Special Considerations for Private Fund Advisers under the Advisers Act



As the investment adviser community is well aware, one of the key provisions of last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act”) is the removal of the so-called private adviser exemption. Because of that change, most investment advisers to private funds will be required to register under the Investment Advisers Act of 1940 (the “Advisers Act”), if they are not already registered with the Securities and Exchange Commission (the “SEC”). Applying the Advisers Act to private fund managers poses some unique and challenging issues, and there is little guidance on many of these issues. We highlight in this article key challenges unique to registered private fund advisers, including (i) completing Form ADV, (ii) complying with certain substantive provisions of the Advisers Act, and (iii) new compliance requirements arising from the Dodd-Frank Act. Although advisers to various categories of private funds, such as hedge funds, private equity funds and real estate funds, will face different compliance issues due to the asset class managed, this article will focus on the issues common to private fund advisers generally.

Form ADV

A threshold question faced by private fund advisers is which entities need to register. The reason this is problematic for most private fund advisers is that private funds are usually organized as limited partnerships, and the actions of the private fund adviser are subject to the control and supervision of an entity affiliated with the adviser that acts as the general partner of the fund. According to 2005 guidance from the SEC staff (the “Staff”), where an adviser and affiliated general partner both make investment recommendations and decisions for a fund, the general partner would not be required to register, provided that it is subject to examination by the SEC and that all of its investment advisory activities are subject to the Advisers Act rules (such as recordkeeping rules and requirements relating to performance-based compensation). However, private fund advisory organizations often present more complicated fact patterns, such as multiple affiliated advisory entities with substantially overlapping employees and management or a structure in which the entity that is paid the management fee is not the same as the entity at which portfolio management employees are housed. Due to the dearth of more specific guidance, private fund advisers will have to analogize their particular structures to the guidance available.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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