The Investment Advisers Act of 1940, as amended (the “Advisers Act”), defines an “investment adviser” generally to include a natural person or entity who, for compensation, engages in the business of providing investment advice to others regarding securities. Compensation may include any form of direct or indirect economic benefit (e.g., compensation paid directly from the person receiving advice or compensation paid by a third party).
Whether a person is “in the business” of providing investment advice depends on the frequency and regularity with which a person or entity provides advice with regard to securities. Although all hedge fund managers fall within the definition of an “investment adviser,” they may not be required to register as an investment adviser pursuant to various exemptions. The SEC and each state impose different registration requirements and exemptions from registration for investment advisers.
A hedge fund manager is exempt from registering as an investment adviser under the Advisers Act which is enforced by the SEC, if such person or entity (under the Dodd-Frank rules):
has less than $150 million in AUM; and
manages only pooled investment vehicles.
The regulations surrounding this area have been interpreted in a wide range of manners, and the area is changing every day.