Fundamental changes in the regulatory landscape for investment advisers is on the not-so-distant horizon, stemming from a slew of proposed SEC rules that add colour to the expanded regulation mandates set forth in the Dodd-Frank Wall Street Reform Act. Effective from 21 July 2011, the heavily relied upon "private adviser" exemption has been revoked. What will be left is a new narrowly crafted "foreign private adviser" exemption and two quasi-exemptions, giving rise to two new categories of so called "exempt reporting advisers"; investment advisers who:

Significant new public reporting obligations for registered investment advisers, as well as exempt reporting advisers, also are proposed. Comments on the various proposals must be submitted to the SEC by 24 January 2011.

The new foreign private adviser exemption would be available if a non-US adviser:

Exempt reporting advisers will avoid most of the substantive requirements of the Advisers Act yet are proposed to be subject to broad (and public) disclosure requirements, SEC examinations and any applicable US state registration requirements. During the SEC's 19 November open meeting, SEC Commissioner Kathleen L. Casey, expressed concern that the benefits of being an exempt reporting adviser "are effectively rendered empty by [the SEC's] parallel proposal imposing reporting requirements on these advisers". Using the same Form ADV registration document as fully registered advisers, exempt reporting advisers would fill out a subset of items from Part 1 of Form ADV, including the substantial private fund reporting requirements noted below.

One category of exempt reporting advisers, called "private fund advisers", includes any adviser that:

Under the proposed rules, a private fund adviser may manage an unlimited number of private funds, but if the adviser has just one other type of client (for example; a separate account), the adviser would have to register with the SEC unless another exemption is available. As proposed, the $150 million threshold, calculated quarterly, reflects both contributions and redemptions of investor capital, and investment appreciation and depreciation.

For purposes of "private fund advisers" the SEC's proposed rules treat US and non-US advisers quite differently. Whereas a US adviser would count all assets of all private funds it manages, a non-US adviser, an adviser whose principal office and place of business is outside of the United States, may disregard accounts and investment funds managed from outside of the United States, regardless of the extent of investments by US persons. Under the proposed rules, it appears to be irrelevant where a non-US firm's funds are formed or domiciled. The SEC instead seems to be looking only to the location of the fund's management.

The other category of exempt reporting adviser is provided for in what the SEC calls the "venture capital exemption". Unlike the private fund adviser exemption, the venture capital exemption would apply its provisions equally to non-US advisers. A "venture capital fund" would be a private fund that:

All registered advisers, as well as exempt reporting advisers, are proposed to be subject to extensive new public reporting requirements. Managers of private funds must provide no fewer than 29 separate items of information about each fund. Also, affiliate-by-affiliate disclosure will have to be made about all financial industry "related persons" rather than solely those that are investment advisers or broker-dealers.

Many of the new responsibilities for investment advisers will be unfamiliar and the private fund reporting requirements will be a significant change to the status quo. The importance of preparing for registration and reporting in the coming months cannot be underestimated. Firms still considering whether alternatives to registration exist must now identify the practical effects which these industry changes will have on their business and begin to adapt accordingly. Finally, it is important to note that the SEC proposals are subject to change; final rules cannot be expected until February 2011, at the earliest.

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