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Impact of Dodd-Frank Act on Investment Advisers to Private Art Funds.

August 25th, 2010

By Enrique E. Liberman

Enrique Liberman is the President of the Art Fund Association and a Partner in the Art Law practice group of the law firm of Tannenbaum Helpern Syracuse & Hirschtritt LLP in New York City. Mr. Liberman counsels art investment funds on their formation and governance and has written and spoken on issues affecting the art fund industry. Mr. Liberman is a graduate of Harvard Law School (’99) and Stanford University (’96).

Investment advisers to privately offered art funds of funds and art investment funds utilizing leverage or securities trading should take note that the recently adopted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has dramatically altered the regulatory landscape for investment advisers to private funds. While the principal changes promulgated under the Dodd-Frank Act do not take effect for a year, advisers to art funds of funds and art funds with significant leverage and securities positions should consult with their legal advisers in advance of such date to ensure their timely compliance.

The Investment Advisers Act of 1940 (the “Advisers Act”) requires that persons who give investment advice relating to securities for compensation to U.S. clients must register as an investment adviser with the U.S. Securities and Exchange Commission (the “SEC”) unless it meets certain exemptions. While the registration of an art fund or art fund of funds manager as an investment adviser brings certain advantages from a marketing standpoint as many pension funds, family offices and institutions take comfort from the fact that the manager is regulated by the SEC, it also brings several disadvantages in the form of regulatory compliance and restrictions on charging performance based fees to certain “qualified clients”. Registered art fund and art fund of funds managers are subject to stringent record-keeping rules promulgated by the SEC as well as periodic SEC examinations looking into, among other things, charged performance fees and conflicts of interest disclosures. As a result, most private fund advisers have relied upon exemptions from registration in structuring or choosing the investment funds they advise.

Perhaps the most significant result of the Dodd-Frank Act is the elimination of the “private adviser” exemption promulgated under the Advisers Act and defended in the important decision of the U.S. Court of Appeals in Goldstein v. SEC in 2006. Under the prior regulatory regime, an investment adviser would be exempt from registration with the SEC if its was deemed a “private adviser” – namely that it advised fewer than 15 clients in any 12-month period, did not advise registered investment companies or business development companies and did not hold itself out as an investment adviser. Many, if not most, investment advisers relied on the private adviser exemption in operating their businesses.

The Dodd-Frank Act repeals such exemption, which means many investment advisers will now be required to register with the SEC, unless another exemption is available to an adviser. That being said, investment advisers can find some comfort in the fact that the Dodd-Frank Act did create a number of new exemptions for private fund advisers. Such exemptions from registration depend in part upon the amount of the adviser’s assets under management (“AUM”), namely the various securities positions (and not art works) managed by such adviser.

  • Mid-Sized Adviser Exemption. Investment advisers that act solely as an adviser to investment funds that are deemed “Private Funds” (namely funds exempted from registration as a mutual fund under the Investment Company Act of 1940) and that have less than US$150 million of AUM are exempt from registration with the SEC under the Advisers Act.
  • Venture Capital Fund Adviser Exemption. Investment advisers solely to “venture capital funds” are also exempt from SEC registration. Under the provisions of the Dodd-Frank Act, the SEC has one year to craft the definition of “venture capital fund”.
  • Small Business Investment Company Adviser Exemption. Advisers that are not themselves “business development companies” and that advise small business investment companies licensed or seeking licenses under the Small Business Investment Act of 1958 are also exempt from registration with the SEC.
  • Family Offices Exemption. “Family offices” are expressly excluded from the definition of “investment adviser” under the Advisers Act and therefore generally exempted from registration with the SEC, although such family offices remain subject to various antifraud provisions under the Advisers Act. The SEC is charged with defining “family offices” but must do so in a manner that is consistent with the SEC’s previous exemptive orders for family offices.
  • Foreign Private Adviser Exemption. Foreign private advisers are exempt from SEC registration under the Dodd-Frank Act. A “foreign private adviser” is defined as an investment adviser that (i) has no place of business in the U.S., (ii) has fewer than 15 clients and investors in the U.S. invested in “Private Funds”, (iii) such U.S. clients and investors account for less than US$25 million of its AUM and (iv) does not hold itself out generally to the public as an investment adviser or advises an investment company under the Investment Company Act of 1940 or a business development company. It is still unclear as to whether foreign private advisers must extend the protections of the Advisers Act to their non-U.S. clients and investors.

Even those advisers who meet an exemption from SEC registration may still be required to register as an investment adviser with the state regulator of the state in which the adviser maintains its principal office and place of business and of the states in which the adviser conducts its operations.

For those investment advisors that must now register with the SEC, it is important to also note that the Dodd-Frank Act mandates new recordkeeping and reporting obligations by such advisers and the Private Funds they advise. Specifically, they must report to the SEC on such matters as (i) the amount of AUM and leverage, (ii) counterparty credit risk exposure, (iii) trading and investment positions, (iv) valuation policies and practices of the fund, (v) types of assets held, (vi) any investor side letters affording certain investors with preferential investment terms, (vii) trading practices, and (viii) other information that SEC determines necessary to protect investors and assess systemic risk.  

While compliance with the provisions of the Dodd-Frank Act is not required until one year after the law was enacted, investment advisers to art funds of funds and art funds utilizing securities trading and leveraging strategies should begin assessing their need for registration or deregistration, as the case may be, and adopting the extensive compliance procedures mandated by the new Advisers Act.

For questions or assistance in finding advisors to assist you in dealing with the changes brought about by the passage of the Dodd-Frank Act, please contact Art FA at

The opinions set forth in this publication are those of the author and are not attributable to the Art Fund Association or any other organization. This publication is for educational purposes only and is not intended as legal advice. No attorney-client relationship is created as a result of the dissemination of this publication. To the extent this publication is construed as a solicitation for clients, please note the following: Attorney Advertising. Past outcomes are no guarantee of similar results.

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