As a consequence of the Dodd-Frank Financial Reform Act, starting later this year, currently by October 19, 2011, about 4,000 investment advisers with assets under management of over $30 Million but under $100 Million who are SEC registered will be required to terminate their SEC registration and become state registered.
This will expose these investment advisers to primary regulation under state laws. In turn, states tend to look to the North American Securities Administrators Association (NASAA) in adopting rules for regulation of investment advisers. This has possibilities for disparate federal-state treatment of a significant portion of the investment adviser industry and the first of these (post Dodd-Frank) has manifested itself in the area of custody.
Under federal rules private investment fund managers registered with the SEC as investment advisers are required to comply with the SEC custody rules. These rules can be quite onerous. Nonetheless, most private investment fund managers can comply with the SEC rules by furnishing copies of annual audited financial statements of the fund to their investors. As virtually all of these funds are audited, this imposes no special hardship on them.
However, last month, NASAA proposed rules for custody which would also have required, as to fund managers who are state registered as investment advisers, that these fund managers, in addition to annual audited statements, furnish their investors with quarterly statements ("custodial statements") showing all the transactions in the fund, cash balance, and positions at the end of the quarter. That may sound like an innocuous addition but comment letters to NASAA from the industry argued strenuously that such disclosure would undermine the confidentiality of proprietary trading strategies and put smaller funds at a competitive disadvantage to larger SEC regulated ones that did not have to make these disclosures.
The custody rule proposal and comment letters can be viewed on the NASAA website at: http://www.nasaa.org/issues___answers/regulatory_activity/14085.cfm
It appears that NASAA is working on a revision of the requirements for advisers to private funds regarding the quarterly custodial statement requirements which will likely be rereleased for comment soon.
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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.
Nothing is this blog is intended to be or may be relied upon as specific legal advice. Securities and related laws are complex and competent counsel should be consulted. Views expressed by the author in this article are his own and not those of any other person.
