The Securities and Exchange Commission voted on Friday to propose new rules to strengthen the agency’s oversight of investment advisors as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

These rules include requiring advisors to register with the SEC, to file reports about their business activities to the Commission (even if they are exempt from SEC registration because they have fewer than 15 clients), and to define “venture capital fund.” The proposed rules also would increase the asset threshold for advisors to register with the SEC and would require the disclosure of more information by investment advisors and the private funds they manage. Amendments were proposed as well that would revise the Commission's pay-to-play rule.

The SEC’s proposed rules will close some loopholes. For example, many advisors to private funds haven’t had to register with the SEC because they have considered each fund as one client, instead of each investor in a fund as one client. This has meant advisors to hedge funds and other private funds have not been under the SEC’s purview, even though those advisors could be managing a lot of money for many investors. Not anymore. The Dodd-Frank Act eliminated this private advisor exemption, which means many previously unregistered advisers will have to register with the Commission.

Advisors will also be required to give more information about the funds they manage, including the amount of assets in the fund, the types of investors in the fund, and the adviser's services to the fund. They will also have to identify “gatekeepers,” such as auditors, prime brokers, custodians, administrators, and marketers that work with the funds.

The SEC stated that these reporting requirements will “help identify practices that may harm investors, deter advisers' fraud, and facilitate earlier discovery of potential misconduct.”
While many private fund advisors that previously didn’t register with the Commission will now need to register, others may no longer need to if they meet the three new exemptions outlined in the Dodd-Frank Act: If they are advisors solely to venture capital funds; advisors solely to private funds with less than $150 million in assets under management in the U.S.; or if they are foreign advisors without a place of business in the U.S.

Currently, advisors managing less than $25 million for their clients do not need to register with the SEC.The Dodd-Frank Act requires “mid-sized advisors” that manage between $25 million and $100 million for their clients to register with the state where they have their primary office and would be subject to examination by that state.

This will mean approximately 4,100 of the current 11,850 registered advisors will switch from registration with the Commission to registration with the states.

“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 a statement.

But this takes people and resources. The SEC acknowledged that it has “limited resources” with which to oversee more advisors, which is why the Dodd-Frank Act reallocated regulatory responsibility for smaller investment advisers to the states.



Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access