Senate Financial Reform - Registration Requirements for Advisors to “Private Funds”

On May 20, 2010, the Senate voted 59 to 39 to approve the “Restoring American Financial Stability Act of 2010” (the “Senate Bill”).  The Senate Bill will now proceed through the reconciliation process with the “Wall Street Reform and Consumer Protection Act of 2009” (the “House Bill”), the version of the omnibus financial reform bill passed by the House of Representatives.  The Private Investment Adviser Registration Act, included as Title IV of the Senate Bill, would (1) require many investment advisers with at least $100 million of assets under management (AUM) to register with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 (“Advisers Act”) by removing the exemption for investment advisers to fewer than 15 clients in the preceding 12 months that do not hold themselves out publicly as an investment adviser (the “15 Client Exemption”) and (2) impose record keeping and reporting requirements for investment advisers to private funds.

The Senate Bill would exempt several categories of investment advisers from some or all requirements, including: (1) investment advisers located outside of the United States with less than $25 million in assets attributable to U.S. persons, (2) investment advisers to venture capital and private equity funds and (3) family offices.  Private equity funds would, however, be subject to record keeping and reporting requirements.  As noted above, the Senate Bill would raise the minimum threshold for federal registration of investment advisers that are subject to state regulation from $25 million to $100 million of AUM. 

For most investment advisers, the portion of the Senate Bill that relates to registration of investment advisers is substantially similar to the language in the discussion draft that Senate Banking Committee Chairman Sen. Christopher Dodd distributed in November of 2009 (the “Dodd Discussion Draft”).  There are subtle but material differences, however, for investment advisers located outside of the United States, advisers that are registered with the Commodity Futures Trading Commission (CFTC) and investment advisers regulated as advisers to small business investment companies. 

The Senate Bill differs from the House Bill in some of its significant details, which are set out in the chart below.

Comparison of Significant Differences Between Proposed Financial Reform Legislation


Senate Bill House Bill
Change for registration requirements for investment advisers

Would delete the 15 Client Exemption

Same as Senate Bill

Registration for non-U.S. investment advisers

Would provide an exemption for advisers that (1) do not have a place of business in the United States, (2) have fewer than 15 clients domiciled or resident in the United States in the past 12 months, (3) do not hold themselves out to the public in the United States as investment adviser, (4) have aggregate AUM attributable to U.S. clients or investors in private funds advised by the non-U.S. investment adviser of less than $25 million and (5) are not advisers to investment companies or business development companies

Same as Senate Bill, except that “fewer than 15” test includes clients in the United States and investors in the United States in private funds

Other exemptions from registration

* Advisers to the exempt type of funds would still be subject to record keeping and reporting requirements,that will likely be different from those imposed on other private funds specified below


Would provide exemptions for (1) advisers to venture capital funds (to be defined by the SEC), (2) advisers to private equity funds (to be defined by the SEC),* (3) advisers to family offices (to be defined by the SEC) and (4) advisers only to small business investment companies unless the adviser is registered as a business development company

Would provide exemptions for (1) advisers to venture capital funds (to be defined by the SEC),* (2) advisers only to “private funds” with less than $150 million in AUM* and (3) advisers only to small business investment companies

Transition from state to federal registration

Would prohibit advisers that are regulated or required to be regulated by a state authority in which they are domiciled with less than $100 million in AUM (or such higher amount as the SEC may set by rule)[1] from registering with the SEC

Would continue to prohibit investment advisers with less than $25 million from registering with the SEC, but would require advisers that are registered with, and examined by, the state in which they are located to remain registered with the state until they have $100 million (or such higher amount determined by the SEC) in AUM

Commodity Fund Advisers

Would retain current exemption from investment adviser registration for advisers registered with the CFTC that do not primarily act as an investment adviser or advise registered investment companies or business development companies

Would require CFTC advisers to a private fund to register with the SEC

Investment advisers operating solely within one state

Would require investment advisers to a “private fund” operating within one state to register

Same as Senate Bill

Information required to be maintained and disclosed to the SEC for each “private fund”

Would require registered investment advisers to maintain records and to report to the SEC with respect to the following: (1) AUM of the private fund, (2) use of leverage, (3) counterparty credit exposure, (4) trading and investment positions, (5) trading practices, (6) valuation policies and practices, (7) types of assets held, (8) side arrangements whereby certain advisers receive more favorable rights and (9) other information determined by the SEC

Same as Senate Bill but does not require disclosure of (1) side letters, (2) types of assets held or (3) valuation policies and practices

Disclosure to investors, prospective investors, counterparties and creditors

No disclosure required

Would require disclosures of reports, records and other documents as the SEC determines

Investor qualification standards

Would require the SEC to (1) adjust the net worth accredited investor standard for natural persons (currently more than $1 million either individually or jointly with spouse) to exclude the value of the person’s primary residence, (2) increase the $1 million net worth standard after the fourth anniversary of the enactment of the Senate Bill, (3) review the definition of “accredited investor” as it relates to natural persons (other than as referenced in (2) above) and adjust the term as it relates to natural persons and (4) subsequently review the accredited investor standard (under Rule 215 under Regulation A under the Securities Act of 1933) as it applies to natural persons every four years

Would require inflation adjustment for the financial thresholds in Rule 205-3 under the Advisers Act (the “qualified client” threshold for charging compensation based on capital appreciation) and every five-year period going forward

Flexibility of the SEC to define terms used in the Advisers Act

Would provide the SEC with the authority to adopt rules and regulations to define technical, trade and other terms used in the Advisers Act, but would prohibit the SEC from defining the term “client” to include an investor in a private fund for purposes of certain antifraud provisions

Would permit the SEC to classify persons and matters as within its jurisdiction based on (1) size, (2) scope, (3) business model, (4) compensation scheme or (5) the potential to create or increase systemic risks and to “ascribe different meanings to terms (including the term ‘client’) used in different sections. . . ” of the Advisers Act, but would prohibit the SEC from defining “client” to include an investor in a private fund

Transition period

Except as expressly stated, the amendment and other new requirements would be effective one year after enactment

Same as Senate Bill

Changes to custody requirements

Would require a registered investment adviser to take steps to safeguard client assets as the SEC may require, including verification with an independent public accountant

Companion legislation (the Investor Protection Act of 2009) would require the SEC to prohibit a registered investment adviser from having custody of client funds or securities in excess of $10 million unless the assets are maintained with a qualified custodian that does not provide investment advice with respect to those assets and to require persons exempt from the custody rules to have an independent fiduciary verify client assets and provide a report to the client

Definition of “private fund”

Would include issuers that would be an investment company under the Investment Company Act of 1940 were it not for sections 3(c)(1) or 3(c)(7) (i.e., hedge funds, private equity funds and venture capital funds)

Same as Senate Bill


In addition to the above, the Senate Bill would also require studies on (1) the financial thresholds or other criteria to qualify as accredited investors, (2) the formation of a self-regulatory organization for private funds, (3) fails to deliver from short sales and (4) real-time reporting of short sale positions



Given that both the Senate Bill and the House Bill have passed their respective chambers with very similar provisions regarding the registration of investment advisers, SEC registration for investment advisers to large hedge funds seems almost certain.  We will continue to monitor and provide updates as significant developments occur in the reconciliation process.

To view a comparison of the Advisers Act as now in force versus the Advisers Act as it would be amended by the Senate Bill, please click here.  To view a comparison of the House Bill to the Senate Bill, please click here.  To view a comparison of the Dodd Discussion Draft to the Senate Bill, please click here.

[1]Current threshold is $25 million.

Contact Information

If you have any questions regarding this alert, please contact— 

Mark H. Barth        
New York

Eliot D. Raffkind  

David M. Billings

Fadi G. Samman
Washington, D.C.

Barry Y. Greenberg

Simon W. Thomas

Prakash H. Mehta
New York

Stephen M. Vine  
New York