The Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated certain statutory exemptions that allowed many hedge fund managers and other investment advisers to avoid registering with the Securities and Exchange Commission. Advisers previously exempt from registration are now rushing to understand how becoming a "registered investment adviser" will change their business and what will be required of them going forward.

Becoming a registered investment adviser prompts heightened fiduciary duties, SEC reporting requirements and examinations, record-keeping obligations and compliance with certain business practices that facilitate the adviser's role as a fiduciary.

Investment advisers are fiduciaries to their advisory clients, owing them a duty of undivided loyalty and utmost good faith. To enforce this fiduciary obligation, the SEC requires registered investment advisers to eliminate, or at least disclose, all conflicts of interest that might incline an adviser to render advice that is not disinterested.

If an adviser does not avoid a conflict of interest that could impact the impartiality of its advice, it must fully disclose the conflict and receive specific consent from the client to so act. Departure from the SEC's fiduciary standards may constitute fraud upon the adviser's clients.

To register with the SEC, an investment adviser must file the Form ADV registration form through the Investment Adviser Registration Depository, or IARD, and thereafter file an annual updating amendment to Form ADV. Upon registering, advisers become subject to compliance examinations by the SEC staff. In addition to making annual filings, prompt amendments to Form ADV are required when certain registration information becomes inaccurate.

Recently proposed amendments to Form ADV would require disclosure of basic organizational and operational information about the funds the adviser manages; identification of the adviser's auditors, prime brokers, custodians, administrators and marketers; and the types of advisory clients, their employees and any business practices of the adviser that may present conflicts of interest.

Registered investment advisers are required to maintain certain books and records in compliance with applicable adviser statutes and SEC rules. The types of records include compliance policies and procedures, a code of ethics, disclosure statements to investors, proxy voting policies and procedures, and advertising and performance records, each of which must comply with applicable law. These records are not required to be filed with the SEC, however; such records are inspected by the SEC during compliance examinations.

A particularly significant consequence of becoming a registered investment adviser is the limitation placed on charging performance fees to all clients. Performance fees may generally be charged only to "qualified clients" who meet certain minimum-net-worth thresholds.

Part of the adviser's fiduciary obligation includes being required to seek to obtain the best price and execution for their securities transactions. Advisers are not obligated to get the lowest possible commission cost but rather must determine whether the transaction represents the best qualitative execution for its clients. Advisers may determine that it is reasonable for clients to pay commission rates that are higher than the lowest commission rate available in order to obtain certain products or services from a broker-dealer (that is, soft-dollar arrangement).

To qualify for a "safe harbor" with respect to soft-dollar arrangements, advisers must use clients' brokerage commissions to pay for certain defined "brokerage or research" products and services, use such products and services in making investment decisions, make a good-faith determination that the commissions that clients will pay are reasonable in relation to the value of the products and services received, and disclose these arrangements.

The SEC prohibits certain types of advertising practices by advisers. Advertising must not be false or misleading and must not contain any untrue statement of a material fact. Specifically prohibited are: testimonials; the use of past specific recommendations that were profitable, unless the adviser includes a list of all recommendations made during the past year; a representation that any graph, chart or formula can in and of itself be used to determine which securities to buy or sell; advertisements stating that any report, analysis or service is free, unless it really is free; and any implication that the SEC or another agency has sponsored, recommended or approved the adviser, based upon its registration. In addition, registered advisers may not compensate others to seek out new clients on their behalf unless the solicitation arrangement is in compliance with applicable SEC rules.

Registered investment advisers that have "custody" of client assets must take specific measures to protect client assets from loss or theft. Advisers must maintain these client funds and securities at a "qualified custodian." Generally, qualified custodians include most banks and insured savings associations, SEC-registered broker-dealers, Commodity Exchange Act-registered futures commission merchants and certain foreign financial institutions. The qualified custodian must send account statements for the fund to each fund investor.

Once an investment adviser is registered with the SEC, navigating the myriad requirements will often seem complex and burdensome. Nevertheless, with the appropriate guidance, advisers can effectively satisfy their compliance obligations.

Mauro Viskovic is a partner with Kranjac Manuali & Viskovic LLP in New York and focuses his practice on corporate and securities law matters.