Compliance Solutions for Investment Advisers

Compliance Alert! SEC Adopts Amendments to Advisers Act

Dear Compliance Professional,

The rules adopted by the SEC last week provided much needed clarity to both the new assets under management (AUM) threshold for SEC registration and the required transition of certain “mid-sized” SEC-registered investment advisers to state registration. This Compliance Alert! will provide an overview of what these new rules mean for all SEC and state-registered investments advisers.  Subsequent Compliance Alert! newsletters will delve into the details of these changes and discuss the new requirements for calculating AUM and changes to Form ADV Part 1.

The easiest way to approach these changes is to divide advisers into four categories:

1. Advisers currently registered with the SEC;

2. Advisers applying for SEC registration;

3. Advisers currently registered with one or more states; and

4. Advisers that are “mid-sized” advisers (e.g., advisers with AUM between $25 million and $100 million).

Advisers Currently Registered with the SEC

All investment advisers registered with the SEC on January 1, 2011 must file an amendment to its Form ADV no later than March 30, 2012. For most advisers this will be the same as its annual updating amendment. For advisers with a fiscal year other than December 31st, this filing will be done as an “other-than-annual” amendment.  For any such adviser, the only difference between the March 30th filing and a typical “other-than-annual” amendment is that the adviser will be required to complete all items in Form ADV Part 1A and not just those items required to be updated in a typical “other-than-annual” amendment.

On this filing an adviser will report the current market value of their AUM within 90 days of the filing. It is the reported AUM on this filing that the SEC will use to determine eligibility for on-going SEC-registration. An SEC-registered adviser MAY remain registered with the SEC if its AUM is at $90 million, but MUST de-register if its AUM falls below $90 million.

If an adviser’s AUM has fallen below $90 million, it will then have until June 28, 2012 to transition its registration to one or more states.

Advisers Applying For SEC Registration

Starting on July 21, 2011, an adviser applying for SEC registration may register with the SEC if its AUM is between $100 million and $110 million, but MUST register with the SEC if its AUM is above $110 million. Therefore, new rule raises the threshold above which an investment adviser must register with the SEC to $110 million. Once registered with the SEC, an adviser need not withdraw its registration until it has less than $90 million of assets under management (see above). The amendment operates to provide a buffer of 20 percent of the $100 million statutory threshold for registration with the SEC, which is the same percentage as the current buffer.

Advisers Currently Registered with One or More States

If, on its next annual updating amendment, a state-registered adviser’s AUM has increased to at least $100 million (but is less than $110 million) the adviser MAY register with the SEC or stay registered with one or more states. If the state-registered adviser’s AUM has increased to at least $110 million, the adviser MUST transition its registration to the SEC.

Mid-Sized Advisers

The new rules create a category of mid-sized advisers which is defined as those advisers having AUM of between $25 million and $100 million. These advisers are not eligible for registration with the SEC (remember, you need AUM of at least $100 million to have the option to register with the SEC or of at least $90 million to stay registered with the SEC). However, a mid-sized adviser MUST remain registered with the SEC – even absent the requisite amount of AUM – if either of the following are true:

  1. The adviser is not required to be registered in the state where it maintains its principal office and place of business; or
  2. The adviser is not subject to examination by the state securities authority in the state where it maintains its principal office and place of business.

Currently, this means any adviser in the State of Wyoming (which does not register advisers) or the States of Minnesota and New York (neither of which have an adviser examination program). All mid-sized advisers that have its principal office and place of business in these states MUST remain registered with the SEC.

Once an adviser figures out what category it falls into, the rest is fairly straightforward. Of course, this being the SEC we are dealing with, “straightforward” is a relative term.

line