment adviser to private funds if the adviser acts as an adviser solely to private funds and has assets under management in the United States of less than $150,000,000. The exemption is available for advisers that would otherwise be subject to registration with the SEC (see discussion below on the new threshold for federal registration). Notwithstanding this exemption, the SEC will require such advisers to maintain specified records and provide the SEC with such annual or other reports as the SEC determines are necessary or appropriate in the public interest or for the protection of investors.
Foreign Private Adviser Exemption
An exemption to registration is included for “foreign private advisers”. A “foreign private adviser” is defined as any investment adviser who has:
- No place of business in the United States;
- In total, fewer than 15 clients (with an investment fund and its investors each counting as one client in the
United States); and - Total assets under management attributable to clients (including private funds and their investors) in the
United States of less than $25 million, or such higher amount as the SEC may deem appropriate;
and does not:
- Hold itself out to the public in the United States as an investment adviser;
- Act as an investment adviser to a registered investment company; or
- Act as a company that has elected to be a business development company pursuant to the 1940 Act and has not withdrawn its election.
SBIC Exemption
The Private Fund Act includes a new exemption for any investment adviser, other than a business development company, that solely advises: (a) small business investment companies (“SBICs”) that are licensees under the Small Business Investment Act of 1958 (“SBIA”); (b) entities that have received from the Small Business Administration notice to proceed to qualify for a license as an SBIC under the SBIA, which notice or license has not been revoked; or (c) applicants affiliated with one or more licensed SBICs and that have applied for another license under the SBIA, which application remains pending.
