Navigating the Dodd-Frank Act

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Investment Adviser Workshop

• Navigating the Dodd-Frank Acts New Regulatory
  Requirements for Investment Advisers

Presented byTexas State Securities Board
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• Workshop Topics
• What Dodd-Frank Means for Investment Advisers
• IA Regulation in Texas
• What to Expect from State IA Inspections

Texas State Securities Board
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• DISCLAIMER

This seminar and the accompanying materials are
presented as an educational experience, covering
some of the changes mandated by the Dodd-Frank
Wall Street Reform and Consumer Protection
Act. You may be subject to all relevant laws,
regulations, rules and orders whether or not they
are included in this presentation. The views
expressed are those of the presenter, and the
Texas State Securities Board reserves the right
to change its position. Presenters believe all
information is truthful and accurate however,
mistakes can occur.
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• About Us Our primary goal is to protect investors

• The Texas State Securities Board (TSSB)
  regulates
• Investment Advisers Investment Adviser
  Representatives
• Broker-Dealers their Agents
• Other responsibilities of the TSSB
• Enforcement of the Texas Securities Act
• Inspections
• Securities Registration
• Investor Education

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• What Dodd-Frank Means For IAs

Under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, state securities
regulators will have greater responsibility for
the regulation of investment advisers, by
restoration of authority over certain investment
advisers.
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What Dodd-Frank Means For IAs

• Dodd-Frank establishes a threshold of 100
  million assets under management (AUM) for
  federally covered advisers.
• Law takes effect July 21, 2011.
• Approximately 4,000 advisers nationwide will be
  affected, including about 1200 who will be
  seeking registration in Texas.
• Eliminates the private adviser exemption.

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What Dodd-Frank Means For IAs

• Private Fund Investment Advisers Registration Act
  of 2010 (Title 4 of Dodd-Frank) Please
  reference final rule in SEC IA Release 3222.
  Significant reforms to the regulation of advisers
  to hedge funds and other private funds,
  including, among others
• Eliminates the private fund adviser exemption at
  203 (b) (3)
• Requires SEC registration for advisers to
  private funds with AUM of at least 150 million
• Requires SEC reporting for advisers to private
  funds with AUM of less than 150 million and for
  advisers to venture capital funds
• Defines foreign private adviser exempts from
  SEC registration

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What Dodd-Frank Means For IAs

• SECs PRIVATE FUND DEFINITION
• Private fund An issuer that would be an
  investment company under the Investment Company
  Act, but for the exceptions contained in 3(c)(1)
  or 3(c)(7) of that Act.

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What Dodd-Frank Means For IAs

• 3(c)(1)
• securities are not publicly offered and are owned
  by not more than 100 persons
• interests typically offered pursuant to Reg D,
  Rule 506.
• generally held by accredited investors
• 3(c)(7)
• Securities are not publicly offered and generally
  not owned by more than 499 persons
• Investors must be qualified purchasers
  (individuals with investments of
  5,000,000/institutions with 25,000,000 of
  investments)

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What Dodd-Frank Means For IAs

• Advisers to Private Funds
• Registration and Reporting Requirements
• Advisers solely to private funds with AUM of less
  than 150 million
• Exempt from registration with the SEC
• Reporting requirement with SEC
• State registration required, unless exempt under
  Texas Rule 109.6.
• Advisers solely to private funds with AUM of 150
  million or more
• Register with the SEC
• States are preempted Notice Filing Requirement

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What Dodd-Frank Means For IAs

• In Texas, all advisers with 100 million or less
  under management will be required to register
  with the state unless
• They fall between 25 million and 100 million
  and are required to be registered in 15 or more
  states, or
• The investment adviser qualifies for an exemption
  under Rule 203A-2 of the Investment Advisers Act
  of 1940 (i.e, pension consultant).

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What Dodd-Frank Means For IAs

• The SEC has POSTPONED the effective date of the
  Switch.
• On June 22, 2011, the SEC issued final rules
  implementing the Dodd-Frank Acts required
  changes. Among other things, these final rules
  detail the deadlines for investment advisers to
  submit their Form ADV and, as applicable,
  withdraw their registration with the SEC. These
  rules establish March 30, 2012, as the date by
  which each adviser must
• 1) determine whether it is eligible for SEC
  registration and
• 2) file an amended Form ADV.
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• The rules also provide an additional ninety days
  for advisers no longer eligible for SEC
  registration to register with the appropriate
  state(s) and withdraw SEC registration by June
  28, 2012.
• Although the state of Texas is cooperating with
  the SECs extension, we urge you to pursue dual
  registration to avoid the potential bottleneck
  during the 1st and 2nd quarters of 2012.

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What Dodd-Frank Means For IAs

• About State Regulation
• Switching is not new. Regulatory switches
  regularly happen when the asset levels of IA
  firms rise above or fall below mandated
  thresholds.
• States are preparing to handle the switch. State
  securities regulators are working to ensure a
  seamless, comprehensive and effective switching
  process.
• States conduct a thorough review of adviser
  applications. State reviews will not change
  with the migration of IAs with up to 100
  million in assets under management.

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What Dodd-Frank Means For IAs

• About State Regulation
• Firms switching to state regulation for the first
  time can expect thorough inspections generally on
  a more frequent basis than they may have
  experienced before.
• The goal of our inspections is to ensure
  compliance with the Texas Securities Act and
  regulations.

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• IA Regulation

Registration Form ADV
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IA Regulation The Registration Process

• You now have two choices regarding the timing of
  your
• registration.
• Remain SEC registered and continue your Notice
  Filing in Texas until the SEC establishes a new
  deadline.
• Move forward with dual registration with the SEC
  and the state. If all conditions of registration
  have been met, your application for Texas
  registration will be approved.

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IA Regulation Registration Form ADV Part 1

• Form ADV Part 1 is a uniform form that
• will be used by the Adviser to determine their
  eligibility to remain registered with the SEC,
  or to switch to state registration.
• must be filed electronically on the Investment
  Adviser Registration Depository (IARD).

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IA RegulationRegistration Form ADV Part 1

• Material changes must be filed within 30 days
  Texas Rule 116.9(a)(6).
• Called an other than annual amendment
• Do not file hard copy changes with our office
  Online ONLY
• What is a material change that requires an other
  than annual amendment?
• Change of name, address, contact information,
  form of organization, custodial arrangements,
  disciplinary actions, etc.
• Texas recently adopted Texas Rule 116.9(d) that
  requires state registered advisers to file a Part
  2 along with the annual updating amendment on
  Form ADV within 90 days of the end of fiscal
  year. The effective date of the Rule is March 9,
  2011.

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IA RegulationRegistration Form ADV Part 2

• July 28, 2010 SEC adopted a new Form ADV Part 2
  replacing the old Part II, effective October 12,
  2010.
• All new and current SEC advisers are required to
  use the newForm ADV Part 2 and uploaded onto the
  IARD system.
• Part 2 will be available for viewing through
  Investment Advisor Public Disclosure System
  (IAPD) available from the SEC website at
  http//www.adviserinfo.sec.gov

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IA Regulation Registration Form ADV Part 2

• Effective March 9, 2011
• New Applicants applying for IA registration for
  the first time should submit the new Form ADV
  Part 2 through the IARD.
• IAs Switching from SEC to State registration must
  incorporate the new Form ADV Part 2 with their
  Form ADV Part 1.B submission seeking State
  registration.

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IA RegulationRegistration Form ADV Part 2

• The new Part 2 consists of three parts
• Part 2A, the Firm Brochure 19 Items
• Includes all firm details written in plain
  English to promote effective communication
  between you and your clients.
• Part 2A Appendix 1, Wrap Fee Program Brochure -
  10 Items
• If you sponsor a wrap fee program.
• Part 2B Brochure Supplement - 7 Items
• For supervised persons who formulate investment
  advice for clients and have direct client
  contact.

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IA RegulationRegistration Form ADV Part 2

• Key Points of Form ADV Part 2
• Provides new and prospective clients with a
  brochure written in plain English. No more check
  the box features.
• Describes business practices and investment
  strategies
• Provides meaningful disclosure regarding material
  or potential conflicts of interest and
• Describes the background of the investment
  adviser and its advisory personnel.

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IA RegulationRegistration Form ADV Part 2

• Key Points of Form ADV Part 2
• An adviser is a fiduciary whose duty is to serve
  the best interests of its clients.
• An adviser must deal fairly with clients and
  prospective clients, seek to avoid conflicts with
  its clients and, at a minimum, make full
  disclosure of any material conflict or potential
  conflict.
• Disclosures that clients and prospective clients
  receive is critical to their ability to make an
  informed decision about whether to engage an
  adviser.
• To evaluate the risks associated with a
  particular IA, its business practices and
  investment strategies, it is essential that
  clients and prospective clients have clear
  disclosure that they are likely to read and
  understand.

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IA Regulation ADV Part 2A Appendix 1 Wrap Fee
Program Brochure

• Instructions for Preparing your Wrap Fee Program
  Brochure
• Who must deliver a wrap fee program brochure?
• If you sponsor a wrap fee program, you must give
  a wrap fee program brochure to each client of the
  wrap fee program.
• However, if a wrap fee program that you sponsor
  has multiple sponsors and another sponsor creates
  and delivers to your wrap fee program clients a
  wrap fee program brochure that includes all the
  information required in your wrap brochure, you
  do not have to create or deliver a separate wrap
  fee program brochure.
• A wrap fee program brochure takes the place of
  your advisory firm brochure required by Part 2A
  of Form ADV, but only for clients of wrap fee
  programs that you sponsor. See SEC rule 204-3(d)
  and similar state rules.

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IA Regulation Form ADV Part 2B Brochure
Supplement

• Instructions for Preparing your Brochure
  Supplement
• For which investment adviser representatives must
  we prepare a brochure supplement?
• You must prepare a brochure supplement for the
  following investment adviser representatives
• (i) Any representative who formulates investment
  advice for a client and has direct client
  contact and,
• (ii) Any representative who has discretionary
  authority over a clients assets, even if the
  representative has no direct client contact.

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IA RegulationThe Registration Process

• To begin the registration process, check Texas
  under Item 1 of Form ADV Part 1B, and file Form
  U4 for each investment adviser representative who
  intends to provide services in this state.
• The fee to amend the Form ADV is 25 (and
  collected thru the IARD system) to switch from
  SEC to state registration
• The fee for each Form U4 is 285.
• Upload the Form ADV Part 2

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IA Regulation Documents Required for
Registration

• The TSSB will be notified electronically of your
  Form ADV filing within 48 hours of your filing
  and payment of the fees. Upon receipt, the TSSB
  will communicate directly with you requesting
  additional documents required for registration.
• List of documents that must be submitted in paper
  form for registration in Texas.
• Articles of incorporation/Bylaws
• Balance Sheet and Certification Form
• Advisory contract
• Private Placement Memorandum and subscription
  documents, if an adviser to a hedge fund

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IA Regulation Registration Goal of
registration review

• Upon receipt of a complete application, your
  application is reviewed for compliance with
  Chapter 116 of the Rules and Regulations of the
  Texas Securities Board.
• The goal is to ensure that your firm is in
  compliance before conducting business. You will
  receive a comment letter if, among other things
• You failed to include information required or
  requested
• Your investment adviser representatives have not
  qualified by examination (i.e., passed the Series
  65)
• We find discrepancies in the responses in Form
  ADV Part 1 and 2 and the advisory contract.
• Must respond to comment letters to continue with
  the application process.
• Upon our determination that you have satisfied
  all of the registration requirements, the Agency
  will approve your registration.

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State IA Examinations/Inspections
What to Expect
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State IA Examinations/InspectionsWhat to Expect

• Our goal in examining state-registered
  Investment Advisers is to protect investors and
  ensure the advisers are in compliance with the
  statutes and regulations
• Generally, there are two types of Inspections
• Routine ? generally a standard comprehensive
  exam
• For Cause ? there for a reason, sometimes a
  focused exam
• Typically, examinations are unannounced.

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State IA Examinations/InspectionsExamination
Focus

• State IA examinations generally include the
  following areas
• Books and records
• Financials
• Registration Form ADV Part I and 2
• Investment Activities
• Complaints
• Advertising and Marketing
• Conflicts of interest
• Custody
• Supervisory/Compliance Procedures
• Business Practices

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State IA Examinations/Inspections What to Expect

• Routine exams are typically a three-part
  process.
• On-Site Inspection
• Post-Exam
• Resolution
• Onsite portion of exam may last from one day to
  a week depending on several factors.
• Usually two examiners.

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State IA Examinations/Inspections What to
Expect Onsite

• ONSITE
• Introduction and description of the purpose of
  the visit.
• Identify contact/point person for the examiner.
• Initial interview conducted by examiner.
• Tour of the office
• Where are your records?
• Where is the copier?
• Where can I work?
• Interview Questions about your practice

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State IA Examinations/Inspections What to
Expect Onsite

• ONSITE
• Try to have key personnel available.
• Exit interview (optional).
• The examiner explains what comes next. May be
  done onsite or may come after the actual visit,
  but not required.

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State IA Examinations/Inspections What to
Expect Post-Exam

• Post-Exam
• Once examiner has left your office, the exam is
  not over.
• Most of exam is done at the regulators office
  and frequently additional documents or
  information is requested.
• May take one to several weeks depending on
  several factors.

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State IA Examinations/Inspections What to
Expect Resolution

• Resolution
• Once post-exam work is complete, a deficiency
  letter will be mailed to you.
• Registrant must respond to the deficiency letter
  in writing, usually within a set amount of time.
• Once all deficiencies have been satisfactorily
  addressed, exam is closed.
• Certain issues may be referred to the legal
  section of the Inspections Compliance Division.

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State IA Examinations/Inspections Common Exam
Deficiencies

• Inaccurate or incomplete Forms ADV Part 1 2
• Incomplete, inadequate, or no contract with
  clients
• Failing to maintain current suitability
  informationregarding clients
• Non-compliance with privacy requirements
• Incomplete or no written supervisory/compliance
  procedures

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State IA ExamsCommon Exam Deficiencies

• Non-compliance with advertising rules
• Failing to maintain applicable books and records
• Not sending invoice of fees if auto-deducting fee

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Resources

• Texas State Securities Board
• www.ssb.state.tx.us
• North American Securities Administrators
  Association
• www.nasaa.org
• Investment Adviser Resources
• Uniform Forms
• IA Switch Resource Center

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IA Regulation Registration Form ADV Part 2

• Form ADV Part 2 Resources
• The new Part 2 of Form ADV is posted on the
  websites of the SEC and the North American
  Securities Administrators Association (NASAA).
• NASAA has posted guidance for investment advisers
  filing the new Form ADV Part 2 in IARD.
• Visit the NASAA website, look in Industry
  Regulatory Resources
• www.nasaa.org

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More IA Switch Resources

• NASAA IA Switch Resource Center
• The North American Securities Administrators
  Association (NASAA) is assisting states with the
  migration of investment advisers.
• NASAAs online IA Switch Resource Center includes
  an FAQ, calendar of events and additional
  guidance to help advisers make the switch to
  state regulation.
• Advisers can use the resource center to submit
  questions about the switch. The resource center
  is available at www.nasaa.org

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Questions?

• For more information,
• contact
• Texas State Securities Board
• Registration Division
• 512-305-8300

Texas State Securities Board