Exempt Reporting Advisers
Must File Form ADV Part 1A
Applies to most hedge fund and private equity fund
managers that manage below $150 million in AUM
November 29, 2011
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John Schrier, Fund Structuring
CACEIS
John Schrier joined CACEIS (USA) Inc. in 2009 and currently serves as Corporate Counsel, Fund
Structuring. Mr. Schrier has over 20 years of legal and tax experience in the area of alternative
investments. His positions prior to joining CACEIS (USA) Inc. include serving as the partner in
charge of the tax practice and co-head of the investment management practice of a midtownManhattan law firm, leading capital markets practice groups as a principal with Big 4 accounting
firms, and serving as chief counsel with the U.S. subsidiary of Japan’s third-largest investment
management firm.
Mr. Schrier received a B.A. in Economics, cum laude, from the University of Missouri – Columbia, a
Juris Doctorate with honors from the University of Maryland – Baltimore, a Masters Degree in
Business Administration from the Smith School of Business, University of Maryland – College Park,
and an Ll.M. in Taxation from New York University. He is a regular speaker on asset management
regulatory compliance and tax matters, including recently at the Investment Advisers Association’s
annual summit, and before a joint gathering of examiners from the Securities and Exchange
Commission, Chicago Board of Exchange and North American Securities Administrators Association
as one of three non-governmental speakers to provide instruction on the detection of hedge fund
fraud. Mr. Schrier is on the Steering Committee of the Westchester Darfur Coalition, and holds a
Class 8 USSF Soccer Referee License.
3
Ron S. Geffner, Partner
Sadis & Goldberg LLP
Ron S. Geffner is a member of Sadis & Goldberg LLP
and oversees the Financial Services Group. He regularly
structures, organizes and counsels private investment
vehicles, investment advisory organizations, brokerdealers, commodity pool operators and other
investment fiduciaries. Mr. Geffner also routinely
counsels clients in connection with regulatory
investigations and actions. Mr. Geffner's broad
background with federal and state securities laws and
the rules, regulations and customary practices of the
United States Securities and Exchange Commission
(“SEC”), Financial Industry Regulatory Authority,
Commodities Futures Trading Commission and various
other regulatory bodies, enables him to provide strategic
guidance to a diverse clientele. He provides legal
services to several hundred hedge funds, private equity
funds and venture capital funds organized in the United
States and offshore
4
Daniel G. Viola, Partner
Sadis & Goldberg LLP
Daniel Viola is the Head of the Regulatory Defense and
Compliance Group. He structures and organizes brokerdealers and investment advisers and regularly counsels
investment professionals in connection with regulatory
matters.
Mr. Viola served as a Senior Compliance Examiner for the
Northeast Region of the U.S. Securities and Exchange
Commission (“SEC”), where he worked from 1992 through
1996. During his tenure at the SEC, Mr. Viola worked on
several compliance inspection projects involving compliance
examinations of registered investment advisers to ensure
compliance with the Investment Advisers Act, the
Investment Company Act, the Securities Act, and the
Securities Exchange Act. Mr. Viola’s examination experience
includes financial statement, performance advertising, and
disclosure document reviews, as well as analysis of
investment adviser and hedge fund issues arising under
ERISA and blue-sky laws.
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Overview
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Investment Adviser Registration
Advisers Act Rule Changes
Best Practices for Investment Advisers
Exempt Reporting Advisers (“ERAs”)
Form ADV Part 1A
Registration Issues for Advisers
Form PF
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Investment Adviser Registration
• Under the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), the Investment Advisers Act
of 1940 (the “Advisers Act”) was also amended to require many
investment advisers that were exempt from registration with the
SEC to register.
• Generally, the Dodd-Frank Act requires all investment advisers to
hedge funds and/or private equity funds that manage $150 million
or more in assets to register with the SEC.
• The new rules under the Advisers Act became effective on July 21,
2011.
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Advisers Act Rule Changes
IA-3220 Family Offices
Rule 202(a)(11)(G)-1. Exclusion and Definition of Family offices.
IA-3221 Rules Implementing Amendments to the Investment Advisers Act of
1940
Rule 202(a)(30)-1. Foreign Private Advisers.
Includes important definition of “client” and “investor”.
Rule 203-1. Application for investment adviser registration.
Subsection (e). March 30, 2012 deadline for Private Adviser Transition.
Rule 203A-1. Eligibility for SEC registration.
Rule 203A-2. Exemptions from prohibition on Commission registration.
Rule 203A-3(d). Definition of assets under management. See Form ADV instruction.
Rule 203A-5. Transition rules.
Rule 204-1. Amendments to Form ADV.
Rule 204-2. Books and records to be maintained by investment advisers.
Rule 204-4. Reporting by exempt reporting advisers.
Rule 206(4)-5. Political contributions by certain investment advisers.
Rule 222-1. Definitions (b) Principal office and place of business.
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Advisers Act Rule Changes
IA-3222: SEC Exemptions for Private Fund Advisers
Rule 203(l)-1. Venture capital fund defined.
Rule 203(m)-1. Private fund adviser exemption.
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Best Practices for Investment Advisers
• Review and revise Form ADV and disclosure brochure annually to reflect current
and accurate information.
• Review and update all contracts.
• Prepare and maintain all required records, including financial records.
• Prepare and maintain client profiles.
• Prepare a written compliance and supervisory procedures manual relevant to the
type of business.
• Prepare and distribute a privacy policy initially and annually.
• Keep accurate financials. File timely with the jurisdiction. Maintain surety bond, if
required.
• Calculate and document fees correctly in accordance with contracts and ADV.
• Review all advertisements, including website and performance advertising, for
accuracy.
• Implement appropriate custody safeguards, if applicable.
• Review solicitor agreements, disclosure, and delivery procedures.
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Exempt Reporting Advisers (“ERAs”)
ERAs are investment advisers to hedge funds and private
equity funds that avoid full SEC registration by relying on
either Rule 203(m)-1 or Rule 203(1)-1.
• Must prepare and file Form ADV Part 1A with the SEC by
March 30, 2012. Newly formed funds should file within 60
days from the date that such fund is formed.
• Rule 204A.
• Rule 206(4)-5.
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Form ADV Part 1 Expanded Scope
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New Filing Status for Exempt Reporting Advisers.
Contact person now CCO: additional persons may be named as authorized to discuss ADV.
More specific info. on numbers of employees, IARs, RR’s, new insurance agent info., total number of clients
(range reduced to within 100), percentage of clients who are non-U.S.
Item 5.D. Types of Clients, each client may be counted in multiple categories as appropriate.
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Amendments to Calculating Your Regulatory Assets Under Management.
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New Item requires approximate AUM for each type of client.
Include accounts for which you receive no compensation, inc. family and friends.
Private funds must include uncalled committed capital.
Item 7. Other types of related persons, swap dealers and participants, etc.
Item 8. Are all soft dollar benefits received 28(e) eligible? Do you compensate any persons for client referrals?
Item 9. Clarifies that custody questions apply when you or a related person has custody in connection with
advisory services you provide. How many persons act as qualified custodians to your clients?
Schedule D, Section 7.B. More info. on private funds including Private fund identification
number, and laws of what state or country in which funds organized, plus exclusion status, and
master-feeder status, type of fund (hedge, liquidity, private equity, real estate, securitized asset,
venture, other), ownership of funds, expanded info. on auditors, identification of prime brokers,
custodians and administrators, identification of any third party marketers.
See red-line version at: http://www.sec.gov/divisions/investment/iard/formadv1a-comparison.pdf.
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Registration issues for advisers located in
New York
• New York advisers with pooled investment vehicles and/or separately managed
accounts and less than $25 million in AUM must register with New York if the
adviser has six or more New York clients.
• Advisers with between $25-$100 million in AUM (“mid-sized advisers”) must
register with the SEC. If they advise only pooled investment vehicles, they can avoid
registration, but must file as exempt reporting advisers (“ERAs”).
▫ Since New York does not have an examination program, mid-sized advisers in
New York with at least one separately managed account must register with the
SEC.
• Advisers with over $150 million in AUM are required to register with the SEC.
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Registration issues for advisers located in
New York - continued
• Advisers who file as ERAs:
▫ Required to fill out several items of Part 1A of Form ADV (“Part 1A”).
▫ Subject to certain provisions of the Investment Advisers Act of 1940, Sections
204A and 206.
▫ Required to establish and maintain and enforce written policies and procedures.
▫ Subject to pay-to-play rules.
▫ Not required to undergo routine SEC compliance examinations, still subject to
SEC’s examination authority.
▫ Must submit their initial Form ADV within sixty (60) days of first relying on the
exemption with the first filing required to be made between January 1, 2012 and
March 30, 2012 and then annually thereafter.
▫ All reports filed by ERAs will be made publicly available.
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Registration issues for advisers located in
California
• On May 13, 2011, the California Department of Corporations published a Status Quo
Letter allowing advisers with a place of business in California who were previously
relying on the private adviser exemption to continue to rely on the exemption until
final rules were adopted. No final rules have been adopted as of yet.
• Advisers with less than $25 million in AUM do not have the option of registering as
exempt reporting advisers and must register with California.
• Advisers with a place of business in California, between $25 and $150 million in
AUM, who advise only pooled investment vehicles must file as ERAs by March 30,
2012.
• California advisers that only advise pooled investment vehicles and manage over
$150 million in AUM are required to register with the SEC.
• California advisers that advise separately managed accounts and have over $100
million in AUM are required to register with the SEC.
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Registration issues for advisers located in
Connecticut
• Recently adopted federal exemptions for Connecticut advisers allow many advisers to
avoid full SEC and state registration.
• Advisers with a place of business in Connecticut and between $0 and $150 million in
AUM who advise only pooled investment vehicles are able to avoid full registration by
filing as ERAs.
• Connecticut advisers with over $150 million in AUM are required to register with the
SEC.
• Connecticut advisers that manage between $0 and $100 million in AUM must
register with Connecticut, or if advising only pooled investment vehicles, can file as
ERAs.
• Connecticut advisers with over $100 million in AUM who advise at least one
separately managed account must register with the SEC.
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Registration issues for advisers located in Texas,
Maryland, Massachusetts and Pennsylvania
• In general, if an adviser is located in the above states, then they
must register with their state regulators if they manage between $0
and $100 million in AUM.
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Registration issues for advisers located in
Illinois and New Jersey
• Advisers managing more than $25 million in AUM must register
with the SEC, if the state does not require registration, unless the
adviser can find an exemption from SEC registration.
• Advisers based in Illinois and New Jersey who have more than five
(5) clients triggers state registration.
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The Creation of Form PF
Who is Required to File?
Registered investment advisers that advise one or more private funds and have at least $150 million in regulatory assets under
management (“RAUM”). The filing deadlines vary based on the RAUM, as follows:
RAUM Attributable to Hedge
Funds
Less than $150 million
$150 million - $1.5 billion
$1.5 billion - $5 billion
$5 billion or more
Filing Frequency
First Filing Deadline
No filing required
Annually, within 120 days after
end of fiscal year.
Quarterly, within 60 days after
end of fiscal quarter.
Quarterly, within 60 days after
end of fiscal quarter.
No filing required
April 30, 2013
February 28, 2013
August 31, 2012
For advisers with RAUM that is attributable to private equity funds, liquidity funds and registered money market funds,
the RAUM threshold varies.
ERAs are not required to file Form PF.
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The Creation of Form PF
The Basis for the SEC’s Proposed Form PF
Section 204(b)(3) REQUIRED INFORMATION.—The records and reports required to be maintained
by an investment adviser and subject to inspection by the Commission under this subsection shall
include, for each private fund advised by the investment adviser, a description of—
•
(A) the amount of assets under management and use of leverage, including off-balance-sheet leverage;
(B) counterparty credit risk exposure;
(C) trading and investment positions;
(D) valuation policies and practices of the fund;
(E) types of assets held;
(F) side arrangements or side letters, whereby certain investors in a fund obtain more favorable rights or
entitlements than other investors;
(G) trading practices; and
(H) such other information as the Commission, in consultation with the Council, determines is necessary and
appropriate in the public interest and for the protection of investors or for the assessment of systemic risk, which
may include the establishment of different reporting requirements for different classes of fund advisers, based on
the type or size of private fund being advised.
Section 211. Requires rules within one year of Dodd-Frank Act passage.
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Form PF
To comport with the provisions of Sections 404 and 406 of the Dodd-Frank Act requiring greater
transparency for large funds with systemic risk implications for the stability of the nation’s financial markets,
the SEC proposes a rule requiring advisers to large private funds to file a new, Form PF on a quarterly basis.
The information on Form PF would remain confidential and unlikely to be released under Freedom of
Information Act requests, and would be used by the Financial Stability Oversight Council (FSOC) to oversee
systemic financial risks.
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Form PF disclosures would vary based upon fund type, but would include the following:
▫ Large hedge funds - advisers would disclose their concentration by asset class, geography, and
turnover, and in certain instances would also disclose details including leverage, risk profile, and
liquidity.
▫ Large liquidity funds – advisers would disclose asset type, risk profile, and details of the fund’s
compliance, or lack thereof, with Investment Company Act Rule 2a-7.
▫ Large private equity funds – advisers would disclose leverage, bridge financing, and investments in
financial institutions.
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For further information about the proposal, go to
http://www.sec.gov/news/press/2011/2011-23.htm
•
.
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Sadis & Goldberg LLP
If you have questions, please contact:
Ron S. Geffner
212.573.6660
rgeffner@sglawyers.com
Daniel G. Viola
212.573.8038
dviola@sglawyers.com
Sadis & Goldberg LLP
551 Fifth Avenue, 21st Floor
New York, NY 10176
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CACEIS
If you have questions, please contact:
John Schrier
212.403.9541
john.schrier@caceis.com
CACEIS
295 Madison Avenue, 5th Floor
New York, NY 10017-6304