Historically, many hedge fund managers have avoided registering with the SEC as investment advisers in reliance on Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (Advisers Act). That section – often referred to as the “private adviser exemption” – provided that an investment adviser would not have to register with the SEC if it (1) had fewer than 15 clients in the preceding 12 months, (2) did not hold itself out generally to the public as an investment adviser and (3) did not act as an investment adviser to a registered investment company or business development company. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010 (Dodd-Frank Act) repealed Section 203(b)(3) of the Advisers Act, effective as of the July 21, 2011 anniversary of the effective date of the Dodd-Frank Act. However, the Dodd-Frank Act also authorized the SEC to delay (beyond July 21, 2011) the registration deadline for hedge fund managers that (1) previously avoided registration based on the private adviser exemption and (2) were not eligible for another registration exception. On June 22, 2011, the SEC exercised this authority and delayed until March 30, 2012
the date by which hedge fund managers that are no longer eligible for a federal registration exemption (as of July 21, 2011) will have to register with the SEC. The majority of hedge fund industry participants greeted the federal registration deadline delay with a sigh of relief (although a vocal minority noted that the delay penalized managers that scrambled to prepare). However, the federal registration relief created a state registration headache for many hedge fund managers. Specifically, the investment adviser registration laws or rules of various states effectively incorporate the federal private adviser exemption by reference. The federal private adviser exemption will be repealed as of July 21, 2011. Therefore, as of July 21, 2011, states with laws or rules that incorporate the federal private adviser exemption by reference will no longer have effective registration exemptions. Absent state-level registration deadline delays or other state-level exemptions, hedge fund managers face the prospect of required registration in various states. What should hedge fund managers do?