President Obama Signs the Dodd-Frank Wall Street Reform and Consumer Protection Act
Note: Change to the Definition of an Accredited Investor is Effective Immediately. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Financial Bill") into law. Set forth below are certain aspects of the Financial Bill which impact investment managers to hedge funds and private equity funds.
The Financial Bill revises one of the definitions of an "accredited investor" under the Securities Act of 1933 ("1933 Act"). Specifically, in determining if a natural person is an "accredited investor" who meets the $1 million net worth test, the value of such person's primary residence must now be excluded from the $1 million net worth calculation. Previously, a natural person's primary residence (net of any mortgage) was included in calculating a natural person's net worth. The other definitions of "accredited investor" under the 1933 Act are currently remaining the same. This change in definition is effective immediately. As a result, we urge you to contact us as soon as possible as the Confidential Private Placement Memorandum and Subscription Documents for any investment funds you manage will need to be revised for this new definition of "accredited investor". Please note that, absent further guidance from the Securities and Exchange Commission ("SEC"), we currently believe that the new "accredited investor" definition only applies to (i) new investors in your hedge funds and (ii) existing investors in your hedge funds that make an additional capital contribution. We do not currently believe that you need to recertify existing investors in your hedge funds that are not making additional capital contributions. Likewise, with respect to private equity funds, if an investor has already made a capital commitment to the fund, we do not believe that subsequent draw-downs of capital by the fund from such investor will require you to recertify such investor. However, as with hedge funds, any investor that is making a new capital commitment to the private equity fund would need to meet the new definition of "accredited investor".
Under the Financial Bill, the Investment Advisers Act of 1940 ("Advisers Act") will also be amended to require many investment advisers that are currently exempt from registration with the SEC to register. Generally, the Financial Bill requires all investment advisers to hedge funds and/or private equity funds that manage $150 million or more in assets to register with the SEC. Importantly, the "private adviser" exemption which many hedge fund and private equity fund managers relied upon in the past is being eliminated. The "private adviser" exemption enabled an investment adviser to avoid SEC registration if it: (i) did not act as an investment adviser to a registered investment company or business development company; (ii) had fewer than 15 clients (counting each fund as 1 client); and (iii) did not hold itself out to the public as an investment adviser. Please note that the SEC will need to issue additional guidance on numerous aspects of the Financial Bill relating to investment adviser registration and coordinate their efforts with various State regulators. Unlike the change in the "accredited investor" definition set forth above, the new rules under the Advisers Act will become effective on July 21, 2011.
If you have any questions concerning this Financial Services Alert or any related matters, please contact Lance Friedler, 212-573-8030.