Several proposals were introduced in 2009 and 2010 that sought to more closely regulate investment advisers that were previously exempt under the Investment Advisers Act of 1940, as amended (“Advisers Act”) and private investment companies, i.e., investment companies exempt from the Investment Company Act of 1940, as amended (“Investment Company Act”). On March 15, 2010, Senator Christopher Dodd (D-CT) introduced a proposed omnibus financial regulation package entitled The Restoring American Financial Stability Act of 2010 (“Senate Bill”). The bill contained several portions that are relevant to private equity. The Senate Bill is similar in many respects to Representative Barney Frank’s (D-MA) earlier-proposed Wall Street Reform and Consumer Protection Act of 2009 (“House Bill”), which the House of Representatives passed on December 11, 2009.
In July 2010, the two houses agreed on a final version of the bill that would subject investment advisers to a new registration and exemption regime, among other things. As a combination of prior drafts of the House Bill and the Senate Bills, the final bill was enacted on July 21, 2010 to form the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
Title IV (Regulation of Advisers to Hedge Funds and Others), known as the Private Fund Investment Advisers Registration Act of 2010 (“Title IV”), of the Dodd-Frank Act primarily covers changes to the investment adviser registration and exemptions regime under the Advisers Act. Title IV also affects investment advisers in other important respects. For example, it clarifies the authority of the Securities and Exchange Commission (“SEC”) to define the term “client” in certain situations and as a response to an adverse precedent set in the Goldstein decision. Second, it imposes new record and reporting requirements on registered investment advisers. Third, it modifies the custody obligations of registered investment advisers. Fourth, it adjusts the “qualified client” and “accredited investor” investor suitability standards under the Advisers Act and the Securities Act of 1933 (“Securities Act”), respectively. Fifth, it commissions GAO studies on investor suitability and the feasibility of an SRO that will oversee “private funds.” Finally, it requires a SEC study and report on short sales. These changes affect virtually all investment advisers, including, without limitation, private equity, hedge fund, and certain real estate investment advisers.
Throughout the past two years since Title IV was enacted, the SEC has promulgated several rules related to Title IV. The focus of this article is to provide a summary of Title IV as well as the related rules that the SEC has promulgated thereunder in order to give the reader an understanding of Title IV as it has been implemented by the SEC. This article considers only the impact of Title IV and related SEC rules on investment advisers. It generally does not consider the impact of the Volcker rule (Section 619 of the Dodd-Frank Act), which has yet to be finalized, or other aspects of the Dodd-Frank Act on investment advisers.