Elimination of the Private Adviser Exemption and Modification of the Intrastate Adviser Exemption (§§ 102 – 403)

The legislation eliminates the “private adviser” exemption (for advisers to fewer than 15 clients) and substantially modifies the “intrastate adviser” exemption from registration under the Investment Advisers Act of 1940 (Advisers Act). Numerous private fund managers currently rely on these exemptions—the private adviser exemption in particular. Advisers to private funds (except for venture capital funds and family offices) with assets under management of at least $150 million will now be required to register as investment advisers with the SEC. These changes will become effective one year after the enactment of the legislation.

Until recently, an investment adviser that advised fewer than 15 clients and neither held itself out to the public as an adviser nor acted as an adviser to a registered investment company was exempt from registration. Under the legislation, however, an adviser to a “private fund”—regardless of the number of clients—must register with the SEC unless the adviser falls within one of the specifically enumerated exemptions discussed below. Congress’s definition of “private fund” includes any issuer that would be an investment company but for the availability of certain exemptions found in the Investment Company Act. As a result, private funds generally will include hedge funds, private equity funds, and venture capital funds.

Furthermore, before the legislation, an investment adviser to a private fund was exempt from registration if all its clients were residents of the same state in which the adviser was headquartered and the adviser refrained from providing advice regarding exchange-listed securities. Under the legislation, unless another exemption applies, an adviser that previously would have qualified under this exemption will be required to register if it has even a single client that qualifies as a private fund.