Introduction
Title IV clarifies the registration and record-keeping requirements for covered investment advisers to provide the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC) with information necessary to evaluate systemic risk of these private funds. Although the Title provides for three major exemptions under this rule, it also expands the registration requirements to include most private funds, including hedge funds, which could previously avoid registration and record-keeping requirements. The Title also addresses state registration requirements, establishes a standard for identifying accredited investors, and provides for periodic review and revision of the Title to account for inflation.
Purpose
This Title broadens the requirements of registration and record-keeping for investment advisers of private funds, including hedge funds, which had previously been able to claim exemptions to those requirements. Since hedge funds often carry substantial risk and manage large assets, this enhanced supervision and record keeping will allow the FDIC to conduct analyses of systemic risk of these funds, and can hold advisers to more stringent reporting and registration requirements.
Provisions
These provisions apply to private funds, which include almost every organization that would be considered an investment company under § 3 of the Investment Company Act of 1940. See 15 U.S.C. § 80b-2 (Dodd-Frank Act § 402).
Advisers Exempted from Compliance
Although most investment advisers are covered by Title IV, advisers who solely advise venture capital funds, family offices, or funds managing less than $150,000,000 are exempted from compliance. See 15 U.S.C. § 80b-3, 15 U.S.C. § 80b-2 (Dodd-Frank Act §§ 407, 408, 409. This title retains an exemption for “intrastate advisers”; however, investment advisers that advise any private funds cannot claim this exemption to registration. See 15 U.S.C. § 80b-3 (Dodd-Frank Act § 403). Title IV also eliminates an exemption for advisers that serve less than fifteen clients, an exemption that was commonly exercised by private fund advisers. See id. The FDIC and the Commodity Futures Trading Commission (CFTC) share rulemaking authority under this title, and are charged with promulgating rules regarding the registration of mid-sized private funds, based on the fund’s size, governance, and trading practices. See 15 U.S.C. § 80b-11 (Dodd-Frank Act §§ 406, 408).
Registration and Record-Keeping Requirements
The Title requires that any investment adviser, including the advisers of private hedge funds, must register as an investment advisor with the FDIC and provide and maintain records regarding the fund’s activity. See 15 U.S.C. § 80b-4 (Dodd-Frank Act § 404). These records must include information necessary to the public interest, for the protection of investors, or for the assessment of the systemic risk of that fund. See id. Records must include information on assets under management, use of leverage, counterparty credit risk exposure, trading and investment positions, valuation policies and practices, types of assets, side arrangements or side letters, and trading practices. See id. Title IV provides that the FDIC shall conduct a periodic inspection of these records and can share this information with the Financial Stability Oversight Council (FSOC), although both the FDIC and the FSOC have strict requirements to keep this information confidential. See id. Investment advisers also have a duty to take steps to safeguard any assets over which they exercise control, including verification of the assets by an independent public accountant. See 15 U.S.C. § 80b-18b (Dodd-Frank Act § 411).
Title IV also establishes the requirements for investment advisers to register with the state authorities—investment advisers must register in the state where they have their principal place of business if they have assets above $100,000,000, or whatever value the state laws provide. See 15 U.S.C. § 80b-3 (Dodd-Frank Act § 410).
Miscellaneous Provisions
With regards to accredited investors, Title IV sets the standard for accredited investors to those with a net worth of over $1,000,000, excluding the investor’s primary residence. See 15 U.S.C. § 77b (Dodd-Frank Act § 413). The Title also provides that the FDIC will review all money values used as factors in this title every five years to adjust for inflation. See id. at § 418. In addition to this periodic review, the FDIC and U.S. Government Accountability Office (GAO) are also charged with a number of studies under this area, which will lead to more specific rules in the future. See Dodd-Frank Act §§ 415, 416, 417.
Implementation
The transition period for execution expired in July 2011, so from that date forward, all requirements for investment advisers covered by Title IV were fully enforceable. The SEC will promulgate rules that clarify the remaining exemptions, giving investment advisors more guidance as to which advisors will be covered by this Title. Moreover, further rules from the SEC provide more clarity to the requirements for regulatory assets, state registration, and additional SEC reporting. See the U.S. Securities and Exchange Commission Spotlight on Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act.
[Last updated in October of 2022 by the Wex Definitions Team]