SEC Proposes New Rules for Advisers

November 19, 2010 ( - The Securities and Exchange Commission (SEC) has voted to propose new rules to “strengthen the SEC's oversight of investment advisers and fill key gaps in the regulatory landscape”.


The SEC’s proposed rules would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that, among other things:

  • Facilitate registration of advisers to hedge funds and other private funds with the SEC.
  • Implement the Dodd-Frank Act’s mandate to require reporting by certain advisers that are exempt from SEC registration.
  • Increase the asset threshold for advisers to register with the SEC.
  • Define “venture capital fund” and provide clarity regarding certain exemptions to investment adviser registration.

The SEC also proposed amendments to rules that would require disclosure of greater information by investment advisers and the private funds they manage, as well as amendments that would revise the Commission’s pay-to-play rule.

“The enhanced information envisioned by these proposed rules would better enable both regulators and the investing public to assess the risk profile of an investment adviser and its private funds,” said SEC Chairman Mary L. Schapiro, in announcing the initiative. 

In explaining the proposal, the SEC noted that a large number of individuals and institutions invest a significant amount of assets in private funds, such as hedge funds and private equity funds. However, until the passage of the Dodd-Frank Act, advisers managing those assets were “subject to little regulatory oversight”.

With the Dodd-Frank Act, Congress closed this regulatory gap by generally extending the registration requirements under the Investment Advisers Act to the advisers of these funds. The new law also provided the SEC with the ability to require the limited number of advisers to private funds that will not have to register to file reports about their business activities.  Further, the SEC noted that, in “acknowledging the Commission's limited examination resources — and in light of the new responsibilities for private fund advisers — the Dodd-Frank Act reallocated regulatory responsibility for smaller investment advisers to the state securities authorities”.


The SEC also proposed to amend the investment adviser "pay-to-play" rule in response to changes made by the Dodd-Frank Act.  Under the proposed amendment, an adviser would be permitted to pay a registered municipal advisor, instead of a "regulated person," to solicit government entities on its behalf if the municipal advisor is subject to a pay-to-play rule adopted by the MSRB that is at least as stringent as the investment adviser pay-to-play rule. The MSRB received new authority over municipal advisors under the Dodd-Frank Act.

Hedge Fund and Other Investment Advisers

To “enhance its ability to oversee investment advisers to private funds”, the SEC said it is considering requiring advisers to provide additional information about the private funds they manage, noting that the information obtained as a result of these amendments “would assist the Commission in fulfilling its increased responsibility for private fund advisers arising from the Dodd-Frank Act”.

Under the proposed rules, advisers to private funds would have to provide:

  • Basic organizational and operational information about the funds they manage, such as information about the amount of assets held by the fund, the types of investors in the fund, and the adviser's services to the fund.
  • Identification of five categories of "gatekeepers" that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).

These reporting requirements are designed to help identify practices that may harm investors, deter advisers' fraud, and facilitate earlier discovery of potential misconduct. And this information "would provide for the first time a census of this important area of the asset management industry", according to the SEC.

In addition, the SEC proposed other amendments to the adviser registration form to improve its regulatory program, amendments that would require all registered advisers to provide more information about their advisory business, including information about: 

  • The types of clients they advise, their employees, and their advisory activities.
  • Their business practices that may present significant conflicts of interest (such as the use of affiliated brokers, soft dollar arrangements and compensation for client referrals).

The proposal also would require advisers to provide additional information about their non-advisory activities and their financial industry affiliations.

Private Fund Adviser

The SEC noted that advisers to private funds had, for many years, been able to avoid registering with the SEC because of an exemption that applies to advisers with fewer than 15 clients — an exemption that counted each fund as a client, as opposed to each investor in a fund. As a result, the SEC noted that some advisers to hedge funds and other private funds “have remained outside of the Commission's regulatory oversight even though those advisers could be managing large sums of money for the benefit of hundreds of investors”.

However, the SEC noted that Title IV of the Dodd-Frank Act eliminated this private adviser exemption. Consequently, many previously unregistered advisers, particularly those to hedge funds and private equity funds, will now have to register with the SEC, and be subject to its regulatory oversight, rules and examination.

Exempted Advisers

The SEC noted that, while many private fund advisers will be required to register, some of those advisers may not need to if they are able to rely on one of three new exemptions from registration under the Dodd-Frank Act, including exemptions for:

  • Advisers solely to venture capital funds.
  • Advisers solely to private funds with less than $150 million in assets under management in the U.S.
  • Certain foreign advisers without a place of business in the U.S.

However, the SEC said it can still impose certain reporting requirements upon advisers relying upon either of the first two of these exemptions ("exempt reporting advisers").  Under the proposed rules, exempt reporting advisers would nonetheless be required to file, and periodically update, reports with the SEC, using the same registration form as registered advisers. Rather than completing all of items on the form, exempt reporting advisers would fill out what the SEC termed “a limited subset of items”, including:

  • Basic identifying information for the adviser and the identity of its owners and affiliates.
  • Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
  • The disciplinary history of the adviser and its employees that may reflect on their integrity.

Exempt reporting advisers would file reports on the Commission's investment adviser electronic filing system (IARD), and these reports would be publicly available on the Commission's website. 

Reallocation of Regulatory Responsibility

The SEC noted that regulatory responsibility for investment advisers has been divided between the SEC and the states since 1996, primarily based on the amount of money an adviser manages for its clients (under existing law, advisers generally may not register with the SEC unless they manage at least $25 million for their clients).  The Dodd-Frank Act raises the threshold for SEC registration to $100 million by creating a new category of advisers called "mid-sized advisers." The SEC noted that a mid-sized adviser, which generally may not register with the Commission and will be subject to state registration, is defined as an adviser that:

  • Manages between $25 million and $100 million for its clients
  • Is required to be registered in the state where it maintains its principal office and place of business.
  • Would be subject to examination by that state, if required to register.  

As a result of this amendment to the Investment Advisers Act, the SEC said that about 4,100 of the current 11,850 registered advisers will switch from registration with the SEC to registration with the states (although it noted that these advisers will continue to be subject to the Advisers Act's general anti-fraud provisions). 

The SEC has proposed amendments to several of its current rules and forms to: 

  • Reflect the higher threshold required for Commission registration.
  • Clarify when an adviser will be a mid-sized adviser.
  • “Facilitate the transition of advisers between federal and state registration” in accordance with the new requirements.

The SEC also noted changes reflecting exemptions for advisers to venture capital funds, private fund advisers with less than $150 million in assets under management, and foreign private advisers. 

More information is available at