WHAT’S THE RULE? The Securities and Exchange Commission on June 22, 2011 adopted final rules on the reporting requirements for advisers to private funds that are exempt from the new registration mandate under the Dodd-Frank Act. The rules also establish the framework for transferring oversight of all investment advisers with up to $100 million in assets under management from the SEC to the states. Finally, the rules ensure that prohibitions against pay-to-play abuses will apply to the advisers to private funds that are exempt from registration.
WHY IS IT IMPORTANT? The rules promote sorely needed transparency in the private fund market. Prior to Dodd-Frank, advisers to private funds were not required to register with the SEC and their activities were essentially unregulated. This regulatory gap put investors and the financial system at heightened risk. Dodd-Frank requires most private fund advisers to register and file reports with the SEC. Even the advisers that are exempt from registration (advisers to funds with less than $150 million and advisers to venture capital funds) must file reports with the SEC. The rules will implement the reporting obligations for those “exempt reporting advisers,” to ensure transparency in the entire private fund market. A subsequent rule will address general registration requirements for private fund advisers. The rule will also alleviate some of the burden on the SEC by transferring oversight of all investment advisers with less than $100 million under management to the states. The provisions also will help ensure that even the exempt reporting advisers cannot use political contributions to win advisory business from government entities.
WHAT DID BETTER MARKETS ARGUE? We argued that the proposed rules should be strengthened in several respects. For example, Better Markets urged the SEC to expand the reporting requirements for exempt reporting advisers to include information about employees, clients, compensation details, participation in client transactions, and custody arrangements. Better Markets also supported the proposals to transfer oversight of mid-sized investment advisers to the states.
WHAT DID THE COMMISSION DO? The SEC did expand the reporting requirements for exempt reporting advisers, although not as much as Better Markets advocated. It added additional reporting requirements regarding other business activities, the private funds that are advised, and the disciplinary history of the advisers. The rules sensibly implement the transfer of mid-sized investment advisers to state oversight, and they also ensure that exempt reporting advisers will be covered by restrictions to prevent pay-to-play political contributions.