The Securities and Exchange Commission (“SEC”) has announced its timeline for the implementation of financial reform under the Dodd-Frank Bill. See Implementing Dodd-Frank Wall Street Reform and Consumer Protection Act - Upcoming Activity. While the timeline covers the entire range of financial reform efforts under the bill, such as rules governing consumer protection and credit rating agency oversight, this article will focus on those items affecting investment adviser and broker-dealer registration and compliance.
The timeline for proposal and adoption of these rules is as follows:
October 2010
Oversight of Investment Advisers
§409: Propose rules defining “family office”
Family offices and their investment officers may be exempt from registration under the Investment Advisers Act of 1940 (“Advisers Act”) if they provide investment services to fewer than 15 family members, trusts or entities and do not offer services to the general public. Of consequence, proposed rule changes may affect how multiple families and trusts are counted under the exemption.
November - December 2010
Oversight of Investment Advisers
§§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds
The Dodd-Frank Bill provides that investment advisers “solely” to venture capital funds will be exempt from registration with the SEC, but will be subject to certain reporting and recording keeping requirements. Private equity firms, however, were not provided a similar exemption under the bill. Nonetheless, the SEC is to provide its definition of ‘venture capital firm’, with private equity firms possibly meeting that definition. Otherwise, those firms will be subject to the same registration requirements as other private fund managers.
§410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management (“AUM”) from SEC to State regulation, as provided in the Act
An item previously covered by the blog, the SEC recently increased the AUM level required to register with the Commission. This set of proposals will cover the transition to state registration authorities for those investment advisers not meeting the required AUM level.
§418: Propose rules to adjust the threshold for “qualified client”
Qualified clients not only invest more assets in a fund, but also allow for investment advisers to charge a performance fee. Currently, a qualified client is defined as a natural person who or a company that immediately after entering into the contract has at least $750,000 under the management of the investment adviser, or has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $1,500,000 at the time the contract is entered into.
Under the Dodd-Frank Bill, the current requirements will be adjusted for inflation in the upcoming year, and then again every five years, each time by an increment of $100,000.
Exempt Offerings
§413: Propose rules to revise the “accredited investor” standard
In order to qualify for exemption under the Regulation D "Safe Harbor" provisions of the Securities Act of 1933, a fund is not permitted to offer securities to more than 35 non-accredited investors. These proposed rules will detail the Dodd-Frank Bill exclusion of primary residence from the ‘net worth’ standard, the more prominent of two categories for individuals seeking to qualify as an accredited investor.
§926: Propose rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated
These proposed rules will detail the disqualification of certain felons from participating in the offering or sale of securities. As set forth in the Dodd-Frank Bill, the SEC will promulgate rules that disqualify “bad actors” from relying on the Rule 506 exemption under Regulation D. Currently, these rules only apply to Rule 505 exemptions.
January - March 2011
Oversight of Investment Advisers and Broker-Dealers
§§404 and 406: Propose (jointly with the CFTC for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk
The SEC and CFTC recently announced the formation of a joint committee that will address emerging regulatory issues. The effort of this committee, and the focus of these proposals, will focus on identifying emerging regulatory risks, assessing and quantifying the impact of such risks and their implications for investors and market participants, and furthering SEC and CFTC efforts on regulatory harmonization.
§913: Report to Congress regarding the study of the obligations of brokers, dealers and investment advisers
This report will focus on such recent broker-dealer items as audit requirements and procedures, and for investment advisers, registration, reporting and recordkeeping requirements. In addition, the SEC will likely report on standards of care owed to investors for both broker-dealers and investment advisers, with the Commission recently issuing for public comment whether there are gaps, shortcomings, or overlaps in the current legal or regulatory standards of such care.
§914: Report to Congress regarding the need for enhanced resources for investment adviser examinations and enforcement
This report will detail the increased resources necessary for the SEC and CFTC to effectively promulgate and oversee financial reform measures under the Dodd-Frank Bill.
§919B: Complete study of ways to improve investor access to information about investment advisers and broker-dealers
The SEC recently promulgated rules updating Form ADV, Part 2 disclosure requirements. The study will seek to further efforts to improve the quality, nature and scope of information provided to investors.
April - July 2011
During this period, the SEC plans to adopt rules based on the submitted proposals for the items outlined above.
In addition, the §913 and §914 studies may result in rule proposals by the SEC or CFTC, although the time period for such action is not defined.
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The publication of the SEC timeline for implementation of the Dodd-Frank Bill marks a continuation in the financial reform effort. In this evolving regulatory landscape, investment managers and broker-dealers should move forward with a focus on transparency, documentation of compliance and communication with investors. The blog will post important updates as the new regulatory system takes shape.
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Robert Kiggins, Esq. of McCarthy Fingar LLP, is author of the blog, and may be reached at (914) 385-1024 or rkiggins@mccarthyfingar.com. As always, nothing in this blog is legal advice and readers w should not rely on anything in this blog as being legal advice.
