Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on June 22, 2011.
Today, we will consider adopting a series of rules that implement the core provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as they apply to investment advisers.
We will be jointly considering the first two items on the agenda and after separate votes on those two matters, we will consider the third proposed rule regarding the definition of “family office”.
We begin with the registration of hedge fund and other private fund advisers, who previously have been able to avoid such registration because of a statutory exemption that applies to advisers with fewer than 15 clients. The Dodd-Frank Act eliminated this exemption – making it clear that hedge fund advisers and other advisers relying on this exemption should no longer operate beyond regulatory oversight.
As a result, many of these private fund advisers will now, not only register with the Commission, but be subject to its rules, its regulatory oversight and its examination program.
Today’s rules will fill a key gap in the regulatory landscape. In particular, our proposal will give the Commission, and the public, insight into hedge fund and other private fund managers who previously conducted their work under the radar and outside the vision of regulators.
Among other things, the rules we are adopting today will:
Facilitate the registration of advisers to hedge funds and private equity funds.
Also, our rules will require these advisers to:
In developing our registration rules and reporting requirements, we sought to obtain from all of these advisers a meaningful collection of data that would aid investors and assist our regulatory and examination efforts –without requiring any disclosure that could inadvertently harm the interests of private fund investors.
In acknowledging the Commission's limited examination resources – and in light of the new responsibilities for private fund advisers – the Dodd-Frank Act also reallocated regulatory responsibility for certain smaller investment advisers to the state securities authorities. Under the law, advisers with between $25 and $100 million of assets under management are directed to register with the states, if they are subject to examination by state securities authorities. Today’s rules implement this provision.
While the Dodd-Frank Act imposes new registration responsibilities upon advisers to hedge funds and many other private funds, Congress exempted from registration advisers solely to venture capital funds and advisers solely to private funds with less than $150 million in assets in the United States.
But, at the same time, Congress mandated that these advisers be subject to certain reporting requirements.
In developing a reporting regime for these “exempt but reporting advisers,” the Commission is following a balancing approach. We are seeking information on key census data about the firm, its private funds and any disciplinary information. But we chose not to require the full panoply of information, including the ADV, Part 2 client-oriented narrative disclosure that would be required of a registered investment adviser.
This is the Commission’s first time developing a reporting a regime for advisers that are exempt from registration. Thus, it is important that we assess our reporting requirements for these advisers once we have experience receiving the information – and can fine-tune the information we collect at that point. I therefore am directing the staff to reconsider the information we collect from “exempt but reporting advisers” after we receive and assess the first year’s filings. This will enable the Commission to make any adjustments that are necessary if we are not receiving sufficient information from these advisers.
In addition, although the law enables the Commission to examine these “exempt but reporting advisers,” we do not intend to conduct routine examinations of them. As many observers know, the Commission has scarce resources, and it is important therefore that we target those resources toward the advisers that are actually registered with us, where the investing public expects us to be focused.
At the same time, if there are indications that we should conduct an on-site visit of an exempt but reporting investment adviser, we legitimately and appropriately will have the ability to do so.
To give effect to the venture capital provisions of the Dodd-Frank Act, the SEC is required to develop a definition of “venture capital fund.” Our definition distinguishes venture capital funds from hedge funds and private equity funds by focusing on the lack of leverage of venture capital funds and the non-public, start-up nature of the companies in which they invest.
The rule therefore focuses on the provision of capital for the operating and expansion of start-up businesses, rather than buying out prior investors. In crafting the definition of venture capital fund, our goal was to develop a definition that provided an accurate and legitimate definition of venture capital fund, without including loopholes that could be inappropriately exploited down the road.
While many commenters supported the proposed definition, others believed there needed to be some level of additional flexibility to accommodate unexpected situations or a limited number of non-conforming investments. Many commenters suggested various carve outs for particular types of investments.
To accommodate the need for some flexibility, without unduly complicating the rule, the definition provides a 20 percent “basket” that would be outside the strict venture capital-oriented investment parameters imposed on the remaining 80 percent of the fund. This 20 percent basket would enable legitimate one-off investments and flexibility while maintaining a fund’s core venture capital nature.
Today’s rules also provide clarity on the parameters of the foreign private adviser exemption and the exemption applicable to advisers solely to private funds with less than $150 million in assets under management in the United States.
Finally, while not the subject of today’s deliberation, the Commission will supplement the rules we are adopting today with consideration of adoption of a new form, Form PF. As proposed earlier this year, Form PF would provide additional information from private fund advisers that would be reported on a non-public basis pursuant to the Dodd-Frank Act. And, the information would be used to inform the SEC and the Financial Stability Oversight Council about the systemic risk profile of private fund advisers and the private funds they manage.
The private fund and related investment adviser provisions of the Dodd-Frank Act become effective on the one year anniversary of enactment – or July 21. As such, it is important that we adopt today’s rules before then to provide both certainty and clarity about the new registration requirements – and any related exemptions.
However, to facilitate an orderly transition and enable private fund advisers to come into compliance with our rules, advisers will not be required to comply with these registration requirements until the first quarter of 2012. This will give us time to adjust the registration system to accommodate private fund advisers – and the change in threshold for registering with the SEC versus the states. It also will give advisers to hedge funds and other private funds time to develop compliance systems and provide registration information, consistent with SEC requirements.
I would like to thank those who contributed substantial amounts of time, energy and effort in crafting this set of proposals: From the Division of Investment Management, Eileen Rominger, Bob Plaze, David Vaughan, Dan Kahl, Penelope Saltzman, Jamie Eichen, Matt Goldin, Melissa Roverts, Devin Sullivan, Jennifer Porter, Tram Nguyen, Michael Spratt, Brian Johnson, John Russo and David Bartels.
This group was assisted by Mark Cahn, Meridith Mitchell, David Blass, Lori Price, Bob Bagnall, Jill Felker, and Sarah Buescher in the Office of the General Counsel; Craig Lewis, Jonathan Sokobin, Bruce Kraus, Harvey Westbrook, Chuck Dale, and Matthew Carruth in the Division of Risk, Strategy, and Financial Innovation; Norm Champ; Jim Reese, Jackie Sturgill, Karen Stevenson and Brian Snively in the Office of Compliance Inspections and Examinations; Marc Sharma in the Office of Investor Education and Advocacy; Jeff Minton, Paul Beswick and Jeff Cohan in the Office of the Chief Accountant; Bruce Karpati and Rob Kaplan in the Division of Enforcement; Linda Sundberg in the Division of Trading and Markets; and Gerald Laporte and David Beaning from the Division of Corporation Finance.
I also want to thank my colleagues on the Commission and our counsels for their contributions.