The Advisers Act generally defines an investment adviser, with certain exceptions, as any individual or firm that receives compensation for giving advice, making recommendations, issuing reports, or furnishing analyses on securities either directly to investors or through publications. As of July 21, 2011, individuals or firms that meet this definition and that have over $100 million in assets under management generally must register with SEC and are subject to SEC regulation. Advisers with less than $100 million in assets under management may be required to register with and be subject to oversight by one or more state securities regulators. The Advisers Act requires investment advisers to adhere to the high standards of honesty and loyalty expected of a fiduciary and to disclose their background and business practices. Traditionally, private funds (such as hedge and private equity funds) have been structured and operated in a manner that enabled the funds to qualify for an exclusion from some federal statutory restrictions and most SEC regulations that apply to registered investment pools, such as mutual funds. For example, in 2008, we found that private equity and hedge funds typically claimed an exclusion from registration as an investment company. By relying on one of two exclusions under the Investment Company Act of 1940, such funds are not required to register as an investment company. The first exclusion is available to private funds whose securities are owned by 100 or fewer investors. The second exclusion applies to private funds that sell their securities only to highly sophisticated investors. To rely on either exclusion, the private fund must not offer its securities publicly. Before the passage of the Dodd-Frank Act, many advisers to private funds were able to qualify for an exemption from SEC registration. Although certain private fund advisers were exempt from registration, they remained subject to antifraud (including insider trading) provisions of the federal securities laws. The Dodd-Frank Act requires that advisers to certain private funds register with SEC by July 21, 2011. 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. As shown in figure 1, according to SEC staff, 11,505 investment advisers were registered with SEC as of April 1, 2011, of which the staff estimate 2,761 advise private funds. Of these 2,761, approximately 863 registered investment advisers report on their disclosure form that their only clients are private funds, and approximately 1,898 advisers report that they advise private funds and other types of clients, such as mutual funds. When the Dodd-Frank Act’s new registration provisions take effect, the composition of registered investment advisers will change. SEC staff estimates that approximately 3,200 advisers currently registered with SEC will fall below the required amount of assets under management for registration with SEC (increasing from $25 million under current law to $100 million under the Dodd-Frank Act amendments. As a result, they will be required to register with one or more state securities authorities instead of SEC—leaving 8,300 advisers registered with SEC. In addition to these advisers, SEC staff also estimates that (1) approximately 750 new investment advisers to private funds will have to register with SEC because of the elimination of the registration exemption on which private fund advisers have typically relied and (2) approximately 700 new investment advisers will register with SEC as a result of growth in the number of investment advisers (based on historical growth rates). Therefore, SEC staff estimates that there will be approximately 9,750 registered investment advisers after the implementation of these Dodd- Frank Act amendments. However, an estimate of the total number of registered investment advisers with private fund clients remains uncertain, because some of the 2,761 currently registered advisers with private fund clients may be required to deregister with SEC, depending on the amount of their assets under management, and some of the newly registering advisers may advise one or more private funds. Although advisers to certain private funds will be required to register with SEC, the private funds themselves may continue to qualify for an exclusion from the definition of an investment company under the Investment Company Act of 1940. Because private funds typically are not required to register as investment companies, SEC exercises limited oversight of these funds. Nonetheless, the Dodd-Frank Act amends the Advisers Act to state that the records and reports of private funds advised by a registered investment adviser are deemed to be the records and reports of the investment adviser. Thus, according to SEC staff, such records and reports are subject to examination by SEC staff. SEC oversees registered investment advisers primarily through its Office of Compliance Inspections and Examinations, Division of Investment Management, and Division of Enforcement. In general, SEC regulates investment advisers to determine whether they (1) provide potential investors with accurate and complete information about their background, experience, and business practices and (2) comply with the federal securities laws and related regulations. More specifically, the Office of Compliance Inspections and Examinations examines investment advisers to evaluate their compliance with federal securities laws, determine whether these firms are fulfilling their fiduciary duty to clients and operating in accordance with disclosures made to investors, and assess the effectiveness of their compliance-control systems. The Division of Investment Management administers the securities laws affecting investment advisers and engages in rulemaking for SEC consideration and other policy development intended, among other things, to strengthen SEC’s oversight of investment advisers. The Division of Enforcement investigates and prosecutes violations of securities laws or regulations. Securities SROs include national securities exchanges and securities associations registered with SEC, such as the New York Stock Exchange and FINRA. SROs are primarily responsible for establishing the standards under which their members conduct business; monitoring the way that business is conducted; bringing disciplinary actions against their members for violating applicable federal statutes, SEC rules, and their own rules; and referring potential violations of nonmembers to SEC. SEC oversees SROs, in part by periodically inspecting them and by approving their rule proposals. At the time that the system of self-regulation was created, Congress, regulators, and market participants recognized that this structure possessed inherent conflicts of interest because of the dual role of SROs as both market operators and regulators. Nevertheless, Congress adopted self-regulation of the securities markets to prevent excessive government involvement in market operations, which could hinder competition and market innovation. Congress also concluded that self-regulation with federal oversight would be more efficient and less costly to taxpayers. For similar purposes, Congress created a self- regulatory structure for the futures markets. NFA is a futures SRO registered with CFTC as a national futures association. Section 914 of Title IX of the Dodd-Frank Act required SEC to study the need for enhanced examination and enforcement resources for investment advisers. Among other things, SEC was required to study the number and frequency of examinations of investment advisers by SEC over the last 5 years and the extent to which having Congress authorize SEC to designate one or more SROs to augment SEC’s efforts in overseeing investment advisers would increase the frequency of examinations of investment advisers. In January 2011, SEC staff issued the report. SEC staff concluded that the number and frequency of examinations of registered investment advisers have declined over the past 6 years and that SEC faces significant capacity challenges in examining these advisers, in part because of the substantial growth of the industry and the limited resources and number of SEC staff. As a result, SEC staff recommended three options to Congress to strengthen SEC’s investment adviser examination program: (1) imposing user fees on advisers to fund SEC examinations, (2) authorizing an SRO to examine all registered investment advisers, and (3) authorizing FINRA to examine its members that are also registered as investment advisers for compliance with the Advisers Act. In its report, SEC staff discusses the trade-offs of each of these options. 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. However, SEC staff and two securities law experts told us that legislation would be needed to allow a private fund adviser SRO to be formed under the federal securities laws. Moreover, regulators, industry representatives, and others identified a number of challenges to forming a private fund adviser SRO, some of which were similar to the challenges involved in creating other SROs, such as FINRA and NFA. 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. Neither the Advisers Act nor the other federal securities laws expressly authorize the registration of a private fund adviser SRO. As a result, SEC staff and these experts told us that Congress would need to enact legislation to allow for such an SRO to register with SEC and for SEC to delegate any regulatory authority to the SRO. Past proposals to create an SRO to oversee investment advisers were also predicated on legislation.