Specifically, Title IV of the Dodd- Frank Act, among other things, amends the Investment Advisers Act by    eliminating the exemption from SEC registration upon which advisers  to private funds have generally relied—thereby generally requiring  advisers only to private funds with assets of $150 million or more to  register with SEC;    providing SEC with the authority to require certain advisers to private  funds to maintain records and file reports with SEC;    providing exemptions from registration to advisers solely to venture  capital funds, advisers to certain private funds with less than $150  million of assets under management, and certain foreign private  advisers;    authorizing SEC to collect certain systemic-risk data and share this  information with the Financial Stability Oversight Council; and    generally requiring that advisers with assets under management of  less than $100 million register with the state in which they have their  principal office, if required by the laws of that state. SEC oversees registered investment advisers primarily through its Office  of Compliance Inspections and Examinations, Division of Investment  Management, and Division of Enforcement. Although Forming an SRO to Oversee Private Fund Advisers Appears Feasible, It Would Require Legislative Action and Present Challenges

Regulators, industry representatives, investment advisers, and others we  interviewed told us that it was difficult to opine definitively on the feasibility  of forming and operating a private fund adviser SRO because of the many  unknown factors, such as its specific form, functions, and membership. Nonetheless, the general consensus was that forming a private fund  adviser SRO similar to FINRA could be done but not without challenges. Regulators and industry representatives pointed to the creation and  existence of other securities SROs as evidence that forming an SRO to  oversee private fund advisers is feasible. Legislation Would Be Needed to Allow a Private Fund Adviser SRO to Operate under the Federal Securities Laws

According to SEC staff and two securities law experts, legislation would  be needed to allow for the formation of a private fund adviser SRO under  the federal securities laws. Moreover,  they said that an existing SRO would also face challenges reaching  agreement on, among other things, the SRO’s governance structures. While a Private Fund Adviser SRO Could Help Address SEC’s Examination Capacity Challenges, It Would Involve Trade-offs

According to securities regulators and industry representatives, a private  fund adviser SRO could offer a number of advantages and  disadvantages. However, SEC still would have oversight responsibility for  over 10,600 registered investment advisers that do not solely advise  private funds. A private fund adviser SRO could also create regulatory gaps in the  oversight of registered investment advisers. However, in its section 914 study, SEC staff concluded  that the agency likely will not have sufficient capacity to effectively  examine registered investment advisers, including private fund advisers,  with adequate frequency. Agency Comments and Our Evaluation

We provided a draft of this report to SEC. SEC staff provided technical  comments, which we incorporated, as appropriate. Appendix I: Scope and Methodology

The objectives of this report were to examine (1) the feasibility of forming  and operating a private fund adviser self-regulatory organization (SRO),  including the actions that would need to be taken and challenges that  would need to be addressed, and (2) the potential advantages and  disadvantages of a private fund adviser SRO. Although the Dodd-Frank  Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)  directs us to assess the feasibility of forming an SRO for private funds,  our study focuses on an SRO for private fund advisers. In addition, we reviewed past regulatory and legislative  proposals for creating an SRO to oversee investment advisers or funds,  relevant academic studies, SEC staff’s Study on Enhancing Investment  Adviser Examinations (as mandated under section 914 of the Dodd-Frank  Act) (section 914 study), and related material to gain insights on the  potential form and functions of a private fund adviser SRO.
Why GAO Did This Study

Over the past decade, hedge funds, private equity funds, and other private funds proliferated but were largely unregulated, causing members of Congress and Securities and Exchange Commission (SEC) staff to raise questions about investor protection and systemic risk. To address this potential regulatory gap, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) brought certain advisers to private funds under the federal securities laws, requiring them to register with SEC. The Dodd-Frank Act also requires GAO to examine the feasibility of forming a self-regulatory organization (SRO) to provide primary oversight of private fund advisers. This report discusses (1) the feasibility of forming such an SRO, and (2) the potential advantages and disadvantages of a private fund adviser SRO. To address the mandate, GAO reviewed federal securities laws, SEC staff's recently completed study on its investment adviser examination program that was mandated by the Dodd-Frank Act, past regulatory and legislative proposals to create an SRO for investment advisers, and associated comment letters. GAO also interviewed SEC and SRO staffs, other regulators, and various market participants and observers. We provided a draft of this report to SEC for review and comment. SEC staff provided technical comments, which we incorporated, as appropriate.

What GAO Found

Regulators, industry representatives, investment advisers, and others told GAO that it was difficult to opine definitively on the feasibility of a private fund adviser SRO, given its unknown form, functions, and membership. Nonetheless, the general consensus was that forming a private fund adviser SRO could be done, as evidenced by the creation and existence of other SROs. At the same time, they said that the formation of a private fund adviser SRO would require legislation and would not be without challenges. SEC staff and securities law experts said that the federal securities laws currently do not allow for the registration of a private fund adviser SRO with SEC. In addition, regulators, industry representatives, and others told GAO that forming such an SRO could face challenges, including raising the necessary start-up capital and reaching agreements on its fee and governance structures. Some of the identified challenges are similar to those that existing securities SROs had to confront during their creation. Creating a private fund adviser SRO would involve advantages and disadvantages. SEC will assume responsibility for overseeing additional investment advisers to certain private funds on July 21, 2011. It plans to oversee these advisers primarily through its investment adviser examination program. However, SEC likely will not have sufficient capacity to effectively examine registered investment advisers with adequate frequency without additional resources, according to a recent SEC staff report. A private fund adviser SRO could supplement SEC's oversight of investment advisers and help address SEC's capacity challenges. However, such an SRO would oversee only a fraction of all registered investment advisers. Specifically, SEC would need to maintain the staff and resources necessary to examine the majority of investment advisers that do not advise private funds and to oversee the private fund adviser SRO, among other things. Furthermore, by fragmenting regulation between advisers that advise private funds and those that do not, a private fund adviser SRO could lead to regulatory gaps, duplication, and inconsistencies.