Fund Advisers Face New Registration, Reporting Regs

SEC rules, implementing Dodd-Frank requirements, include "family office" exclusions from Investment Advisers Act of 1940.

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 marked the onset of major changes for financial advisers. The SEC in June followed through with rulemaking responsibilities under the new law by releasing final rules that include new registration and reporting requirements for advisers to hedge funds and other private funds, and define “family offices” that are excluded from the Investment Advisers Act of 1940.


The rules could mean major new compliance responsibilities for CPAs who specialize in certain areas of personal financial planning.


The first set of rules requires advisers to hedge funds and other private funds to register with the SEC, establishes new exemptions from SEC registration and reporting requirements for certain advisers, and reallocates regulatory responsibility for advisers between the SEC and states. The other set of rules defines “family offices” that are to be excluded from the Investment Advisers Act.


The rules implementing the amendments to the Investment Advisers Act ( include a transitional exemption period so that private advisers, including hedge fund and private equity fund advisers, newly required to register do not have to do so until March 30, 2012. The rules regarding exemptions for venture capital fund and certain private fund advisers ( became effective July 21, 2011. Family offices that do not meet the terms of the exclusion under the new rule ( must register with the SEC or applicable state securities authorities by March 30, 2012.



In the first set of rules, the SEC also amended rules to expand disclosure by investment advisers, particularly about the private funds they manage, and revised the commission’s “pay-to-play” rule.


To enhance its ability to oversee investment advisers of private funds, such as hedge funds and private equity funds, and fulfill its responsibilities under Dodd-Frank, the SEC said in a press release that it is requiring advisers to provide additional information about the private funds they manage. The amended adviser registration form will require advisers of private funds to provide:

  • Basic organizational and operational information about each fund they manage, such as the type of private fund that it is (for example, hedge fund, private equity fund or liquidity fund), general information about the size and ownership of the fund, general fund data, and the adviser’s services to the fund.
  • Identification of five categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage (that is, auditors, prime brokers, custodians, administrators and marketers).


The SEC also adopted amendments that require all registered advisers to provide more information about their advisory business, including information about:

  • The types of clients they advise, their employees, and their advisory activities.
  • Their business practices that may present significant conflicts of interest (such as the use of affiliated brokers, soft-dollar arrangements and compensation for client referrals).


The rules also require advisers to provide additional information about their nonadvisory activities and their financial industry affiliations.



Under Dodd-Frank, private fund advisers may not need to register with the SEC if they are able to rely on one of three new exemptions, including for:

  • Advisers solely to venture capital funds.
  • Advisers solely to private funds with less than $150 million in assets under management (AUM) in the U.S.
  • Certain foreign advisers without a place of business in the U.S.


But the SEC can still impose certain reporting requirements upon advisers relying upon either of the first two of these exemptions (“exempt reporting advisers”). Rather than completing all of the items on the form, exempt reporting advisers will fill out a limited subset of items, including:

  • Basic identifying information for the adviser and the identity of its owners and affiliates.
  • Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
  • The disciplinary history (if any) of the adviser and its employees that may reflect on the integrity of the firm. Exempt reporting advisers will file reports on the commission’s investment adviser electronic filing system (IARD), and these reports will be publicly available on the commission’s website. These advisers will be required to file their first reports in the first quarter of 2012.



Dodd-Frank raised the threshold for SEC registration to $100 million in AUM by creating a new category of advisers called “mid-sized advisers.” A mid-sized adviser, which generally may not register with the commission and will be subject to state registration, is defined as an adviser that:

  • Manages between $25 million and $100 million for its clients.
  • Is required to be registered in the state where it maintains its principal office and place of business.
  • Would be subject to examination by that state, if required to register.


Note, however, that advisers with their principal office and place of business in Minnesota, New York or Wyoming with between $25 million and $100 million in AUM won’t have to switch to state regulation and instead must register with the SEC. New York did not provide confirmation that it conducts exams of advisory firms when surveyed by the SEC; Minnesota reported it doesn’t conduct exams; and Wyoming doesn’t have an investment adviser law.


The SEC said in a press release that this amendment to the Investment Advisers Act will force about 3,200 of the current 11,500 registered advisers to switch from registration with the SEC to registration with the states. These advisers will continue to be subject to the Investment Advisers Act’s general antifraud provisions. The SEC said its amendments:

  • Reflect the higher threshold required for SEC registration.
  • Provide a buffer to prevent advisers from having to frequently switch between SEC and state registration.
  • Clarify when an adviser will be a mid-sized adviser.
  • Facilitate the transition of advisers between federal and state registration in accordance with the new requirements. Advisers registered with the SEC will have to declare that they are permitted to remain registered in a filing in the first quarter of 2012, and those no longer eligible for SEC registration will have until June 28, 2012, to complete the switch to state registration.



The SEC also amended the investment adviser “pay-to-play” rule in response to changes in Dodd-Frank. The pay-to-play rule is designed to prevent an adviser from seeking to influence government officials’ awards of advisory contracts through political contributions.


The amendment allows an adviser to pay a registered municipal adviser to act as a placement agent to solicit government entities on its behalf, if the municipal adviser is subject to a pay-to-play rule adopted by the Municipal Securities Rulemaking Board (MSRB) that is at least as stringent as the investment adviser pay-to-play rule. Advisers will also continue to be permitted to hire as a placement agent an SEC-registered investment adviser or a broker-dealer that is subject to a pay-to-play rule adopted by the Financial Industry Regulatory Authority (FINRA) that is at least as stringent as the investment adviser pay-to-play rule.



The SEC also established definitions for several categories of exemptions created by Dodd-Frank. Those include:

  • Dodd-Frank amended the Investment Advisers Act to exempt from registration advisers that only manage venture capital funds, and directed the SEC to define the term “venture capital fund.” The commission is adopting a definition of “venture capital fund” that is designed to implement Congress’ intent in enacting this exemption.
  • The commission adopted a rule to implement the new statutory exemption for private fund advisers with less than $150 million in AUM in the United States.
  • The commission adopted rules to define certain terms included in the statutory definition of “foreign private adviser” to clarify the application of the foreign private adviser exemption and reduce the potential burdens for advisers that seek to rely on it. Under Dodd-Frank, foreign private advisers are those that (1) do not have a place of business in the U.S., (2) have less than $25 million in aggregate AUM from U.S. clients and private fund investors and (3) have fewer than 15 U.S. clients and private fund investors.



Historically, family offices were not required to register with the SEC under the Investment Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients. Dodd-Frank removed that exemption so the SEC could regulate hedge funds and other private equity fund advisers. Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Investment Advisers Act.


The SEC’s new rule enables those managing their own family’s financial portfolios to determine whether their “family offices” can continue to be excluded from the Investment Advisers Act. The rule excludes from the registration requirement any company that:

  • Provides investment advice only to “family clients,” as defined by the rule.
  • Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule.
  • Does not hold itself out to the public as an investment adviser.


The final rule expanded the definition to include “family clients” in lieu of the more narrow “family members” in the proposed rule ( The AICPA argued in favor of this change in comments it submitted on the proposed rule in November. The Institute said the definition of a family office’s “family clients” must be inclusive enough to encompass all of the clients and arrangements that are typically present in a single-family office. The AICPA’s comment letter is available at (For prior JofA coverage, see “AICPA Comments on SEC Proposed Rule for Family Offices.”)


The rule also defines family members and key employees that a family office can advise under the exclusion.  



Jeffrey Gilman is a JofA copy editor. To comment on this article or to suggest an idea for another article, contact him at or 919-402-4458.





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