The Dodd-Frank Act, passed in 2010 in response to the 2008 financial crisis, included major amendments to the Investment Advisers Act of 1940. The amendments were intended to address gaps in regulation and increase oversight of investment advisers, particularly those managing hedge funds and private equity funds. The goal was to reduce systemic risk and protect investors by bringing more transparency and accountability to the investment advisory industry. Some key reasons the Dodd-Frank Act amended the Investment Advisers Act are:
Expansion of SEC registration and reporting requirements
One of the main amendments required advisers to hedge funds and other private funds, with assets under management over $150 million, to register with the SEC. Previously, most of these funds were exempt from registration, operating in a regulatory gray area. Registration enables the SEC to conduct examinations, bringing new transparency. Advisers also must provide data for systemic risk assessments.
Stricter rules for custody of client assets
The SEC gained authority to implement stricter standards for investment advisers who have custody over client funds and securities. Custody opens the door for fraud and abuse of client assets. New safeguards were intended to deter misconduct and increase accountability.
Clarification of fiduciary duty
The SEC was authorized to promulgate rules clarifying that an adviser has a fiduciary duty to act in the best interest of its clients. This ‘fiduciary standard’ is more stringent than the ‘suitability standard’ that applies to brokers. The uniform standard aims to mandate that clients’ interests are put first.
Additional disclosures and reporting
Investment advisers are required to disclose a range of new information to the SEC, including the types of clients they advise, their assets under management, their advisory strategies, potential conflicts of interest, disciplinary history, and more. Improved disclosures facilitate better risk monitoring.
Restrictions on performance fees and referral fees
The SEC gained increased authority to protect investors from potentially abusive fee practices. Performance fees can motivate excessive risk-taking. Referral fees can incentivize putting client money into poor investments. Tighter regulation aims to curb misaligned incentives.
In summary, the Dodd-Frank Act amended the decades-old Investment Advisers Act to address the lack of robust SEC oversight and bring much-needed transparency and accountability to the investment advisory industry, particularly for private fund advisers. By expanding SEC registration and reporting requirements, clarifying the fiduciary duty standard, imposing stricter rules around custody of client assets, requiring additional disclosures, and restricting certain adviser fee practices seen as prone to abuse, the amendments sought to strengthen regulation and reduce systemic risks in order to better protect investors.