The SEC Division of Investment Management, is reviewing the applications of private fund advisers, and focusing on two particular areas: advertising and the Form ADV.

The Division’s review will be “informed” by the questions and concerns raised by private fund advisers regarding the Investment Advisers Act of 1940 application to their practices and business models. The Dodd-Frank Act, among other changes, required mid-sized investment advisers to shift from SEC to state registration.  The statute also directed advisers to hedge and private equity funds with more than $150 million in assets to register with the SEC. This change resulted in more than 1,500 new registrants in 2012.  Private fund advisers now account for almost 40 percent of the SEC’s registered advisers.

In its rules to implement Dodd-Frank, the SEC directed that new registrants provide in their Form ADV’s information about each private fund they manage, including the size and ownership of the fund, and the services provided to the fund. However, the Form ADV may not be designed to take into account the sometimes complex structure of private funds. The advisers also had to provide other information, including identifying certain “gatekeepers” in their business, and business practices that could present significant conflicts of interest. The Advisers Act Rule 206(4)-1 bars registered advisers from using any advertisement that contains untrue or misleading statements.  The rule also bars advisers from using or referring to testimonials in their advertisements.

Accordingly, RIAs must update Form ADVs and comply with advertising rules or face sanctions.