Avoid an ERA of judgement as Dodd-Frank countdown begins

The deadline for private fund managers and advisers to apply for Securities and Exchange Commission (“SEC”) registration under Dodd-Frank (The Dodd-Frank Wall Street Reform and Consumer Protection Act) is now under 120 days. As countdown starts to 14 February 2012, when firms requiring registration must have submitted their application to meet the formal implementation deadline of 30 March, many non-US managers and advisers still appear confused to whether they require SEC registration, they cast an SEC footprint or they can escape the regulator’s scrutiny altogether.

Some risk making the fundamental error of doing nothing, wrongly thinking the many exemptions the SEC has created provide a way out of SEC oversight and responsibilities altogether. This is far from the real situation, especially when it comes to Exempt Reporting Advisor status.

Non-US fund managers will come under the SEC’s scope if they have more than $25m AUM attributable to US clients or if they have 15 or more US clients, irrespective of the related AUM, where US clients includes US investors in a fund (i.e. US individuals, corporations, trusts etc). Many non-US based asset managers meet these criteria; however full SEC registration applies only to managers that actually undertake activities in the US; those that do not have a place of business in the US, but otherwise meet the criteria, must report to the SEC as Exempt Reporting Advisers (“ERA’s”) or make use of another exemption.

So, where does the confusion around ERA status arise? It appears to stem from the way the SEC defines “exempt”, as this new regulatory status is not what it says on the tin. Why? Because whilst the SEC’s new regulatory category of ERA status provides an exemption from SEC registration, it also creates new obligations on non-US based managers.

The oxymoron of ERA status is that firms are exempt SEC registration but subject to many of the same responsibilities of an SEC regulated firm;

• a disclosure regime to obtain the information the SEC requires;
• record-keeping obligations under Rule 204-2;
• compliance with anti-fraud and pay to play provisions; and
• the threat of external SEC examination.

This is the sting in the tail which means that many firms will find themselves exempt in name alone.

What needs to be done?

Whether firms decide to register with the SEC or take advantage of an exemption, they will need to prepare and submit the relevant ADV Parts I and / or Part II. These documents need to be drafted according to exacting standards defined by the SEC with new disclosures required for the private funds they manage or advise.

Firms that can take advantage of ERA status have until 30 March 2012 to submit their Form ADV Part I. Firms required to register fully with the SEC need be authorised by 30 March 2012. With the SEC requiring 45 days to process a registration application, firms need to be taking action now in preparation of submitting both ADV Parts I and II by 14 February 2012 at the absolute latest. But adoption of new US legislative requirements and incorporation of the new SEC status within firms’ policies and procedures, as well as likely teething troubles with the reporting and registration software, mean that firms should start much earlier.

Firms will also need to re-define existing policies and procedures to meet the new requirements, ranging from an ERA’s obligations that include anti-fraud and Pay to Play provisions, record-keeping requirements and SEC inspection preparation, to a full registrant’s obligations that extend to Personal Account dealing, Code of Ethics, Proxy Voting, Client Solicitation, Marketing and Custody requirements.

Another potential error firms could make is to re-paper SEC requirements alongside existing FSA compliance arrangements, building parallel approaches to FSA and SEC compliance. Our analysis of the respective rules shows that there is more in common between the FSA and SEC than there are differences. That’s why we have developed our own FSA and SEC compliant policies, procedures and monitoring programme, designed to kill two birds with one manual.

Fund managers should be ready for SEC compliance well ahead of the registration and reporting deadlines. They will need to have established proportionate and well-considered compliance arrangements capable of ensuring and demonstrating compliance with SEC requirements and provide independent assurance of compliance to senior management.

We have been tracking this development for over a year, working with our US colleagues and in consultation with ex SEC officials, to develop an effective and proportionate solution to the needs of non-US firms that will soon assume SEC responsibilities. IMS is well placed to support your SEC registration or ERA reporting, as well as the annual updates to ADV forms, the provision of an integrated SEC and FSA compliance framework covering advice, policies, procedures, independent monitoring and, where required, an SEC Annual Review.

If you would like to discuss further the countdown to Dodd-Frank implementation or the errors to avoid, about becoming an ERA or registering with the SEC, please contact Jon Wilson who leads the SEC registration delivery in London and is supported by a dedicated team of consultants in both London and New York.