First, the good news: the deadline for compliance has been extended to March 2012 from July 2011. But the bad news is that the rules are extensive and complicated – failure to properly evaluate whether they apply to your business may have severe consequences.
Non-US advisers, even those with no place of business in the United States and no US clients, may be subject to registration in the US under the Investment Advisers Act of 1940 if they have sufficient US connections. The SEC has suggested that the test of whether the US has jurisdiction over a non-US adviser is whether there are sufficient “conduct and effects" in the US.
Non-US investment advisers of any size that fall within the definition of “investment adviser” and have those minimum US connections generally will be required to register with the SEC, unless they can take advantage of any one of several new exemptions. Before President Obama signed the Dodd-Frank Act into law in July 2010, investment advisers with 14 or fewer clients generally were exempt from registering with the SEC as investment advisers. A single private fund – without regard to size or number of investors – counted as one client. Many non-US investment advisers with fewer than 14 US fund clients, or with US investors in non-US funds they advised, relied on this exemption.
But the Dodd Frank Act’s elimination of the private adviser exemption creates new compliance challenges for offshore advisers with US connections. Even as the US eliminated the “private adviser” exemption, it created some new exemptions of interest to non-US advisers. You may qualify for the new “foreign private adviser” exemption if you have no place of business in the US; have fewer than 15 clients in the US and investors in the US in private funds; have aggregate assets under management attributable to clients in the US and investors in the US in private funds advised by the investment adviser of less than $25m; and do not portray yourself generally to the public in the US as an investment adviser.
Investors in a private fund include anyone who would be included in determining the number of beneficial owners of the outstanding securities of a small private fund (that is, a fund with fewer than 100 investors) or whether the outstanding securities of a private fund are owned exclusively by qualified purchasers. A single investor in two or more private funds is counted only once. Advisers to master funds, however, must look through to the investors in the feeder funds that invest in the master fund. Even if you can rely on this exemption, you still will be subject to the supervisory and anti-fraud provisions of the Investment Advisers Act.
Offshore advisers that are subject to US jurisdiction but cannot satisfy the conditions of the foreign private adviser exception may be required to register with the SEC, unless they can rely on another exemption from the registration requirements.
New registration requirements
Generally, US investment advisers with less than $100m assets under management may not register with the SEC. But, non-US investment advisers with a principal place of business outside the US may be required to register with the SEC no matter how much in assets they have under management.
Although the Dodd-Frank Act eliminated the “private adviser” exemption that many non-US advisers relied on, it also created new exemptions. US advisers solely to venture capital funds and mid-sized advisers solely to private funds (with aggregate assets under management of less than $150m) do not need to be fully compliant. Similarly, non-US advisers may be able to rely on these exemptions as well, subject to strict conditions. Non-US advisers that rely on the exemptions for advisers solely to venture capital funds and mid-sized advisers solely to private funds nonetheless must comply with the “pay to play” rules, certain reporting requirements, supervisory requirements and, of course, the anti-fraud provisions of US law.
Affiliates of US investment advisers
Since 1992, the staff of the SEC has said that it would not recommend enforcement action, subject to certain conditions, against non-US unregistered advisers that are affiliated with SEC-registered advisers, despite sharing personnel and resources. The SEC said that it does not intend to change this position and will provide guidance on a case by case basis. It would be advisable to consult with your counsel to determine whether your relationship with US advisers requires any additional compliance oversight.
Compliance obligations
Time needs to be spent carefully evaluating whether exemptions from these new rules apply to your business.
If you are subject to US jurisdiction and none of the above exemptions applies to your business, what do you need to do? Put simply, you need to ramp up your compliance programme as the 30 March 2012 deadline approaches. Non-US advisers who are required to register with the SEC but do not, or fail to comply with the applicable compliance obligations (some of which may extend to unregistered and exempt investment advisers) can be subject to severe penalties that could jeopardise client relationships.
Non-US advisers required to register with the SEC will be subject to the full scope of compliance obligations under the Investment Advisers Act. These include: custody of client assets; record keeping; restrictions on securities transactions with, or among, advisory clients; allocation of securities and advisory recommendations among clients; aggregation of orders; use of client commissions to “pay up” for research; proxy voting policies; performance advertising; advisory contract requirements; payments of fees to client solicitors; ”pay to play” rules concerning accounts of municipalities; and disclosure on Form ADV and other public disclosures.
Moreover, non-US advisers registered with the SEC will be subject to SEC examinations, and must develop formal compliance programmes reasonably designed to prevent violations of US law.
Many offshore advisers are facing a compliance burden similar to that of their onshore, non-US counterparts in the coming months.
