Annual Letter: 2012
This is our annual letter briefly reviewing various issues that our investment adviser clients should consider over the next few days or weeks.
New Investment Adviser Registration Rules
As discussed in our previous letter to clients and friends, the Securities and Exchange Commission (the “SEC”) has adopted new investment adviser registration requirements under the Investment Advisers Act of 1940 (the “Advisers Act”) as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). As discussed in our letter sent together with this letter, the California Commissioner of Corporations has also proposed to amend the exemption from California investment adviser registration available to advisers that advise only Private Funds (defined in Item 2 below).
1. Becoming Registered or Switching Registration. These regulatory changes will require many of our clients that are currently not registered as investment advisers with any regulatory authority to register in 2012. They also will require some of our clients that are SEC-registered to switch to state registration and vice versa. If your firm is unregistered and you are required to register in California, the registration deadline may be as early as March 30, 2012, in which case, you should begin the filing process immediately. If your firm is required to register with the SEC, you should file Form ADV by February 14, 2012. The entire registration process can take from 60 to 120 days or longer. Therefore, we recommend that you call us as soon as possible to discuss a timeline for the registration process if these requirements apply to your firm.
2. Exemptions. An investment adviser with assets under management (“AUM”) of less than $150,000,000 that advises only Private Funds is exempt from SEC registration (an “Exempt Reporting Adviser”). A “Private Fund” is a fund that would be an investment company under the Investment Company Act of 1940 (the “ICA”), but for ICA section 3(c)(1) or 3(c)(7). Most hedge funds, private equity funds and venture capital funds are Private Funds. Exempt Reporting Advisers will be required to file reports on Part 1A of Form ADV with the SEC on the IARD, disclosing organizational and operational information, but will not be registered and will not be required to prepare and deliver to investors Part 2 of Form ADV. An Exempt Reporting Adviser must file its first report by March 30, 2012. A registered adviser that is switching to Exempt Reporting Adviser status must first withdraw its registration by filing Form ADV-W on the IARD system before filing its first Exempt Reporting Adviser report. As previously mentioned, California has proposed an exemption from registration that would be available to advisers to Private Funds, but we do not know whether or when the exemption will be adopted, if ever.
The remainder of this letter discusses the regulatory requirements that currently apply to investment advisers given their registration status now.
Federally Registered Investment Advisers
1. Annual Updating Amendment to Form ADV. If you are an SEC-registered adviser, you must amend your Form ADV each year within ninety days after the end of your fiscal year. This annual amendment must update your responses to all items of Parts 1 and 2 of Form ADV. You must amend Part 1 electronically on the IARD system.
When you amend Part 1, the IARD system will prompt you to indicate the type of amendment. You should select “annual updating amendment.” Part 1 has been extensively revised, especially those items that require information about private funds. Advisers to private funds will need extra time to review those items and may need to discuss them with us before filing.
Unlike Part 1, Part 2A is not an online form. Instead, you must submit Part 2A electronically as a separate document in text-searchable PDF format. The IARD will not accept any other format, including a PDF file containing a scanned copy of a paper document. An SEC-registered investment adviser is not required to file Part 2B or any amendments, but is required to keep its updated Part 2B in its records.
The IARD filing fees for an SEC-registered adviser for an annual updating amendment are (a) $40 if the adviser’s AUM is below $25,000,000, (b) $150 if the adviser’s AUM is between $25,000,000 and $100,000,000 and (c) $225 if the adviser’s AUM is over $100,000,000. You must fund your IARD account with the appropriate amount before you submit the amendment.