December 29, 2010
When an exemption isn't an exemption
Posted by Gordon Smith

Prior to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Investment Advisers Act of 1940 had an expansive exemption for advisers of private funds (including hedge funds, private equity funds and other types of pooled investment vehicles excluded from the definition of “investment company” under the Investment Company Act of 1940). Dodd-Frank removed that exemption, but expressly provided a new exemption from registration for advisers to venture capital funds. The SEC has a proposed regulation to implement these changes, and the venture industry is worried.

Why worried?

Because, according to the SEC release, the new venture capital fund exemption "provide[s] that the Commission shall require advisers relying on [it] to provide the Commission with reports and keep records as the Commission determines necessary or appropriate in the public interest or for the protection of investors. [The] new exemption [does] not limit our statutory authority to examine the books and records of advisers relying upon [this] exemption."

In a release implementing amendments to the Investment Advisers Act of 1940, the SEC proposes reporting requirements for exempt advisers comprising "a limited subset of items on Form ADV." That limited subset consists of seven items on Form ADV (Items 1, 2, 3, 6, 7, 10, 11), and the disclosure filed by exempt advisers would be publicly available. 

You can judge for yourself whether the disclosure is "burdensome and costly," but the logic of this regulation is a bit hard to follow. As observed by one commentator, "Exempting advisers on the basis that their registration is not necessary for the protection of investors while at the same time requiring the public filing of detailed information about those advisers would seem to be inconsistent if not opposite positions."

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