SEC Commissioner Daniel M. Gallagher urged the use of exemptive authority by the SEC for certain fund managers in a speech given before the Investment Adviser Association’s Investment Adviser Compliance Conference.
The Dodd-Frank Act eliminated the exemption from registration for advisers with 15 or fewer clients. Commissioner Gallagher believes this was Congress’s attempt to address what it viewed as a problem in the financial markets: namely, the existence and practices of highly leveraged hedge funds. As a result, many private fund advisers are undergoing the process of registering for the first time with the Commission.
Commissioner Gallagher noted he has met with several representatives from advisers that do not use leverage as part of their business strategy and market only to sophisticated and institutional investors. He believes the rationale for imposing the full weight of the SEC’s registration regime on such advisers is questionable, and, historically, the SEC has conserved its resources by allowing the sophisticated clients of such advisers to police the conduct of their advisers privately.
Commissioner Gallagher pointed out the Advisers Act explicitly provides that “[t]he Commission . . . may conditionally or unconditionally exempt any person or transaction, or any class or classes of persons, or transactions, from any provision or provisions of this title or of any rule or regulation thereunder, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title.” This clear grant of authority to the Commission was not revoked by the Dodd-Frank Act.
Commissioner Gallagher believes that there will be cases, moving forward, when an individual adviser or a particular class of advisers ought to be granted some measure of relief from the full panoply or requirements that come with registration under the Advisers Act.
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