Dodd-Frank Act - Title IV: Regulation of Advisers to Hedge Funds and Others

This title is also be known as ‘‘Private Fund Investment Advisers Registration Act of 2010’’. It has under its purview private funds, foreign investment adviser.

The salient features of this title are listed below:

  • Elimination of private adviser exemption; limited exemption for foreign private advisers; limited intrastate exemption.
  • Collection of systemic risk data; reports; examinations; disclosures.
  • Disclosure provision amendment.
  • Clarification of rulemaking authority.
  • Exemption of venture capital fund advisers.
  • Exemption of and record keeping by private equity fund advisers.
  • Family offices.
  • State and Federal responsibilities; asset threshold for Federal registration of investment advisers.
  • Custody of client assets.
  • Adjusting the accredited investor standard.
  • GAO study and report on accredited investors.
  • GAO study on self-regulatory organization for private funds.
  • Commission study and report on short selling.
  • Transition period.

The title states that any investment adviser who is registered with the Commodity Futures Trading Commission as a commodity trading advisor and advises a private fund, after the date of enactment of the Private Fund Investment Advisers Registration Act of 2010, his/her predominant business will be the provision of securities-related advice, needs to register with the Commission. This is done with the aim to regulate this sector.

The Commission expects the adviser to maintain records regarding the funds advised. They are to make available if required the paperwork for the same. This is done by the commission in public interest or while assessing systemically important financial entities.

The information required in these reports is listed below:

  • The amount of assets under management and use of leverage, including off-balance-sheet leverage counterparty credit risk exposure;
  • Trading and investment positions;
  • Valuation policies and practices of the fund
  • Types of assets held
  • Side arrangements or side letters, whereby certain investors in a fund obtain more favorable rights or entitlements than other investors
  • Other trading practices

Private investment advisers are expected to maintain these records and present them on request. The commission will provide the adviser with a schedule for the same. Confidentiality that does not compromise public interest or reports to Congress will be maintained. Venture Capital fund advisers are exempt from this regulation. Exemption is also provided to investment advisers of private funds, if the adviser acts solely as an adviser to private funds and has assets under management in the United States of less than $150,000,000. However, published reports such as annual reports need to be given to the Commission annually by both the exempted group.

In the case of mid--sized private funds, the Commission will take into account the size, governance, and investment strategy, an assessment of whether such funds pose systemic risk, and shall provide for registration and examination procedures with respect to the investment advisers of such funds which reflect the level of systemic risk posed by such funds.

GAO Study and Report on Accredited Investors

The Comptroller General of the United States will conduct a study on the appropriate criteria for determining the financial thresholds to qualify for accredited investor status and eligibility to invest in private funds. A report of the same will be submitted to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives not later than 3 years after the date of enactment of this Act.

GAO Study on Self-Regulatory Organization for Private Funds

The Comptroller General of the United States shall—conduct a study of the feasibility of forming a self regulatory organization to oversee private funds submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study, not later than 1 year after the date of enactment of this Act.

Commission Study and Report on Short Selling

The Division of Risk, Strategy, and Financial Innovation of the Commission shall conduct a study, taking into account current scholarship, on the state of short selling on national securities exchanges and in the over-the-counter markets, with particular attention to the impact of recent rule changes and the incidence of the failure to deliver shares sold short; or delivery of shares on the fourth day following the short sale transaction the feasibility, benefits, and costs of requiring reporting publicly, in real time short sale positions of publicly listed securities, or, in the alternative, reporting such short positions in real time only to the Commission and the Financial Industry Regulatory Authority.

The feasibility, benefits, and costs of conducting a voluntary pilot program in which public companies will agree to have all trades of their shares marked ‘‘short’’, ‘‘market maker short’’, ‘‘buy’’, ‘‘buy-to-cover’’, or ‘‘long’’, and reported in real time through the Consolidated Tape.