If enacted, pending House legislation – the Small Business Capital Access and
Job Preservation Act – would exempt private equity fund managers from
registering under the Investment Advisers Act of 1940 (Advisers Act). The House
Financial Services Committee held a hearing on this legislation on March 16,
2011. As of the date of this article, no further action has been taken on the
Many private equity fund advisers currently rely on the “private adviser”
exemption from registration on the federal level, which applies where the
adviser has fewer than 15 clients and does not hold itself out to the public as
an adviser. Because each private equity fund usually counts as one client, a
private equity fund manager can have up to 14 funds and still use this exemption
at the federal level.
Dodd-Frank repeals the private adviser exemption under the Advisers Act
effective July 21, 2011, and in its place there will be several new exemptions
- An exemption for advisers solely to private funds where assets under
U.S. management are less than $150 million (150 Exemption).
- An exemption for advisers to small business investment companies.
- An exemption for advisers solely to venture capital funds (Venture
Dodd-Frank does not contain a similar exemption for advisers to private
here for an explanation of the SEC's proposed exemptions, and
here for an explanation of the impact of the SEC's proposals on offshore
managers of private funds.
The legislation provides that advice to a private equity fund cannot be the
basis for requiring registration under the Advisers Act. The legislation directs
the SEC within six months of enactment to define the term private equity fund,
and to adopt rules requiring advisers to private equity funds to maintain books
and records and file reports with the SEC. These provisions are very similar to
the Venture Capital Exemption. Exempt venture capital fund managers will be
subject to books and records requirements and will be required to file certain
reports concerning the funds they manage. However, the Venture Capital Exemption
will be available to advisers "solely" to venture capital funds. The private
equity fund manager legislation does not include the "solely" wording.
On Nov. 19, 2010, the SEC proposed the rules which would implement these new
Dodd-Frank exemptions. The proposed definition of venture capital fund is narrow
and would exclude most private equity firms. As a result, if the proposals are
adopted as proposed, managers of private equity funds will need to register as
advisers under the Advisers Act by July 21, 2011, unless an exemption, such as
the 150 Exemption, is available.
A significant number of private equity fund managers submitted comments, and
many of them requested that the SEC provide an exemption for one year for those
managers, as well as study the issue further. In addition, the SEC is receiving
suggestions that it extend the July 21 date, because of the complex issues
involved and the absence of final rules. The SEC's Dodd-Frank implementation
time line does not include a specific date for the issuance of final rules
relating to the Dodd-Frank adviser registration provisions.
The House hearing included several other bills designed to amend provisions
of Dodd-Frank, some of which will be more controversial than this legislation.
The Senate bill which went to conference and resulted in Dodd-Frank included an
exemption for private equity fund managers, so if the legislation passes the
House, it might get a favorable Senate reception. However, the legislation
probably will have a better chance in the House if it is not linked to the other
bills which were the subject of the hearing.
Private Equity Practice
Equity Practice Group is dedicated to keeping clients advised of new
legislative and business developments as they occur. If you have any questions
regarding these issues, contact your primary attorney at McGuireWoods LLP, or the individuals listed. This alert was authored by David Pankey.