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(The news featured below is a selection from the news covered in the SEC Today, which is distributed to subscribers of that publication.)

SEC Adopts Rules Requiring Private Fund Advisers to Register and Creates New Exemptions for Certain Advisers

The SEC yesterday adopted rules that will implement the Dodd-Frank Act’s repeal of the private fund adviser exemption, thereby requiring hedge fund advisers and advisers of other private funds to register with the Commission by March 30, 2012. Commissioner Elisse Walter said the rules are a long overdue step toward bringing transparency to the private fund industry. Commissioners Kathleen Casey and Troy Paredes dissented, saying that the rules will hinder capital formation without a clear benefit to investors.

The Commission also approved several related rules, including ones to establish new exemptions from registration and reporting for certain advisers and reallocating regulatory responsibility for advisers between the SEC and states. The Commission voted to amend its rules to require more detailed disclosure by investment advisers, particularly with respect to the private funds they manage, and agreed to revise the pay-to-play rule.

Private fund advisers generally have avoided registering with the SEC based on an exemption for advisers with fewer than 15 clients. The advisers counted each fund as one client, even though the fund might have had hundreds of investors. The exemption, which was eliminated by the Dodd-Frank Act, enabled advisers handling large sums of money to avoid SEC oversight.

The staff said that the new rules and amendments are intended to enhance its ability to regulate private fund advisers by eliciting important information from them. Under amended Form ADV, advisers to private funds will have to provide basic organizational and operational information about each fund they manage, general information about the size and ownership of the fund, general fund data, and the adviser’s services to the fund. They also will have to identify five categories of “gatekeepers”—auditors, prime brokers, custodians, administrators and marketers—that perform critical roles for advisers and the funds they manage.

All registered advisers will have to disclose more information about their advisory business, including the types of clients they advise, their employees and their advisory activities. Business practices that may present significant conflicts of interest, such as the use of affiliated brokers and soft dollar arrangements, also must be disclosed.

Certain advisers will not have to register if they qualify for one of three new exemptions specified in the Dodd-Frank Act. They include advisers solely to venture capital funds, advisers solely to private funds with less than $150 million in assets under management in the U.S., and foreign advisers with fewer than 15 U.S. clients, without a place of business in the U.S., and with less than $25 million in aggregate assets under management from U.S. clients and private fund investors.

The Commission unanimously approved new rules to implement these exemptions. The rules define “venture capital fund” as a private fund that invests primarily in “qualifying investments” (generally, private, operating companies that do not distribute proceeds from debt financings in exchange for the fund’s investment in the company), but may hold certain short-term investments. It also states that a venture capital fund is one that is not leveraged except for a minimal amount on a short-term basis, does not offer redemption rights to its investors and represents itself to investors as pursuing a venture capital strategy.

The definition also states that the fund may invest in a “basket” of non-qualifying investments of up to 20 percent of its committed capital. Casey praised the 20 percent basket provision, saying that it will help ensure that funds are not unjustifiably prevented from making the most advantageous investments and from responding to changing market conditions efficiently.

Under a grandfathering provision, funds that began raising capital by the end of 2010 and represented themselves as pursuing a venture capital strategy will be considered venture capital funds. The Commission recognized that advisers may have difficulty conforming pre-existing funds, which generally have terms in excess of 10 years, to the new definition.

The Commission can still impose certain reporting requirements upon advisers relying upon either of the first two of the new exemptions (“exempt reporting advisers”). The new rules provide that exempt reporting advisers will be required to file, and periodically update, reports with the Commission, using the same registration form as registered advisers. However, they will only have to disclose a limited subset of the information that must be provided by registered advisers.

The new rules also address the allocation of regulatory responsibility between the Commission and the states. Regulation of investment advisers is divided between the two based primarily on the amount of money an adviser manages for its clients. Prior to Dodd-Frank, advisers could not register with the Commission unless they managed at least $25 million for their clients.

The Dodd-Frank Act raised the threshold for Commission registration to $100 million by creating a new category of advisers called “mid-sized advisers.” A mid-sized adviser, which will not have to register with the SEC and will be subject to state registration, is one 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, and would be subject to examination by that state, if required to register.

The SEC estimates that because of this amendment, about 3,200 of the 11,500 registered advisers will switch to state registration. The rules adopted yesterday reflect the higher threshold required for Commission registration and clarify when an adviser will be a mid-sized adviser. Registered advisers 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 Commission registration will have until June 28, 2012 to complete the switch to state registration.

The Commission also voted unanimously to adopt a new rule to provide that “family offices” are excluded from the Investment Advisers Act. Family offices are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services.

Family offices typically are considered to be investment advisers, and are subject to the Investment Adviser Act’s registration requirements. However, most family offices claim the exemption available to firms that advise fewer than 15 clients and meet certain other conditions. The Dodd-Frank Act repealed the 15-client exemption to enable the SEC to regulate hedge fund and other private fund advisers, and required the SEC to define “family offices.”

Under the final rule, a “family office” is any company that provides investment advice only to family clients, is wholly owned by family clients and is exclusively controlled by family members and/or family entities, and does not hold itself out to the public as an investment adviser. The rule sets out which family members and employees can be advised under the new exemption. Family offices that do not meet the terms of the exemption will have to register with the Commission by March 30, 2012.