On May 3, the Securities and Exchange Commission (SEC) released proposed amendments to certain rules under the Investment Advisers Act of 1940 (the Advisers Act) to reflect the impact of the Fixing America's Surface Transportation Act of 2015 (the FAST Act) on the Advisers Act.

The FAST Act, passed by Congress and signed by former President Barack Obama in December 2015, included $305 billion to provide state and local governments with long-term funding security to proceed with surface transportation projects. The FAST Act amended Sections 203(l) and 203(m) of the Advisers Act by broadening the Advisers Act exemptions from registration for advisers to small business investment companies (SBICs).

Historically, advisers to SBICs have relied on Section 203(b)(7) of the Advisers Act for their exemption from registration under the Advisers Act. That exemption was available to an adviser to an SBIC so long as its only advisory clients were SBICs. The proposal would expand the exemptions on which an adviser to an SBIC may rely by allowing the adviser to more easily fall within the venture capital fund adviser exemption and the private fund adviser exemption through a change in the definition of "venture capital fund" in Rule 203(l) of the Advisers Act and a modification to the "assets under management" definition set forth in Advisers Act Rule 203(m). However, reliance on the venture capital fund adviser exemption and the private fund adviser exemption both require an adviser to maintain such records and submit such reports as the SEC determines are necessary or appropriate in the public interest and, consistent with the current requirements for advisers relying on these exemptions, to submit a Form ADV to the SEC as an exempt reporting adviser. Exempt reporting advisers are also potentially subject to routine inspections by the SEC. Advisers that rely on Section 203(b)(7), on the other hand, are not subject to reporting or record-keeping provisions under the Advisers Act or examination by the SEC staff.

Venture Capital Fund Adviser Exemption

Section 203(l) of the Advisers Act provides an exemption from registration as an investment adviser for any person whose only advisory clients are venture capital funds. The FAST Act broadened this exemption by expressly including SBICs as venture capital funds for purposes of the exemption.

The SEC's proposed change to Rule 203(l)-1 would update the Advisers Act to make it consistent with the FAST Act's change to Section 203(l). While most, if not all, SBICs satisfy the definition of a "private fund" under the Advisers Act, many did not meet the definition of a "venture capital fund." As a result of the proposed amendment to Rule 203(l)-1 of the Advisers Act, SBICs would be explicitly included in the definition of venture capital funds for purposes of the venture capital fund adviser exemption.

Assets Under Management Definition

The proposed changes would similarly update the definition of "assets under management" in Rule 203(m)-1 of the Advisers Act to reflect changes made by the FAST Act. Currently, the private fund adviser exemption in Section 203(m) of the Advisers Act outlines an exemption from SEC registration for any investment adviser that solely advises private funds provided the adviser has assets under management in the U.S. of less than $150 million. The FAST Act amended this exemption by enabling private fund advisers to exclude the assets of any SBICs they may advise when calculating their private fund assets in relation to this $150 million threshold.

The SEC's proposal would amend the Advisers Act's Rule 203(m)-1(d)(1) definition of "assets under management" to similarly exclude an adviser's regulatory assets under management attributable to SBICs for purposes of determining eligibility for the private fund adviser exemption. The SEC indicated that the changes would reflect that advisers to both private funds and SBICs "can rely on the private fund adviser exemption without regard to the SBIC assets that they advise." An exempt reporting adviser to SBICs that relies on the private fund adviser exemption would continue to be required to submit reports to the SEC and to list the SBICs it advises on Form ADV.

The SEC is accepting comment on the proposed changes. Submissions must be received by June 8.

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