INVESTMENT ADVISER REGULATION
A. INVESTMENT ADVISERS
A person who provides advice on the purchase and sale of securities for compensation must register as an investment adviser with the Securities and Exchange Commission. Such investment advisers then have the responsibility of providing appropriate disclosure information to their clients.
SECTION 202(a)(11) OF THE INVESTMENT ADVISERS ACT OF 1940, 15 U.S.C. § 80b-2(a)(11) (1988)
LOWE v. SEC, 472 U.S. 181 (1985)
Many persons who manage the portfolios of private hedge funds have faced problems in becoming registered with the SEC as investment advisers. Previously, a registered investment adviser could not participate in a performance fee. The investment adviser would not register with the SEC by claiming to only have one or so clients, namely the hedge fund. However, it was possible that the individual partners could be all counted as clients separately causing the investment adviser to have to register with the SEC.
As a result, a rule now allows, under certain circumstances, a registered investment adviser to participate in a performance fee for managing the portfolio of a hedge fund. Also, a rule now allows, under certain circumstances, the consideration of a hedge fund as only one client so an investment adviser of such hedge fund might not have to register with the SEC.
SECTION 203(a) OF THE INVESTMENT ADVISERS ACT OF 1940, 15 U.S.C. § 80b-3(a) (1988)
SECTION 203(b) OF THE INVESTMENT ADVISERS ACT OF 1940, 15 U.S.C. § 80b-3(b) (1988)
SEC RULE 203(b)(3)-1, 17 C.F.R. § 275.203b3-1 (1990)
SECTION 205 OF THE INVESTMENT ADVISERS ACT OF 1940, 15 U.S.C. § 80b-5 (1988)
SEC RULE 205-3, 17 C.F.R. § 275.205-3 (1990)
EXEMPTION TO ALLOW INVESTMENT ADVISORS TO CHARGE FEES BASED UPON A SHARE OF CAPITAL GAINS UPON OR CAPITAL APPRECIATION OF A CLIENT’S ACCOUNT, Release No. IA-1731 (July 15, 1998)
SEC v. CAPITAL GAINS RESEARCH BUREAU, 375 U.S. 180 (1963)
TRANSAMERICA MORTG. ADVISORS, INC. (TAMA) v. LEWIS, 444 U.S. 11 (1979)
Today, many persons are becoming active in the financial planning business. The great surge in applications for investment adviser registration by these financial planners has caused the United States Securities and Exchange Commission to consider the requirement of a membership in a self-regulatory organization that would register with the SEC.
B. GROWTH OF INSTITUTIONAL INVESTORS
Institutional investors constitute a growing percentage of the volume of securities purchased in the securities markets. This trend started several decades ago. Today, institutional investors represent a significant factor in the securities markets.
Institutional investors pool the funds of many individual investors to achieve a reduced cost for the management of portfolio securities, such as in the area of administrative costs and negotiated commissions on large, block purchases of stock. These institutional investor pools also allow the individual investor to achieve a diversity of risk by owning interests in a portfolio consisting of the securities of many different companies.
Portfolio managers attempt to structure the portfolio so as to increase investment return and to minimize risk, often treating risk in an analytical manner. The alpha coefficient is the estimate of an asset's rate of return when the market is stationary. The beta coefficient can be used for rankings of the systematic risk of different assets.
Some portfolio managers utilize technical analysis in the selection of stocks. Technical analysis is the use of charts showing the stock market price and volume performance of a stock to try to discern a trend for predicting a future price level.
Most portfolio managers utilize fundamental analysis in the selection of stocks. Fundamental analysis is the determination of the intrinsic or book value of the stock of a company by using such ratios as the common-stock ratio and the price-earnings ratio to find whether a stock is undervalued or overvalued in the stock market.
C. INVESTMENT COMPANIES
A company must register with the Securities and Exchange Commission as an investment company if it is in the business of investing in the securities of other companies, and has 100 or more shareholders. These investment companies comprise the gigantic mutual fund industry that provides an opportunity for small investors to pool their funds and invest in many different companies efficiently by purchasing large institutional size blocks of stock.
SECTION 3(a) OF THE INVESTMENT COMPANY ACT OF 1940, 15 U.S.C. § 80a-3(a) (1988)
SECTION 3(c) OF THE INVESTMENT COMPANY ACT OF 1940, 15 U.S.C. § 80a-3(c) (1988)
SECTION 15(f) OF THE INVESTMENT COMPANY ACT OF 1940, 15 U.S.C. § 80a-15(f) (1988)
SECTION 11(a) OF THE SECURITIES EXCHANGE ACT OF 1934, 15 U.S.C. § 78k(a) (1988)
SECTION 28(e) OF THE SECURITIES EXCHANGE ACT OF 1934, 15 U.S.C. § 78bb(e) (1988)
SECTION 12(b) OF THE INVESTMENT COMPANY ACT OF 1940, 15 U.S.C. § 80a-12(b) (1988)
SEC RULE 12b-1, 17 C.F.R. § 270.12b-1 (1990)
Performance in the portfolio management of mutual funds is extremely important since the industry is very competitive and the performance results of all mutual funds become publicly known.
Private investment companies have existed for many years in a form called hedge funds. These hedge funds can trade in and out of securities very rapidly and use such speculative techniques as margin purchasing of securities and short selling of stock. Offers to participate in such funds are usually only made privately to wealthy individuals. The amount of required investment is high since the funds allow a limited number of investors to participate. The funds also limit the participants to sophisticated purchasers. This is necessary because of the extremely speculative nature of the trading techniques used in the portfolio management. The portfolio manager, or managers, often use a compensation arrangement based on a percentage of profits. Some public mutual funds have compensation arrangements for portfolio management based on profits, but they are usually not as lucrative as those of the private funds.
Private investment companies continue to offer various participations to institutions, wealthy families, and wealthy, sophisticated individual investors. These private investment companies usually are structured as hedge funds or venture capital funds. In 1994, it was estimated that there was $47,000,000,000 raised by these hedge funds. In 1998, it was estimated that there was $26,000,000,000 raised by these venture capital funds. Such amounts are only estimates because these private investment companies are not required to publicly report information and do not usually voluntarily reveal statistical information. The funds continue to offer securities in private placements and limit the number of investors.
PRIVATELY OFFERED INVESTMENT COMPANIES, Release No. IC-22597 (April 3, 1997)
LONG-TERM CAPITAL MANAGEMENT: REGULATORS NEED TO FOCUS GREATER ATTENTION ON SYSTEMIC RISK, Government Accounting Office Letter Report (October 29, 1999)
DRAPER FISHER JURVETSON FUND I, INC., Prospectus (March 2, 2000)
© 2000 Harry Stansbury
 15 U.S.C. § 80b-2(a)(11) (1988); see 1 TAMAR FRANKEL, THE REGULATION OF MONEY MANAGERS 149-68 (1978).
 See ROBERT C. POZEN, FINANCIAL INSTITUTIONS: INVESTMENT MANAGEMENT 260-78 (1978); see also Robert C. Pozen, Money Managers and Securities Research, 51 N.Y.U. L. Rev. 923, 923-28 (1976).
 See Roberta S. Karmel, Trends in Investment Adviser Regulation, N.Y. L.J., Apr. 18, 1985, at 1.
 See 1 LOUIS LOSS, SECURITIES REGULATION 1410-11 (2d ed. 1961).
 See INVESTMENT PARTNERSHIPS AND "OFFSHORE" INVESTMENT FUNDS 410-12 (Douglas W. Hawes ed., 1969).
 See Robert C. Hacker & Ronald D. Rotunda, SEC Registration of Private Investment Partnerships after Abrahamson v. Fleschner, 78 Colum. L. Rev. 1471, 1476-81 (1978).
 Rule 203(b)(3)-1, 17 C.F.R. § 275.203b3-1 (1990).
 Rule 205-3, 17 C.F.R. § 275.205-3 (1990).
 See 1 TAMAR FRANKEL, THE REGULATION OF MONEY MANAGERS 175 (1978 & Supp. 1989).
 See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 675 & n.14 (2d ed. 1988 & Supp. 1990).
 See JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 487 (1982); ROY C. SMITH, THE MONEY WARS 76 (1990); Robert C. Clark, The Four Stages of Capitalism: Reflections on Investment Management Treatises, 94 Harv. L. Rev. 561, 564 & n. 9 (1981); see also SEC, INSTITUTIONAL INVESTOR STUDY REPORT, H.R. DOC. NO. 92-64, 92d Cong., 1st Sess., at 58-59 (1971); JOHN TRAIN, THE MONEY MASTERS 46-47 (1980); JOHN TRAIN, THE NEW MONEY MASTERS 175-77 (1989); Donald C. Langevoort, Information Technology and the Structure of Securities Regulation, 98 Harv. L. Rev. 747, 771 & n.104 (1985).
 See RAJ K. BHALA, FOREIGN BANK REGULATION AFTER BCCI 39-40 (1994); JAMES J. FISHMAN, THE TRANSFORMATION OF THREADNEEDLE STREET 29 (1993); BRUCE WASSERSTEIN, BIG DEAL 67 (1998).
 See generally PETER L. BERNSTEIN, CAPITAL IDEAS Ch.1 (1992).
 See CHRIS WELLES, THE LAST DAYS OF THE CLUB 38 (1975); Robert C. Clark, The Four Stages of Capitalism: Reflections on Investment Management Treatises, 94 Harv. L. Rev. 561, 566-67 & n. 19 (1981).
 See BENJAMIN GRAHAM, DAVID L. DODD & SIDNEY COTTLE 65 (4th ed. 1962); Robert C. Clark, The Four Stages of Capitalism: Reflections on Investment Management Treatises, 94 Harv. L. Rev. 561, 564 & n. 8 (1981).
 See VICTOR BRUDNEY & MARVIN A. CHIRELSTEIN, CORPORATE FINANCE 58-113 (3d ed. 1987); JACK C. FRANCIS, INVESTMENTS 311 (2d ed. 1976); A.A. Sommer, Jr., Book Review, 93 Harv. L. Rev. 1595, 1599-1601 (1980) (reviewing HOMER KRIPKE, THE SEC AND CORPORATE DISCLOSURE: REGULATION IN SEARCH OF A PURPOSE (1979)).
 JACK C. FRANCIS, INVESTMENTS 331 (2d ed. 1976).
 JACK C. FRANCIS, INVESTMENTS 333 (2d ed. 1976).
 See JACK C. FRANCIS, INVESTMENTS 541-43 (2d ed. 1976).
 See JACK C. FRANCIS, INVESTMENTS 546-64 (2d ed. 1976).
 See JACK C. FRANCIS, INVESTMENTS 257 (2d ed. 1976).
 See BENJAMIN GRAHAM, DAVID L. DODD & SIDNEY COTTLE 194-238 (4th ed. 1962); see also JOHN BROOKS, THE TAKEOVER GAME 85-86 (1987); Note, Valuation of Dissenters' Stock Under Appraisal Statutes, 79 Harv. L. Rev. 1453, 1456-71 (1966).
 15 U.S.C. § 80a-3 (1988); see 1 TAMAR FRANKEL, THE REGULATION OF MONEY MANAGERS 195-254 (1978).
 See SEC, INSTITUTIONAL INVESTOR STUDY REPORT, H.R. DOC. NO. 92-64, 92d Cong., 1st Sess., at 370-72 (1971); CHRIS WELLES, THE LAST DAYS OF THE CLUB 27‑31 (1975); Note, The Regulation of Risky Investments, 83 Harv. L. Rev. 603, 608 (1970).
 See JAMES L. FARRELL, Jr., GUIDE TO PORTFOLIO MANAGEMENT 1‑23 (1983); ADAM SMITH, THE MONEY GAME 207‑19 (1967); JOHN TRAIN, THE MONEY MASTERS 160-61 (1980); JOHN TRAIN, THE NEW MONEY MASTERS 138-39 (1989); Wall Street: The Performers, Forbes, June 15, 1967, at 24; see also Diane H. Gropper, Basket Investing: The New Force In The Stock Market, Institutional Inv., Sept. 1988, at 49.
 See E.L. Hennessee, Flowering Hedges, Barron's, Dec. 13, 1993, at 16; Heyday of the Hedge Funds, Dun's Rev., Jan. 1968, at 23; Dyan Machan & Riva Atlas, George Soros, Meet A.W. Jones, Forbes, Jan. 17, 1994, at 42.
 See SEC, INSTITUTIONAL INVESTOR STUDY REPORT, H.R. DOC. NO. 92-64, 92d Cong., 1st Sess., at 369-70 (1971); JOHN TRAIN, THE NEW MONEY MASTERS 31-35 (1989); Susan Lee, Selling Short, Forbes, Apr. 22, 1985, at 99.
 See ADAM SMITH, SUPERMONEY 178-79 (1972).
 See JOHN BROOKS, THE GO-GO YEARS 141-44 (1973).
 See Douglas W. Hawes, Hedge Funds - Investment Clubs of the Rich, 23 Bus. Law. 576, 576-77 (1968).
 See Carol J. Loomis, Hard Times Come to the Hedge Funds, Fortune, Jan. 1970, at 100.
 See THE MONEY MANAGERS 111-22 (Gilbert E. Kaplan & Chris Welles eds., 1969).
 See SEC, INSTITUTIONAL INVESTOR STUDY REPORT, H.R. DOC. NO. 92-64, 92d Cong., 1st Sess., at 366-67 (1971); JOHN TRAIN, THE NEW MONEY MASTERS 141 (1989); Leslie A. Glick, Mutual Fund Management Fees: In Search of a Standard, 25 Bus. Law. 1471, 1483‑85 (1970).
 See MARTIN MAYER, NEW BREED ON WALL STREET 11-12 (1969).
 See Cary Reich, Has Allen Got a Deal For You!, Institutional Inv., Apr. 1983, at 69.
 See Michael Peltz, High Tech's Premier Venture Capitalist, Institutional Inv., June 1996, at 89.
 See GREGORY J. MILLMAN, THE VANDALS’ CROWN 230 (1995).
 See RANDALL E. STROSS, EBOYS xvi (2000).
 See Anise Wallace, The World's Greatest Money Manager, Institutional Inv., June 1981, at 39.
 See Kevin Muehring, John Meriwether By the Numbers, Institutional Inv., Nov. 1996, at 68.