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2012 Reminders for Private Fund Advisers

February 6, 2012
by: Neil P. Casey

The regulatory landscape for hedge funds and private equity funds has been changed dramatically by the Dodd Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and subsequent rulemaking by the Securities and Exchange Commission (SEC). Advisers to these funds are now required to register with the SEC or state regulatory authorities unless they are able to qualify for one of a handful of narrow exemptions. Additionally, regulatory responsibility for mid-sized advisers (i.e. assets under management between $25 million and $100 million) has largely been shifted from the SEC to state regulators. And, lastly, in the interests of identifying systemic risks, more disclosure is now required with respect to private funds, some of which is to be submitted to the SEC on a confidential basis and the remainder of which will be publicly available.

In light of these changes, we present below a summary of certain regulatory considerations for private funds and advisers under federal law, including various annual and ongoing obligations.

Unregistered Advisers

As widely reported, the Dodd-Frank Act repealed the “private adviser” exemption under Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (the Advisers Act), and many states have followed suit under corresponding state laws.[1]  If you have previously relied on this exemption, you may be required to take urgent action this month to register with the SEC and/or relevant state securities authorities if you are not otherwise exempt from registration. New applicants for SEC registration must make the appropriate Form ADV filing through the IARD (Investment Adviser Registration Depository) no later than February 14, 2012, in order to meet the March 30, 2012 registration deadline. (Because an adviser’s application for registration may be approved by the SEC at any time after filing, the adviser must meet all other Advisers Act requirements at the time of filing). Advisers eligible for the newly created “exempt reporting adviser” status established by the Dodd-Frank Act must file certain information required by Part 1 of Form ADV with the SEC no later than March 30, 2012.

Registered Advisers

Annual Update and Delivery of Form ADV

Rule 204-1 under the Advisers Act requires you to update your Form ADV at least annually, within 90 days of the end of your fiscal year. If your most recent fiscal year ended on December 31, 2011, you are required to file your updated Form ADV with the SEC through the IARD no later than March 30, 2012. This annual updating amendment must include both Part 1 and Part 2A (the brochure) of Form ADV. Additionally, within 120 days of your fiscal year end, you must deliver your updated brochure to your advisory clients (or provide a summary of changes to the brochure and offer to deliver the brochure). You should also consider providing the updated brochure to investors in your private investment funds, as appropriate.

The SEC has recently adopted amendments to Form ADV following enactment of the Dodd-Frank Act. You should be aware that, among other things, the revised Form ADV (i) includes a new, uniform methodology for calculating your assets under management (which is now called “regulatory assets under management” and is calculated on a gross basis) and (ii) requires expanded information about the private funds that you advise, as well as certain information regarding your employees, clients and advisory activities, other business activities, financial industry affiliations, participation in client transactions and custody of client assets.

“Regulatory assets under management” is calculated as the entire value of each securities portfolio for which you provide continuous and regular supervisory or management services, including securities portfolios that are family or proprietary accounts, accounts for which you receive no compensation for your services and accounts of clients who are not U.S. persons. An account is a securities portfolio if at least 50% of the total value of the account consists of securities, and all of the assets of a “private fund” are to be treated as a securities portfolio regardless of the nature of the assets.[2] Outstanding indebtedness or other accrued but unpaid liabilities are to be excluded from the calculation of value of securities portfolios. Additionally, for the accounts of private funds, any uncalled commitments to acquire an interest in, or make a capital contribution to, the private fund are to be included in the value of the account.

Your Form ADV updating amendment will take more time and resources to complete this year in light of the additional information requirements. On the annual updating amendment, you should also make any notice filings with the relevant states where your clients are located. Generally, a minimum number of clients must be located in a state for that state to require a notice filing (typically five, but the number may vary from state to state).

Migration of Certain Advisers to State Regulation

If you are currently registered with the SEC but have less than $90 million of “regulatory assets under management”, as determined in connection with your annual updating amendment to your Form ADV, you are generally no longer eligible for SEC registration unless (a) you are not required to be registered as an adviser with the state securities authorities in the state where  you maintain your principal office and place of business or (b) you are not subject to examination as an adviser by the state where you maintain your principal office and place of business. Subject to certain limited exceptions, if you do not satisfy either (a) or (b) of the preceding sentence, you must withdraw from SEC registration by June 28, 2012 and register with the appropriate state securities authorities by that date.

Elective Change of Status to Exempt Reporting Adviser

If you qualify as an exempt reporting adviser and wish to change your status with the SEC, you must first withdraw from SEC registration before filing your first SEC report as an exempt reporting adviser. Exempt reporting adviser status is not mandatory — even if you meet the requirements for such status, you may nevertheless register with the SEC if you are otherwise eligible for registration.

Annual Review of Compliance Policies and Procedures

Rule 206(4)-7 under the Advisers Act requires that you (i) adopt and implement written policies and procedures reasonably designed to prevent violations, by you and your supervised persons, of the Advisers Act and SEC rules adopted under the Advisers Act; and (ii) conduct, no less frequently than annually, a review of the adequacy of your compliance policies and procedures, as well as the effectiveness of their implementation. According to the SEC, your annual compliance review should consider any compliance matters that arose during the previous year, any changes in your business activities or those of your affiliates, and any changes in applicable law (including the Advisers Act) that may necessitate a change in your policies and procedures. It is recommended that you document the review process, including any findings and recommended modifications of compliance policies and procedures stemming from the review.

Audited Financial Statements

If you are deemed to have custody (within the meaning of Rule 206(4)-2 under the Advisers Act) of client funds or securities, you are generally required, among other things, to be subject to an annual surprise inspection by an independent public accountant. However, in lieu of the annual surprise inspection, you may satisfy this requirement with respect to any private investment fund client by providing annual audited financial statements to all fund investors no later than 120 days[3] following the end of the fund’s fiscal year. The audit must be prepared in accordance with generally accepted accounting principles and performed by an independent public accountant registered with and subject to inspection by the Public Company Accounting Oversight Board.

Privacy Notices

Under SEC Regulation S-P, you are required to deliver to your clients and fund investors, who are natural persons, a privacy notice describing your privacy policies and practices. You are prohibited from providing non-public personal customer information to unaffiliated third parties, other than service providers that need access to that information in order for you to conduct your business, unless customers have been provided with an initial privacy notice that offers the customer the ability to “opt out” of such information sharing. Annual privacy notices must be sent thereafter at least once in any period of 12 consecutive months. The SEC has published a model form of privacy notice, which establishes a safe harbor for compliance with Regulation S-P. Even if you elect not to use the model form, it would be prudent to consider the model form and whether revisions to existing privacy notices are warranted.

Form PF Filings

If you have at least $150 million of regulatory assets under management attributable to hedge funds and other private funds, you will be required to periodically file Form PF via the IARD to report private fund information for use by the Financial Stability Oversight Council, which was established by the Dodd-Frank Act to identify and monitor sources of systemic risk to the U.S. financial system, among other things. Form PF will be a confidential filing.

For purposes of the Form PF reporting requirement, advisers will fall into two categories (large and small), based on their assets under management. Large private fund advisers will consist of (i) advisers with at least $1.5 billion in assets under management attributable to hedge funds, (ii) liquidity fund advisers with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds and (iii) advisers with at least $2 billion in assets under management attributable to private equity funds. These large private fund advisers will be subject to more detailed reporting obligations than smaller advisers. Large private fund advisers may also be required to report information more frequently than small advisers (i.e. quarterly), depending on the type of private funds that they manage. Most private fund advisers will be required to file their first Form PF following the first fiscal year or fiscal quarter, as applicable, ending on or after December 15, 2012. However, certain large private fund advisers (with more than $5 billion in assets under management) will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, ending on or after June 15, 2012.

Private Fund Advisers Generally

Securities Exchange Act of 1934 Filings

  • Schedule 13D, 13G and Section 16 Filings. If you exercise investment discretion over accounts that hold exchange-traded securities, you should keep in mind that throughout the year you may have initial filing obligations and ongoing amendment obligations with respect to Schedule 13D, Schedule 13G and Section 16 under the Securities Exchange Act.  Please note that if you have previously filed a Schedule 13G with respect to a particular security, you must amend your filing by February 14, 2012 to reflect any changes to the information reported in that previous filing.
  • Form 13F. If you exercised investment discretion over $100 million or more in Section 13(f) securities as of the last trading day of any month during 2011, you will be required to make quarterly Form 13F filings with the SEC in 2012.[4] The quarterly filing dates for Form 13F are February 14, 2012, May 15, 2012, August 14, 2012 and November 14, 2012. 
  • Form 13H (New Requirement). If you meet the definition of “large trader” under SEC Rule 13(h), you are required to file an initial Form 13H promptly after effecting aggregate transactions equal to or greater than the “identifying activity level” (generally, daily activity in NMS (national market system) securities of either two million shares or shares with a fair market value of $20 million or monthly activity of either 20 million shares or shares with a fair market value of $200 million). After an initial Form 13H is filed, you must file an annual update with the SEC within 45 days after the end of each full calendar year. Thus, if you filed a Form 13H in 2011, you will not be required to file an annual update until February 2013, although you may be required to file an updated Form 13H sooner if any information contained in your filed Form 13H becomes inaccurate.

Private Offering Filings

  • Form D. Private funds that have sold securities in an exempt offering in reliance on Rule 506 under Regulation D of the Securities Act of 1933 (Rule 506) must electronically file Form D notices and amendments with the SEC via EDGAR. The first Form D filing must be made within 15 days after the first sale of securities in the offering. Thereafter, amendments are required to be filed (i) to correct any material mistake of fact or error in a previously filed notice, as soon as practicable after discovery of the mistake or error, (ii) to reflect changes in certain information in a previously filed notice, as soon as practicable after the change and (iii) annually, on or before the first anniversary of the most recent previously filed notice, if the offering is continuing at that time.
  • State Blue Sky Filings. In connection with private exempt offerings pursuant to Rule 506, many states require Form D notices to be filed with the appropriate state securities authority and payment of a filing fee. The state filings generally consist of a one-time filing made at the time of first sale in that state, and updates may be required to be filed if certain material information changes. Certain states may also require annual renewals, and penalties for late filings may be substantial.

Supplemental Reporting Obligations

You should review your funds’ organizational documents and investor side letters to confirm whether you or the fund has undertaken any additional reporting or notice obligations and then take appropriate action to comply with those undertakings. For example, the investment adviser or general partner of a private equity fund may have undertaken to provide an annual certification to the fund’s ERISA investors as to the fund’s status as a “venture capital operating company” (VCOC) or “real estate operating company” (REOC) during the relevant period.

For more information regarding this alert, please contact Neil Casey (212.631.4414; or Lori Smith (212.714.3075; in our New York office; or Merritt Cole (215.864.7018; in our Philadelphia office.


[1] The repealed “private adviser” exemption applied to any investment adviser that (i) had fewer than 15 clients in the preceding 12 months, (ii) did not hold itself out to the public as an investment adviser, and (iii) did not act as an investment adviser to a registered investment company or a business development company.  For this purpose, each fund was generally counted as one single, separate client.

[2] A “private fund” is defined as any issuer (fund) that would be an investment company under the Investment Company Act of 1940 but for Section 3(c)(1) (i.e. the fund has fewer than 100 beneficial owners of its securities) or Section 3(c)(7) (i.e. investors in the fund are either “qualified purchasers” or “knowledgeable employees”) of that Act.) 

[3] The deadline is extended to 180 days in the case of a fund of funds, and 260 days in the case of a fund of fund of funds.

[4} The official list of Section 13(f) securities is available on the SEC's website at

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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