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|N1na kalmar investments||Some hedge fund advisers may elect to limit the number of investors in their funds, or limit their total assets under management in order to avoid registration under the Advisers Act. Implementing this change to the IARD system promptly will also ensure that our staff, as well as members of realidades 1 3a-7 investment company act investing public, can begin to Start Printed Page access information about advisers to private funds. We disagree that our oversight of hedge fund advisers that are also commodity pool operators would be duplicative. Nevertheless, registration imposes certain costs. We estimate that all advisers that will be new registrants will provide brochures as required by rule In contrast, the investment adviser of an investment company need not consider the individual needs of the company's shareholders when making investment decisions, and thus has no obligation to ensure that each security purchased for the company's portfolio is an appropriate investment for each shareholder.|
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|Keystone xl pipeline project investment||These commenters also noted that registration may help the hedge fund industry to the extent it discourages persons intent on committing fraud from entering the industry and damaging the reputation of the legitimate managers. We hoped that the Commission would accord serious consideration realidades 1 3a-7 investment company act objections to their proposal. Instead, the satellite investment strategy by which the rule was proposed and adopted discouraged a true exchange of ideas about the proposed approach and alternatives. The President of the United States issues other types of documents, including but not limited to; memoranda, notices, determinations, letters, messages, and orders. Rather, we are suggesting that the Commission should not assume a task that is now handled by the market, particularly since it is a task the Commission is not equipped to perform. These registered advisers must adopt compliance procedures under the Start Printed Page Advisers Act and must provide certain safeguards to their clients, including their hedge fund investors.|
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|Realidades 1 3a-7 investment company act||In Schedule D, revising Section 7. We have seen no credible evidence that the Act has in any way impeded their ability to employ successful investment strategies, or to effectively compete with other financial institutions that manage securities portfolios here or abroad. As discussed above, the hedge fund industry has been growing at an extraordinary pace in the past decade. Rule b 3 -2 limits the extraterritorial application of the Advisers Act that would otherwise occur as a result of the new rule, by providing that an offshore adviser to an offshore private fund may treat the fund and not the investors as its client for most purposes under the Act. Registration of hedge fund advisers will benefit all investors and market participants by providing us and other policy makers with better data.|
First Name. Last Name. View All. Rule 3a-7 Share. Resources Main. The Rulemaking Office reviews and considers whether the Commission should propose, adopt, or amend rules and forms under the Investment Company Act, the Investment Advisers Act, and other federal securities laws that affect the asset management industry. The Rulemaking Office also makes recommendations to the Commission on rulemaking initiatives as appropriate, and provides technical assistance on the interpretation and application of recent rulemakings.
In consultation with staff across the Division, the Rulemaking Office also prepares Congressional testimony and reviews and assists in drafting proposed legislation and responding to Congressional inquiries. This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public.
The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations.
It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.
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Commenters opposing the rule challenged our concerns regarding fraud on two grounds. Some asserted that there was an inadequate record of fraud by hedge fund advisers to support requiring hedge fund advisers to register. They asserted that the 46 cases we cited in the Proposing Release represented only two percent of our enforcement cases over the applicable five-year period. Some commenters cited to us a sentence from the Staff Hedge Fund Report that indicated that there was no evidence that hedge fund advisers engaged disproportionately in fraudulent activity.
We reject such arguments. In the face of trends that we now observe, including the potential impact of hedge fund fraud on a growing and broadening number of direct and indirect investors in hedge funds, we believe that waiting would be irresponsible. Second, some commenters asserted that the Commission would be unsuccessful at detecting fraud by hedge fund advisers, pointing to frauds that have occurred involving mutual funds.
Our examination staff uncovered, during routine or sweep exams, five of the eight cases we brought against registered hedge fund advisers, [ 94 ] and two of the cases involving unregistered advisers originated out of examinations of related persons that were registered with us.
Finally, some commenters suggested that hedge fund advisers are different from other advisers and that our examiners would be unable to fully understand their trading strategies and investments. In our experience, there is nothing unique about hedge fund advisers or the types of frauds they have committed that suggests that our examination program would not or could not play the same effective role. Registration with the Commission permits us to screen individuals associated with the adviser, and to deny registration if they have been convicted of a felony or had a disciplinary record subjecting them to disqualification.
Several of the frauds we have seen appear to have been perpetrated by unscrupulous persons using the hedge fund as a vehicle to defraud investors. Our ability to screen individuals and, in some cases, to block their entrance into the advisory profession should serve to discourage unscrupulous persons from using hedge funds as vehicles for fraud.
Registration under the Advisers Act will require hedge fund advisers to adopt policies and procedures designed to prevent violation of the Advisers Act, and to designate a chief compliance officer. We adopted this requirement last year for all advisers registered with us in recognition that advisers have the primary obligation to ensure compliance with the securities laws, and to foster more effective compliance practices.
Compliance officers serve as the front line watch for violations of securities laws, and provide protection against conflicts of interests. Comment letters opposing registration of hedge fund advisers did not challenge the benefits of compliance programs; rather, they complained of the costs of developing a compliance infrastructure, and of submitting to our compliance examinations.
Our Staff Hedge Fund Report noted that, while many unregistered hedge fund managers had strong compliance controls, others had very informal procedures that appeared to be inadequate for the amount of assets under their management. A recent survey of institutional investors reported that the adequacy of operational controls at hedge fund advisory firms was one of most frequently mentioned concerns.
Application of our recent rule requiring more formalized compliance policies administered by an employee designated as a chief compliance officer will serve to better protect hedge fund investors. Registration under the Advisers Act will have the salutary effect of resulting in all direct investors in most hedge funds meeting minimum standards of rule under the Advisers Act, because hedge fund advisers typically charge performance fees. Most commenters did not address this effect of registration under the Act, except with respect to expressing their support for the transitional rule we also proposed, and which we discuss later in this Release.
Several commenters suggested that the Commission exempt from registration hedge fund advisers that are registered with the CFTC as commodity pool operators in order to avoid duplicative registration. We disagree that our oversight of hedge fund advisers that are also commodity pool operators would be duplicative. Most hedge fund portfolios consist primarily of securities, and the CFTC's oversight necessarily focuses more on the area of futures trading, which is the activity of most concern to the CFTC.
Some commenters urged us not to adopt the rule because Commission oversight of hedge fund advisers might tend to cause hedge fund investors to rely on that oversight instead of performing appropriate due diligence before making an investment in a hedge fund. In adopting rule b 3 -2, an important consideration for us has been our dissatisfaction with the operation of the existing safe harbor because it permits advisers, without registering under the Act, to manage large amounts of securities indirectly through hedge funds that may have, collectively, hundreds of investors.
Commenters have not persuaded us otherwise. Many commenters who opposed the rule urged us to maintain the safe harbor because it operated to exempt advisers to hedge funds in which only wealthy and sophisticated investors participated. Section b 3 was not intended to exempt advisers to wealthy or sophisticated clients. First, they were the primary clients of many advisers in when the provision was included in the Act. Surely, the fifteenth wealthy or sophisticated client would not trigger the need for registration.
Other Start Printed Page provisions in the federal securities laws designed to exempt transactions or relationships with wealthy or sophisticated investors contain no such limitations. When a client—even one who is highly sophisticated in financial matters—seeks the services of an investment adviser, he acknowledges he needs the assistance of an expert. The client may be unfamiliar with investing or the type of strategy employed by the adviser, or may simply not have the time to manage his financial affairs.
The Advisers Act is intended to protect all types of investors who have entrusted their assets to a professional investment adviser. The legislative record of NSMIA, in fact, suggests that Congress may have expected the Commission to regulate the activities of advisers to hedge funds eligible for the new Investment Company Act exclusion. NSMIA amended section of the Advisers Act to exempt qualified purchaser funds from restrictions on performance fees.
Thus, Congress understood that at least some of these qualified purchaser pools would be advised by registered advisers, and chose to exempt these advisers only from the restrictions on performance fees. Several commenters submitted alternative approaches for our consideration. These alternatives included provisions aimed at addressing several of the considerations that led us to propose rule b 3 -2, such as the need for information about hedge fund advisers and the broadening exposure of investors to hedge funds.
We have considered these alternatives. However, as discussed below, the alternatives each involve partial responses to our concerns, and all would deny us the ability to examine the activities of hedge fund advisers, and would not, in our judgment, accomplish the goals of this rulemaking. Other commenters offered alternatives based on amending our Form D to Start Printed Page require hedge funds to provide certain information about their advisers.
Finally, some commenters suggested that, instead of registering hedge fund advisers, we gather information about them from a variety of regulatory filings currently made by hedge funds, their advisers, and broker-dealers. While some of the reports emphasized by these commenters might provide us with basic identifying information about hedge funds advisers that are registered as broker-dealers or commodity pool operators, many are not registered in either capacity.
These commenters also focus on several existing transactional reporting requirements, arguing they contain a wealth of information about hedge funds. However, as discussed above, making use of this information would require substantial effort on the part of our staff to extract a composite of information about any particular hedge fund, yielding limited information about its assets instead of any useful information about whether its adviser is fulfilling its fiduciary duties.
As we stated in the Proposing Release, we need information that is reliable, current, and complete, and we need it in a format reasonably susceptible to analysis by our staff. For the reasons discussed below, we believe we have broad authority to adopt the rule. We start our discussion with the statutory language. Section b 3 of the Act provides an exemption from registration for certain investment advisers. To qualify for the exemption, Congress provided two specific tests, each of which an adviser must satisfy.
First, the adviser must not advise fifteen or more clients and, second, the adviser must not hold itself out to the public as an investment adviser. In enacting this provision, Congress exempted from the registration requirements a category of advisers whose activities were not sufficiently large or national in scope, e.
Congress did not appear to have addressed or considered whether an adviser must count an investor in a pooled investment vehicle as a client for purposes of section b 3. This concern is amplified where the adviser solicits investments directly in the fund vehicle based on the adviser's investment management skills, and offers investors the ability to redeem their assets on a short-term basis, as they would be permitted to do if they opened an account directly with the adviser.
Further, the legislative history indicates that Congress deliberately left open the question of how to count clients for entities other than business development companies. When adopting the safe harbor in , we determined to resolve the uncertainty regarding when advisers to hedge funds must register by expressly exempting them from registration. As discussed above, in the intervening two decades and particularly in recent years, much has changed in our capital markets. The growth of hedge funds, their market activity and their trading volume has been dramatic, and as a result they now have a substantial effect on national securities markets and on the national economy.
This growth, together with the increase in fraud involving hedge fund advisers, fully justifies a reexamination of whether it is consistent with the Act to continue to provide an across-the-board registration exemption for all advisers to hedge funds.
The amendments adopted by the Commission today recognize those changed circumstances and constitute an appropriate use of the Commission's rulemaking authority under the Act. As discussed in more detail below, [ ] first, a private fund will be one that is excepted from the definition of investment company under section 3 c 1 or 3 c 7 of the Investment Company Act of By definition, these funds engage in significant securities related activities in a context where they deal privately with Start Printed Page each of their investors since under sections 3 c 1 and 3 c 7 they may not engage in a public offering.
This condition will ensure that the definition does not inadvertently include private equity funds, venture capital funds, or other funds that require long-term commitment of capital. Third, the term is limited to those funds that are marketed based on the skills, ability, and expertise of the adviser to the fund, thereby confirming the direct link between the adviser's management services and the investors.
These investors thus not only expect to receive, but are solicited explicitly on the basis of, the investment management ability of the adviser. Under the definition of private fund, an adviser will only need to look through for purposes of counting clients where some affirmative steps have been taken to make fifteen or more potential clients aware of the ability to obtain the adviser's services through the fund vehicle. Further, since hedge funds did not exist until , [ ] it is unclear whether Congress would have viewed a hedge fund or the hedge fund's investors as the client.
Advisers to hedge funds market their services based on the skills, ability and expertise of the persons who will make the fund's investment decisions. Thus, the clients will still rely exclusively on the efforts and skill of the investment adviser, and any new investors will be attracted to the hedge fund as a means to obtain the asset management services of the adviser.
The clients will periodically receive reports from the adviser about the hedge fund, and their decisions whether or not to withdraw their assets from the fund will necessarily rely heavily on those reports.
A hedge fund adviser may not treat all of its hedge fund investors the same. Some investors may have greater access to risk and portfolio information, [ ] Start Printed Page different lock-up periods may be provided, [ ] and some investors may be able to negotiate lower fees.
Our rule closes this loophole. The new rule is designed to amend the method of counting that hedge fund advisers use for purposes of applying the private adviser exemption. It is not intended to alter the duties or obligations owed by an investment adviser to its clients. Rule b 3 -2 does not alter the minimum amount of assets under management that an investment adviser generally must have in order to register with the Commission.
In determining the amount of assets it has under management, a hedge fund adviser whose principal office and place of business is in the United States must include the total value of securities portfolios in its assets under management. That is, it may not reduce the value of those assets by amounts borrowed to acquire them. An adviser may exclude proprietary assets invested in the fund, and need not include the value of assets attributable to non-U.
Rule b 3 -2 requires investment advisers to count each owner of a private fund towards the threshold of fourteen clients, that is, each shareholder, limited partner, member, or beneficiary of the private fund. First, we have added a provision clarifying that an adviser does not have to count itself as a client regardless of the form its ownership in the pool takes. Without the look-through requirement, an adviser could provide its services through fourteen or fewer top tier funds and continue to indirectly manage the assets of hundreds or, in the case of registered funds of hedge funds, thousands of investors, without registering or being subject to the Commission's oversight.
The Commission's primary concern when developing regulatory policy that has implications for foreign participants in our markets is to ensure that U. In this regard, a single set of rules provides greater transparency to investors, who can be confident that they will receive the same level of protection with respect to their investments regardless of the country of origin of their investment adviser.
Similarly, a single set of rules assures a level playing field for both U. Our approach to offshore advisers to offshore funds with U. However, the absence of such a framework would require us to determine regulatory equivalence of hundreds of potential home jurisdictions. Such an effort would tax our resources. Moreover, regulatory systems that may be equivalent today may diverge in a matter of a few years, thus the evaluation would have to occur on an ongoing basis. The final rules impose the same counting requirements on offshore advisers to hedge funds as offshore advisers providing advice directly to U.
Thus, for purposes of eligibility for the private adviser exemption, an offshore hedge fund adviser must look through each private fund it advises, whether or not those funds are also located offshore, and count each investor that is a U. Start Printed Page residents generally must register under the Advisers Act.
At the suggestion of commenters, we are adopting a provision that allows an adviser to a private fund to determine whether an investor is a U. Several commenters suggested that offshore advisers be required to look through their private funds only if more than 25 percent of the fund was held by U.
Rule b 3 -2 limits the extraterritorial application of the Advisers Act that would otherwise occur as a result of the new rule, by providing that an offshore adviser to an offshore private fund may treat the fund and not the investors as its client for most purposes under the Act.
Commenters supported this aspect of the rule, but also requested that we clarify how we would apply the Advisers Act to offshore advisers relying on it. Several commenters suggested that the definition of private fund exclude 3 c 7 funds because investors in a 3 c 7 fund must all be qualified purchasers and can be presumed to have a certain level of financial sophistication.
As we discussed above, the Advisers Act does not exempt from registration advisers whose clients are all financially sophisticated, and indeed a client's decision to engage a professional adviser acknowledges that the client needs an expert's assistance. Second, a company will be a private fund only if it permits investors to redeem their interests in the fund within two years of purchasing them.
In contrast, the Commission has developed a substantial record of frauds associated with hedge funds. The rule permits a fund to offer redemption rights under extraordinary circumstances without being considered a private fund under the rule. Third, a company will be a private fund only if interests in it are offered based on the investment advisory skills, ability or expertise of the investment adviser. This reliance by hedge fund investors implicates the need for the protections that Advisers Act registration offers.
We are amending rule b 3 -1 to clarify that investment advisers may not count hedge funds as single clients under that safe harbor. We are adopting two amendments to the adviser recordkeeping rule. The first of these amendments permits hedge fund advisers that are required to register with us under new rule b 3 -2 to market their performance from periods prior to their registration with us, even if they have not kept documentation that our rules would otherwise require.
As proposed, the exemption would have covered only the records supporting the performance of the adviser's private funds. Commenters pointed out that a hedge fund adviser may also manage other pools, such as private equity funds. The amendment as we are adopting it applies to records supporting any accounts managed by the hedge fund adviser. We are adding grandfathering provisions to rule under the Advisers Act, the performance fee rule, to avoid disrupting existing arrangements between newly-registered hedge fund advisers and their current pool investors or separate account clients.
We are amending rule 4 -2, the adviser custody rule, to allow additional time for completion of audit work on behalf of advisers to funds of hedge funds that choose to distribute audited fund financial statements to investors under the custody rule.
Some advisers to funds of funds are not able to comply with the current day deadline because they cannot obtain completion of their fund audits prior to completion of the audits for the underlying funds in which they invest. To be eligible for the extended deadline, a fund of funds must invest at least ten percent of it assets in other, unrelated, pooled investment vehicles.
This rulemaking is designed to alter the method of counting clients that hedge fund advisers use for purposes of determining their registration Start Printed Page obligations with us. It is not our intention to amend advisers' method of counting clients for other purposes.
To respond to commenters' concerns, we are amending both rules and A-3 to clarify that advisers and supervised persons may, for purposes of those rules, count clients as provided in rule b 3 -1 without giving regard to the look through requirements in rule b 3 One commenter spoke to these changes to say they were essential. The effective date of new rule b 3 -2 and amendments to rules b 3 -1, A-3, , , and is February 10, Hedge fund advisers may elect to begin complying with the new rule and the rule amendments as of their effective date, but have until February 1, to come into compliance with rule b 3 -2 and the amendments to rules b 3 -1, A-3, , , 4 -2, and Our staff will be available to work with these new registrants on resolving technical questions.
By the compliance date, February 1, , each adviser required to register under the new rule [ ] must have its registration effective, and must have in place all policies and procedures required under our rules. Some advisers, however, may need to either arrange for their private funds to be audited or for quarterly transaction statements to be distributed to the investors in lieu of audit results.
Several commenters asked whether the two-year redemption test under the definition of private fund would apply to investments made prior to the effectiveness of the new rules. Advisers must apply the two-year redemption test to any investments made on or after February 1, , whether those investments are made by new or existing investors, but need not apply this test to investments made prior to the compliance date. Registered advisers amending their Form ADV after the form has incorporated the amendments must respond to Item 7.
By implementing these changes to the IARD system in March of , we will allow most registered advisers to respond to the revised item in conjunction with their regular annual updating amendment, rather than requiring them to file an additional amendment. Implementing this change to the IARD system promptly will also ensure that our staff, as well as members of the investing public, can begin to Start Printed Page access information about advisers to private funds. We are sensitive to the costs and benefits that result from our rules.
Rule b 3 -2 requires certain hedge fund advisers to register with us under the Investment Advisers Act of We are also adopting related rule amendments to facilitate a smooth transition for hedge fund advisers. In the Proposing Release, we identified possible costs and benefits of the rule and rule amendments and requested comment on our analysis. Many commenters supported the new rule, [ ] although many commenters, chiefly hedge fund advisers and a trade association, expressed reservations at the potential costs of the new rule.
As discussed above in this Release, we expect that hedge fund investors, advisory clients and advisers will benefit from the rule and rule amendments, although these benefits are difficult to quantify. Our oversight may prevent or diminish losses that hedge fund investors would otherwise experience as a result of hedge fund advisers' fraud.
Registration allows us to conduct examinations of hedge fund advisers, and our examinations provide a strong deterrent to advisers' fraud, identify practices that may harm investors, and lead to earlier discovery of fraud that does occur. In the last five years, the Commission has brought or authorized 51 enforcement cases in which we assert hedge fund advisers have defrauded hedge fund investors or used the hedge fund to defraud others. While three of these frauds were detected in time to prevent investor losses, this was the exception rather than the rule.
While our regulatory oversight cannot guarantee hedge fund investors will never be defrauded, we expect our oversight will reduce investor losses. This strongly suggests that the Commission's registration requirement will affect an appropriate group of hedge fund advisers and serve as an effective response to combat hedge fund fraud.
However, in 5 of the 8 cases against registered advisers, it was our examiners who uncovered the fraudulent conduct. We believe this has a genuine deterrent effect. Form ADV information that hedge fund advisers will file in registering will aid hedge fund investors in evaluating potential managers. Filing Form ADV will require hedge fund advisers to disclose information about their business, affiliates and owners, and disciplinary history.
As commenters pointed out, many investors currently lack good access to this information about their hedge fund managers. Hedge fund investors should benefit from their advisers' improved compliance controls. Several commenters confirmed this assessment in their comment letters. Mutual fund investors will benefit from hedge fund adviser registration to the extent that Commission oversight deters hedge funds and their advisers from illegal conduct that exploits mutual funds.
Many of the market timers and illegal late traders involved in recent mutual fund scandals have been hedge fund advisers. The registration of hedge fund advisers will benefit not only hedge fund investors but also other investors and the securities markets, to the extent that the Commission's oversight eliminates opportunities for hedge fund advisers to engage in other types of unlawful conduct in the securities markets. Commenters also saw this as a benefit to adviser registration.
There may be other fraudulent activities by hedge fund advisers of which we are unaware because we cannot examine these advisers regularly. Adviser registration, as discussed above, should lead to earlier discovery of fraudulent activities and thus enhance protections to all investors in the securities markets. Registration of hedge fund advisers will benefit all investors and market participants by providing us and other policy makers with better data.
We have limited information about hedge fund advisers and the hedge fund industry, and much of what we do have is indirect information extrapolated from other data. This hampers our ability to develop regulatory policy for the protection of hedge fund investors and Start Printed Page investors in general.
While some commenters agreed with our assessment of this benefit, [ ] others suggested that, instead of registering hedge fund advisers, we compile information about them from a variety of scattered regulatory filings currently made by hedge funds, their advisers, and broker-dealers.
Mandatory registration will provide a level playing field for hedge fund advisers. Many hedge fund advisers have already registered with us, and have organized their compliance procedures under the Advisers Act. We received comments noting that mandatory registration would ensure that all hedge fund advisers compete on the same basis in this regard.
Registering hedge fund advisers may enhance investor confidence in a growing and maturing industry. As discussed above, the hedge fund industry has been growing at an extraordinary pace in the past decade. Such argument could have been used against registration of any kind of investment adviser and against any regulation of the securities industry.
As we discussed in the Proposing Release, registration of hedge fund advisers under the Advisers Act would not impede hedge funds' operations. Comments from registered hedge fund advisers agreed. Instead of imposing specific procedures on registrants, the Advisers Act is principally a disclosure statute that requires registrants to fully inform clients of conflicts so that those clients can determine whether to give their consent.
For the same reasons, registering hedge fund advisers should not impair the ability of hedge funds to continue their important roles of providing price information and liquidity to our markets. Nevertheless, registration imposes certain costs. In the Proposing Release, we analyzed various costs that hedge fund advisers would incur in connection with registration.
Commenters representing the views of unregistered hedge fund advisers generally challenged our cost estimates and predicted the costs of compliance would be burdensome. Investment advisers, whether registered with us or not, place the future of their business at peril if they do not establish a sound compliance infrastructure to fulfill their fiduciary duties towards their clients under the Act.
Registered hedge fund advisers estimated that advisers with good compliance infrastructures in place would incur much less incremental cost than those that did not have good compliance infrastructures. In our Proposing Release, we estimated that the costs of preparing adviser registration submissions, including preparation and submission of Part 1A of Form ADV, would not be high.
Although one commenter suggested the costs of preparing a Part 1A submission can be quite high, we believe the commenter's example does not reflect the experience of other advisers, none of whom made similar comments. Numerous hedge fund advisers have already registered with the Commission using Part 1A, and none has reported to us that its business model presents any difficulty in using the form. We expect that hedge fund advisers will face relatively small internal costs in preparing a Part II, and will be likely to include their Part II disclosure as part of their private placement memoranda for their hedge funds, reducing their overall costs even further.
We received no comments to the contrary. New hedge fund adviser registrants will also face costs to bring their operations into conformity with the Advisers Act and the rules under the Act. In the Proposing Release, we estimated the cost of establishing a compliance infrastructure would primarily consist of establishing procedures and systems that address rules under the Advisers Act such as the books and records rule, [ ] the custody rule, [ ] the proxy voting rule, [ ] the compliance rule, [ ] and the code of ethics rule.
Many unregistered hedge fund advisers have already built sound compliance infrastructures because their business compels it. These firms already have procedures designed to keep good records of all transactions, to keep their clients' assets safe, to provide fair and full disclosure of conflicts of interest, and to prevent their supervised persons from breaching fiduciary duties.
The estimates are averages, premised on the understanding that the costs will likely be less for new registrants that have already established sound compliance practices and more for new registrants that do not yet have good compliance procedures. Several law firms and attorneys representing hedge fund advisers challenged these estimates as being too low, but these firms did not provide any estimates of their own.
Firms may consider factors such as the size of the firm, the complexity of its compliance environment, and the qualifications of current staff. While we recognize some hedge fund advisers will need to designate someone to serve as CCO on a full-time basis, we expect these will be larger firms—those with many employees and a sizeable amount of investor assets under management.
Because there is no currently-available comprehensive database of hedge fund advisers, we cannot determine the number of these larger hedge fund firms in operation, but our staff estimates it is relatively few. Staff estimates approximately half of these hedge fund advisers are already registered with us, and have already designated a CCO.
While the remaining, unregistered, larger hedge fund advisers may not have designated a CCO as such, many of these firms likely already have personnel who perform similar functions to a CCO, in order to address the firm's liability exposure and protect its reputation.
In smaller hedge fund advisers, the designated CCO will likely also fill another function in the firm, and perform additional duties alongside compliance matters. Firms designating a CCO from existing staff may experience costs to the extent the individual is taking on additional compliance responsibilities or giving up other non-compliance responsibilities.
These costs may include costs of shifting responsibilities among employees, and might in some cases include additional compensation costs. Some of these firms may need to add compliance capacity to their staffs. Costs will vary from firm to firm, depending on the extent to which firm staff is already performing some or all of the requisite compliance functions, the extent to which the CCO's non-compliance responsibilities need to be lessened to permit allocation of more time to compliance responsibilities, and the value to the firm of the CCO's non-compliance responsibilities.
We do not have access to information that would Start Printed Page allow us to determine these costs, and commenters did not provide estimates. Several comments on our Proposing Release identified additional cost considerations related to hedge fund advisers' ongoing, annual costs of compliance and the costs of undergoing examination by the Commission. There may be a number of unregistered hedge fund firms whose operations are already substantially in compliance with the Advisers Act and that would therefore experience only minimal incremental ongoing costs as a result of registration.
These costs may be significant for some hedge fund advisers. We do not have access to information that would enable us to determine these additional ongoing costs, which are predominantly internal to the firms themselves. Incremental ongoing compliance costs will vary from firm to firm depending on factors such as the complexity of each firm's activities, the business decisions it makes in structuring its response to its compliance obligations, and the extent to which it is already conducting its operations in compliance with the Advisers Act.
Some commenters asserted that there would be substantial costs associated with hedge fund advisers' responses to our examinations. One hedge fund adviser reportedly estimated spending hours of internal staff time during an SEC examination. Also, we note that one registered hedge fund adviser commented that the firm itself derived benefit from the examination process. The new registration requirement will increase the number of investment adviser firms subject to Commission examinations.
OCIE's examination program already covers a number of advisers to hedge funds. These advisers have registered with the Commission, either because they advise non-hedge fund clients for whom registration is required, or because they perceive registration with the Commission to be necessary to their business model. Implementation of rule b 3 -2 will increase the number of SEC-registered advisers by some amount.
Several commenters expressed concerns about this increase. Though OCIE's resources will be spread over an expanded pool of investment adviser registrants, we are developing risk assessment tools to enhance the efficiency of our examination program by allowing our staff to focus examination resources on the areas of greatest risk to investors.
In addition, we have recently adopted measures that require advisory personnel to be more accountable for the efficacy of Start Printed Page compliance programs. As of October of this year, registered advisers have begun complying with our new compliance rule, which requires them to implement comprehensive policies and procedures for compliance with the Advisers Act, under the administration of a chief compliance officer. Or we could seek additional resources from Congress, if necessary. We are continuing to develop techniques to assess risk.
Our ability to estimate the size of the increase in our workload has been hampered by the absence of any reliable and comprehensive database of hedge funds or advisers to hedge funds. In the Proposing Release, we described our staff's tentative estimates that the addition of new hedge fund advisers to our current registrant pool could increase the total size of this pool by 8 to 15 percent.
The rule amendments contain several collections of information requirements, but the amendments do not change the burden per response from that under the current rules. Rule b 3 -2 will have the effect of requiring most advisers to hedge funds to register with the Commission under the Advisers Act and will therefore increase the number of respondents under several existing collections of information, and, correspondingly, increase the annual aggregate burden under those existing collections of information.
The existing rules affected by rule b 3 -2 contain currently approved collection of information numbers under OMB control numbers , , , , , , , , , , and , respectively. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.
Unless otherwise noted below, responses are not kept confidential. We cannot estimate with precision the number of hedge fund advisers that will be new registrants with the Commission under the Advisers Act after rule b 3 -2 is adopted. As discussed earlier, our staff has estimated that between and 1, hedge fund advisers will be new Advisers Act registrants under the new rule and rule amendments.
We received no comments on these estimates. Form ADV is the investment adviser registration form. The collection of information under Form ADV is necessary to provide advisory clients, prospective clients, and the Commission with information about the adviser, its business, and its conflicts of interest.
Rule requires every person applying for investment adviser registration with the Commission to file Form ADV. Rule requires each registered adviser to file amendments to Form ADV at least annually, and requires advisers to submit electronic filings through the IARD. This collection of information is found at 17 CFR The currently approved collection of information in Form ADV is , hours. We estimate that new respondents will file one complete Form ADV and one amendment annually, and comply with Form ADV requirements relating to delivery of the code of ethics.
Rule requires every person withdrawing from investment adviser registration with the Commission to file Form ADV-W. The collection of information is necessary to apprise the Commission of advisers who are no longer operating as registered advisers. We estimate that the hedge fund advisers that will be new registrants will withdraw from SEC registration at a rate of approximately 16 percent per year, the same rate as other registered advisers, and will file for partial and full withdrawals at the same rates as other registered advisers, with approximately half of the filings being full withdrawals and half being partial withdrawals.
Rule requires that advisers requesting either a temporary or continuing hardship exemption submit the request on Form ADV-H. An adviser requesting a temporary hardship exemption is required to file Form ADV-H, providing a brief explanation of the nature and extent of the temporary technical difficulties preventing it from submitting a required filing electronically. Form ADV-H requires an adviser requesting a continuing hardship exemption to indicate the reasons the adviser is unable to submit electronic filings without undue burden and expense.
Continuing hardship exemptions are available only to advisers that are small entities. The collection of information is necessary to provide the Commission with information about the basis of the adviser's hardship. We estimate that the approximately hedge fund advisers that will be new registrants will file for temporary hardship exemptions at approximately 0.
Form ADV-NR requires these non-resident general partners or managing agents to furnish us with a written irrevocable consent and power of attorney that designates the Commission as an agent for service of process, and that stipulates and agrees that any civil suit or action against such person may be commenced by service of process on the Commission.
The collection of information is necessary for us to obtain appropriate consent to permit the Commission and other parties to bring actions against non-resident partners or agents for violations of the federal securities laws. We estimate that the approximately hedge fund advisers that will be new registrants will make these filings at the same rate 0. Rule requires SEC-registered investment advisers to maintain copies of certain books and records relating to their advisory business.
The collection of information under rule is necessary for the Commission staff to use in its examination and oversight program. Responses provided to the Commission in the context of its examination and oversight program are generally kept confidential.
The currently approved collection of information for rule is 1,, hours, or We estimate that all advisers that will be new registrants will maintain copies of records under the requirements of rule Accordingly, we estimate the new rule will increase the annual aggregate information collection burden under rule by , Rule also requires that an investment adviser deliver, or offer, its brochure on an annual basis to existing clients in order to provide them with current information about the adviser.
The collection of information is necessary to assist clients in determining whether to retain, or continue employing, the adviser. The currently approved collection of information for rule is 5,, hours, or hours per registered adviser, assuming each adviser has on average clients. We estimate that all advisers that will be new registrants will provide brochures as required by rule We note that the average number of clients per adviser reflects a small number of advisers who have thousands of clients, while the typical SEC-registered adviser has approximately 76 clients.
We requested, but did not receive, comments on the number of clients of the average hedge fund adviser. The collection of information under rule A-1 is necessary to establish standards of business conduct for supervised persons of investment advisers and to facilitate investment advisers' efforts to prevent fraudulent personal trading by their supervised persons. The currently approved collection of information for rule A-1 is , hours, or Rule 4 -2 requires advisers with custody of their clients' funds and securities to maintain controls designed to protect those assets from being lost, misused, misappropriated, or subjected to financial reverses of the adviser.
The collection of information under rule 4 -2 is necessary to ensure that clients' funds and securities in the Start Printed Page custody of advisers are safeguarded, and staff of the Commission uses information contained in the collections in its enforcement, regulatory, and examination programs. The currently approved collection of information for rule 4 -2 is 72, hours. We estimate that all hedge fund advisers that will be new registrants will have custody. Advisers to pooled investment vehicles such as hedge funds may distribute audited financial statements to their investors annually in lieu of quarterly account statements sent by either the adviser or a qualified custodian.
We are amending rule 4 -2 to make it easier for advisers to funds of hedge funds to use this approach. We estimate that all new respondents will use this approach and will not be required to undergo an annual surprise examination. Rule 4 -3 requires advisers who pay cash fees to persons who solicit clients for the adviser to observe certain procedures in connection with solicitation activity.
The collection of information under rule 4 -3 is necessary to inform advisory clients about the nature of a solicitor's financial interest in the recommendation of an investment adviser, so the client may consider the solicitor's potential bias, and to protect investors against solicitation activities being carried out in a manner inconsistent with the adviser's fiduciary duties. The currently approved collection of information for rule 4 -3 is 10, hours.
We estimate that approximately 20 percent of the hedge fund advisers that will be new registrants will be subject to the cash solicitation rule, the same rate as other registered advisers. Rule 4 -4 requires registered investment advisers to disclose to clients and prospective clients certain disciplinary history or a financial condition that is reasonably likely to affect contractual commitments.
This collection of information is necessary for clients and prospective clients in choosing an adviser or continuing to employ an adviser. The currently approved collection of information for rule 4 -4 is 10, hours. We estimate that approximately Rule 4 -6 requires an investment adviser that votes client securities to adopt written policies reasonably designed to ensure that the adviser votes in the best interests of clients, and requires the adviser to disclose to clients information about those policies and procedures.
This collection of information is necessary to permit advisory clients to assess their adviser's voting policies and procedures and to monitor the adviser's performance of its voting responsibilities. The currently approved collection of information for rule 4 -6 is , hours.
We estimate that all hedge fund advisers that will be new registrants will vote their clients' securities. Rule 4 -7 requires each registered investment adviser to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act, review those policies and procedures annually, and designate an individual to serve as chief compliance officer. This collection of information under rule 4 -7 is necessary to ensure that investment advisers maintain comprehensive internal programs that promote the advisers' compliance with the Advisers Act.
The currently approved collection of information for rule 4 -7 is , hours, or 80 hours annually per registered adviser. We estimate all advisers that will be new registrants will be required to maintain compliance programs under rule 4 Section c of the Advisers Act mandates that the Commission, when engaging in rulemaking that requires it to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.
As discussed above, rule b 3 -2 will, in effect, require most hedge fund advisers to register with the Commission under the Advisers Act. The new rule is designed to provide the protection afforded by the Advisers Act to investors in hedge funds, and to enhance the Commission's ability to protect our nation's securities markets. We are also adopting rule amendments that will facilitate hedge fund advisers' transition to registration and improve the Commission's ability to identify hedge fund advisers from information filed on their Form ADV.
The new rule and rule amendments may indirectly increase efficiency for hedge fund investors. Hedge fund adviser registration will provide hedge fund investors and industry participants with better access to important basic information about hedge fund advisers and the hedge fund industry. This improved access may allow investors to investigate and select their advisers more efficiently.
We do not anticipate that the new rule will introduce any competitive disadvantages. The new rule may provide a level playing field with respect to advisers' compliance infrastructures. Many hedge fund advisers are already registered with us, either because their investors demand it or because they have other advisory business that requires them to register.
These registered advisers must adopt compliance procedures under the Start Printed Page Advisers Act and must provide certain safeguards to their clients, including their hedge fund investors. While some unregistered hedge fund advisers have adopted sound comparable compliance procedures, others have not. Mandatory registration will require that all hedge fund advisers compete with each other and with other investment advisers on the same basis in this regard.
The amendment to rule is designed to prevent newly-registered hedge fund advisers from being at a competitive disadvantage with respect to the promotion of their previous performance records, and the amendment to rule 4 -2 is designed to allow advisers to funds of hedge funds to use the same approach under the adviser custody rule as do advisers to other pooled investment vehicles.
Some hedge fund advisers may elect to limit the number of investors in their funds, or limit their total assets under management in order to avoid registration under the Advisers Act. To the extent that certain hedge fund advisers choose not to expand their business, some investors may not be able to place their assets with particular advisers; on the other hand, a hedge fund adviser's decision not to expand its business may make it easier for other advisers to enter the market.
The new rule is unlikely to have a substantial effect on capital formation. To the extent that registration and the prospect of Commission examinations improves the compliance culture at hedge fund advisory firms, it may bolster investor confidence and investors may be more likely to entrust hedge fund advisers with their assets for investment.
However, these assets may be diverted from other investments in the capital markets. Pursuant to section b of the Regulatory Flexibility Act, [ ] the Commission hereby certifies that rule b 3 -2 and the amendments to rules b 3 -1, A-3, , , and Form ADV will not have a significant economic impact on a substantial number of small entities. The amendments to rules and will allow advisers affected by the new rule to continue certain marketing practices and performance fees they now have in place.
The amendment to Form ADV will require advisers to private funds to identify themselves as such. No other entities will incur obligations from the new rule and amendments. Accordingly, the Commission certifies that rule b 3 -2 and the amendments to rules b 3 -1, A-3, , , , and Form ADV will not have a significant economic impact on a substantial number of small entities. We are amending rule 4 -2, the adviser custody rule, to accommodate advisers to private funds of funds, including funds of hedge funds.
We amended the rule to extend the period for funds of funds to distribute their audited financial statements to their investors from days to days, so that advisers to funds of hedge funds may comply with the rule. The objective of the amendment to rule 4 -2 is to make the rule requirements easier to comply with for advisers to private funds of funds such as funds of hedge funds.
Section IX of this Release lists the statutory authority for the amendment. The Commission estimates that as of June 30, , [ ] approximately SEC-registered investment advisers that would be affected by the amendment to the rule were small entities for purposes of the Advisers Act and the Regulatory Flexibility Act.
The amendment will impose no new reporting, record-keeping or other compliance requirements. To the contrary, the amendment will provide all advisers, big or small, that advise funds of funds with the opportunity to reduce the burdens they incur complying with the present rule's requirements to send pools' audited financial statements to their investors within days. Start Printed Page The Commission believes that there are no rules that duplicate, overlap, or conflict with the amendment.
The Regulatory Flexibility Act directs the Commission to consider significant alternatives that will accomplish the stated objective, while minimizing any significant adverse impact on small entities. In connection with the new rule, the Commission considered the following alternatives: a The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; b the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; c the use of performance rather than design standards; and d an exemption from coverage of the amendment for such small entities.
The overall impact of the amendment is to decrease regulatory burdens on advisers; small advisers, as well as large ones, will benefit from the new rule. Moreover, the amendment achieves the rule's objectives through alternatives that are already consistent in large part with advisers' current custodial practices.
For these reasons, alternatives to the amendment are unlikely to minimize any impact that the new rule may have on small entities. The day rule cannot be further clarified, or improved by the use of a performance standard. Regarding exemption from coverage of the rule amendment, or any part thereof, for small entities, such an exemption will deprive small entities of the burden relief provided by the amendment. We are adopting new rule b 3 -2 and amendments to rule b 3 -1, rule A-3, rule , rule , rule 4 -2, rule and Form ADV pursuant to our authority under section 19 a of the Securities Act of , [ ] sections 23 a and 28 e 2 of the Securities Exchange Act of , [ ] section a of the Trust Indenture Act of , [ ] section 38 a of the Investment Company Act of , [ ] and sections a 17 , , , e , 4 , A, d and a of the Advisers Act.
C of this Release. The general authority citation for Part continues to read as follows:. Authority: 15 U. Section This section is a safe harbor and is not intended to specify the exclusive method for determining who may be deemed a single client for purposes of section b 3 of the Act. Under paragraph b 6 of this section, the safe harbor is not available with respect to private funds.
You may deem the following to be a single client for purposes of section b 3 of the Act 15 U. If you are relying on this section, you shall not be deemed to be holding yourself out generally to the Start Printed Page public as an investment adviser, within the meaning of section b 3 of the Act 15 U.
You are not required to comply with paragraph a 3 of this section with respect to the account of a Start Printed Page limited partnership or limited liability company, or another type of pooled investment vehicle that is subject to audit as defined in section 2 d of Article 1 of Regulation S-X 17 CFR For purposes of section d 2 of the Act 15 U.
The authority citation for Part continues to read as follows:. In Schedule D, revising Section 7. If, however, you are an SEC-registered adviser and you have related persons that are SEC-registered advisers who are the general partners of limited partnerships or the managers of limited liability companies, you do not have to complete Section 7.
To use this alternative procedure, you must state in the Miscellaneous Section of Schedule D: 1 that you have related SEC-registered investment advisers that manage limited partnerships or limited liability companies that are not listed in Section 7. You must complete a separate Schedule D Page 4 for each limited partnership in which you or a related person is a general partner, each limited liability company for which you or a related person is a manager, and each other private fund that you advise.
Are your clients solicited to invest in the limited partnership, limited liability company or other private fund? Approximately what percentage of your clients have invested in this limited partnership, limited liability company, or other private fund? Four months ago, the majority proposed to regulate hedge fund advisers over our dissent. Our hope was fueled by the fact that many commenters offered excellent insights and recommendations to the Commission. We are disappointed that the majority, unmoved by the chorus of credible concerns from diverse voices, [ 2 ] has determined to adopt the hedge fund registration rules largely as proposed.
Our main concerns with this rulemaking can be broadly divided into the following categories:. The needed information about hedge funds can be obtained from other sources, including other regulators and market participants, as well as through a notice and filing requirement. The proposed amendments are designed to implement Dodd-Frank Section A, which generally requires the SEC to replace requirements linked to credit ratings with other standards of credit-worthiness. In the ANPR, the SEC requests comment regarding conditions that should be added to Rule 3a-7 to address investor protection in lieu of the credit ratings condition.
More specifically, the SEC proposed the following alternative conditions:. Because many ABS issuers currently rely on Rule 3a-7 for their exclusion from the definition of "investment company" and in light of other regulatory initiatives including the Volcker Rule , any conditions added to Rule 3a-7 could limit the availability of its exclusion.
Securities and Exchange Commission. PARAGRAPHMore specifically, the SEC proposed the following alternative conditions:. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC which jobs relate to finance investment realidades 1 3a-7 investment company act supervise the investment decisions or with the SEC and conform to regulations designed to protect. Other investment advisers typically register with the state in which the investment adviser maintains its principal place of business. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register activities of these companies or judge the merits of their. michael real estate investments juq home based jobs without investment in trichy std fxtg forex versus royalties investments avantium investment. This law regulates investment advisers. Because many ABS issuers currently rely on Rule 3a-7 for. Investment management securities rbs investment buy stocks keybanc investment banking dashboard forexfactory investment controlling sap team hot forex metatrader download in chennai without investment forex forex brokers ecn community cfa.(a) Notwithstanding section 3(a) of the Act, any issuer who is engaged in the business securities will not be deemed to be an investment company; Provided That: to accredited investors as defined in paragraphs (1), (2), (3), and (7) of rule. 3a-7 under the Investment Company Act of (the "Act"), J. Background. II. Discussion. A. Rule 3a 1. Scope of the Rule z. Conditions. A. Asset-Backed Issuers as Investment. Companies. B. Rule 3a–7. III. Discussion Act 1– (May ) (''Protecting Investors. Report'').