Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Dodd-Frank Act repealed the “private adviser exemption” contained in section 203(b)(3) of the Investment Advisers Act on which advisers to many private equity and hedge funds had relied in order to avoid registration under the Investment  Advisers Act.  Section 408 of the Dodd-Frank Act, which added new section 203(m) of the Investment Advisers Act, directed the SEC to provide an exemption from registration under the Investment Advisers Act for those who act as investment advisers solely to private funds and have assets under management in the United States of less than $150 million.  The SEC has issued proposed rules (Release No. IA-3111) to implement this provision.  However funds which rely on this exemption may still be subject to burdensome SEC reporting requirements under another SEC proposal.

The proposed rules refer to the exemption as the “private fund adviser exemption.”  Details of the private adviser exemption are set forth below.

Advises Solely Private Funds

Proposed rule 203(m)-1 would, like section 203(m) of the Investment Advisers Act, limit an adviser relying on the exemption to advising “private funds” as that term is defined in the Investment Advisers Act.  A “private fund” is therefore defined as an entity that would be an investment company under the Investment Company Act but for the exceptions in section 3(c)(1) or 3(c)(7) of the Investment Company Act.  An adviser that acquires a different type of client would have to register under the Investment Advisers Act unless another exemption is available.  An adviser could advise an unlimited number of private funds, provided the aggregate value of the adviser’s private fund assets is less than $150 million.

Private Fund Assets

Under proposed rule 203(m)-1, an adviser would have to aggregate the value of all assets of private funds it manages in the United States to determine if the adviser remains below the $150 million threshold.  Proposed rule 203(m)-1 would require advisers to calculate the value of private fund assets by reference to Form ADV, under which the SEC proposes to provide a uniform method of calculating assets under management for regulatory purposes under the Investment Advisers Act.  In the case of a sub-adviser, it would have to count only that portion of the private fund assets for which it has responsibility.  In addition to assets appearing on a private fund’s balance sheet, advisers would include any uncalled capital commitments, which are contractual obligations of an investor to acquire an interest in, or provide the total commitment amount over time to, a private fund, when called by the fund.

Under proposed rule 203(m)-1, each adviser would have to determine the amount of its private fund assets quarterly, based on the fair value of the assets at the end of the quarter.  The SEC proposes that advisers use the fair value of private fund assets in order to ensure that, for purposes of this exemption, advisers value private fund assets on a meaningful and consistent basis.  

Assets Managed in the United States

Under proposed rule 203(m)-1, all of the private fund assets of an adviser with a principal office and place of business in the United States would be considered to be “assets under management in the United States,” even if the adviser has offices outside of the United States.  A non-U.S. adviser, however, would need only count private fund assets it manages from a place of business in the United States toward the $150 million asset limit under the exemption.

Rule 203(m)-1 would deem all of the assets managed by an adviser to be managed “in the United States” if the adviser’s “principal office and place of business” is in the United States.  The SEC would look to an adviser’s principal office and place of business as the location where the adviser controls, or has ultimate responsibility for, the management of private fund assets, and therefore as the place where all the advisers’ assets are managed, although day-to-day management of certain assets may also take place at another location.

United States Person

Under proposed rule 203(m)-1(b), a non-U.S. adviser could not rely on the exemption if it advised any client that is a United States person other than a private fund.  The proposal defines a “United States person” generally by incorporating the definition of a “U.S. person” in SEC Regulation S.  Regulation S looks generally to the residence of an individual to determine whether the individual is a United States person, and also addresses the circumstances under which a legal person, such as a trust, partnership or a corporation, is a United States person. Regulation S generally treats legal partnerships and corporations as Unites States persons if they are organized or incorporated in the United States, and trusts by reference to the residence of the trustee.  It treats discretionary accounts generally as United States persons if the fiduciary is a resident of the United States.


Proposed rule 203(m)-1 includes a provision giving an adviser one calendar quarter (three months) to register with the SEC after becoming ineligible to rely on the exemption due to an increase in the value of its private fund assets.  Because qualification for the exemption depends on remaining below the $150 million threshold on a quarterly basis, an adviser could exceed the limit based on market fluctuations without any new investments from existing or new investors.  This three month period would enable the adviser to take steps to register and otherwise come into compliance with the requirements of the Investment Advisers Act applicable to registered investment advisers, including the adoption and implementation of compliance policies and procedures.  It would be available only to an adviser that has complied with all applicable SEC reporting requirements. 

Check frequently for updates on the Dodd-Frank Act and other important securities law matters.