While the President was not able to sign the historic Dodd-Frank Wall Street Reform and Consumer Protection Act before the July 4th holiday weekend, the bill is poised to be passed by the Senate in the next couple of weeks.  The House has already passed the bill and so it looks like the final draft that came out of the reconciliation process will signed into law.  There are a number of important provisions for the investment management community as well as hedge fund managers.  The provision we hear the most about, however, seems to be the the hedge fund registration requirement - that is, hedge fund managers with $150 million in assets under management will be required to register as investment advisers with the SEC.

Hedge Fund and Private Equity Fund Registration

The exemption from registration for fund managers (Investment Advisers Act Section 203(b)(3)) will be revised so that both hedge fund managers and private equity fund managers will be required to register with the SEC.  Both groups of managers will need to be registered within one year of the signing of the Act.  Additionally, certain managers who are located outside the United States but who have U.S. based investors will be required to register.  Managers to venture capital funds are specifically exempted from the registration requirement.  The SEC will be charged with defining the term “venture capital fund” for exemption purposes.

Other Important Parts of the Act

There are a number of other important parts of the Act which may affect hedge funds and managers.  These include the following:

• OTC Derivatives – some over the counter derivatives will need to cleared through a regulated exchange.  The SEC and CFTC will be working on creating a regulatory framework to address the new requirement.
• Accredited Investor Standard – the accredited investor standard will immediately change.  No longer will investors be able to use the equity in their primary residence in the calculation of their net worth for the purposes of the rule.
• State Regulation of Investment Advisers – investment advisers (generally financial planners and groups who provide advice to separately managed accounts) will need to be state registered if they have less than $100 million of assets under management.  Previously the requirement was $30 million so the states are likely to face an influx of managers who were previously SEC registered.  In the next few weeks we will be able to understand better the mechanics of switching from SEC to state registration.

Moving Forward with Registration & Compliance

Generally managers will need to focus on two items: (1) the mechanics of the registration process and (2) developing an appropriated compliance program which takes into account the regulatory and business items related to the managers business.  The most important aspect of the process will be to craft an appropriate compliance program and the manager will need to be very much involved in that part of the process.  Managers will be required to name a Chief Compliance Officer as well.

Conclusion

As soon as the act is signed into law by President Obama, hedge fund managers should begin the registration process.   Unlike the last time managers face registration, now there is a clear Congressional mandate for managers to be registered and it will not be struck down by court decision.  Accordingly managers need to think about retaining appropriate service providers to help them manage the registration process.  While the Act will provide managers with one year to become registered, we recommend managers begin the process as soon as possible because it will take longer for managers to register in the future as the SEC is expected to deal with a large influx of applications.

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Mallon P.C. sponsors the hedge fund formation website.  Mallon P.C. is a hedge fund law firm helping firms with registration, start up and compliance services.

This website is run by Bart Mallon, Esq.  Mr. Mallon is a hedge fund attorney who is located in San Francisco.  Mr. Mallon provides start up hedge fund managers with information on how to establish a hedge fund.  For more information on his services, please see the video to the right or call him directly at 415-296-8510.