New Investment Adviser Act exemptions for non-US advisers

With effect from 21 July 2011, the Dodd-Frank Act will repeal the private adviser exemption from registration under the US Investment Advisers Act of 1940 and replace it with a number of new, but more limited, exemptions from registration under that Act. This briefing is intended to provide a general summary of certain of these legal developments as they relate to non-US investment advisers.

With effect from 21 July 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) will repeal the so-called “private adviser exemption” from registration under the Investment Advisers Act of 1940, as amended (the Advisers Act). In replacement of the private adviser exemption, the Dodd-Frank Act effectively creates a number of new, but more limited, exemptions from registration under the Advisers Act. As required by the Dodd-Frank Act, on 22 June 2011, the US Securities and Exchange Commission (the SEC) adopted a number of rules implementing, among other things, these new exemptions and establishing certain compliance deadlines.

In addition to being mindful of these new exemptions in conducting their business going forward, non-US investment advisers who manage investment funds that in the past were offered on a private placement basis to US persons or into the United States should now carefully review their position in relation to this new exemptive regime.

The following frequently-asked questions are intended to provide a general summary of certain of these legal developments as they relate to non-US investment advisers. They are not intended to be a full analysis of the law or its application to any particular investment adviser.

Historically, under the private adviser exemption, repealed with effect from 21 July 2011, a non-US investment adviser is generally required to register under the Advisers Act if it has managed 15 or more US clients over the preceding 12 months or it has held itself out to the US public as an investment adviser or both. Generally speaking, each fund a non-US investment adviser manages was considered one client for these purposes if it is organized or has offices in the United States. There was no limit on the amount of assets under the management of the investment adviser under the private adviser exemption.

The Dodd-Frank Act creates a new exemption from registration for non-US investment advisers, which is called the “foreign private adviser exemption”. A foreign private adviser is generally defined by the SEC to mean an investment adviser that:

• has no place of business in the United States
• has, in total, fewer than 15 clients in the United States and investors in the United States in private funds advised by the investment adviser
• has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25 million and
• does not hold itself out generally to the public in the United States as an investment adviser.

There are a number of well-established counting conventions that must be followed under the SEC’s rules, but it is important to note that the new foreign private adviser exemption expressly requires the investment adviser to look through the funds it advises to “investors in the United States in private funds advised by the adviser” for purposes of determining its number of clients. Likewise, the new exemption includes a “$25 million assets under management” ceiling and requires the inclusion of funds under management from those US private fund investors in the calculation.

Non-US investment advisers that do not meet all of the relevant requirements will be required to register under the Advisers Act absent another exemption.

Yes, there are a number of other exemptions that possibly could be relied upon, depending on the circumstances of the investment adviser and the funds it has under management. For example, there are exemptions for advisers that only advise “venture capital funds” or who merely act as “family offices”, in each case as narrowly defined by the SEC. However, perhaps the most relevant of the other exemptions is a new “private fund adviser exemption.” Under this exemption, any investment adviser with “its principal office and place of business outside of the United States” is exempt from SEC registration if:

• the investment adviser has no client that is a United States person except for one or more qualifying private funds and
• all assets managed by the investment adviser at a place of business in the United States are solely attributable to private fund assets, the total value of which is less than $150 million.

It should be noted that under this exemption all of the investment adviser’s US person clients must be qualifying private funds, or in other words they are generally exempt from registration under the Investment Company Act of 1940, as amended (the Investment Company Act), in reliance upon Section 3(c)(1) or Section 3(c)(7) under that Act. This element of the exemption is determined without regard to nature or type of the adviser’s non-US clients.

It also should be noted that the $150 million ceiling applies only in relation to assets under management at a place of business in the United States. In other words, it is determined without regard to assets under management at places of business outside the United States.

In addition, as is more fully described below, the SEC refers to investment advisers that rely on the private fund adviser exemption (as well the venture capital exemption not discussed here) as “exempt reporting advisers” and will require such advisers to maintain such records and to submit such reports as the SEC determines necessary or appropriate in the public interest or for the protection of investors.

Going forward, advisers relying upon the private fund adviser exemption, as so-called exempt reporting advisers, will be required to file Form ADV with the SEC and thereafter update it annually and upon the occurrence of certain events. Form ADV is the form that is filed by investment advisers registered under the Advisers Act; however, exempt reporting advisers will not be required to complete the entire form. Instead, in general terms they will be required to provide information about (i) who they are, (ii) who owns or controls them, (iii) what other activities they are engaged in, (iv) the private funds they advise and (v) the disciplinary history of the adviser and its employees, among other things. The SEC has specifically indicated that it currently will not require disclosure of the following information: (a) each private fund’s net assets; (b) the private fund’s assets and liabilities separated by class and categorisation in the fair value hierarchy; and (c) the percentage of each fund owned by particular types of beneficial owners. The SEC has also made clear that a non-US fund that has never used US jurisdictional means in the offering of securities (roughly, in other words, has not offered its securities in the United States), would not be a “private fund” within the meaning of the rule and therefore would not be subject to any of the fund-specific disclosure requirements in Form ADV. The information filed on Form ADV will be publicly available.

Exempt reporting advisers effectively have until between 1 January and 31 March 2012 to file their initial Form ADV. Following this initial compliance period, the adviser must submit its initial Form ADV within 60 days of relying on the exemption from registration under the Advisers Act.

Exempt reporting advisers must update the form at least annually within 90 days of the end of its fiscal year, or more frequently as may be required by Form ADV (such as changes to basic identification information, form of organisation, disciplinary information or control persons). Should an adviser cease to be a private fund adviser for any reason, it is required to file an amendment to its Form ADV indicating that it is filing a final report.

Advisers filing the form must pay an annual filing fee designed to pay the reasonable costs associated with the filing and maintenance of the system. Although not yet set, the fee is currently expected to range from $40 to $225 based on the amount of assets an adviser has under management.

The SEC has not yet set any specific additional record keeping requirements for exempt reporting advisers, and has said that it will address the issue in a future rule making. The SEC also indicated that it does not anticipate that its staff will conduct compliance examinations of exempt reporting advisers on a regular basis, but instead where there are indications of wrongdoing, e.g. those examinations prompted by tips, complaints and referrals.

It should be emphasised that advisers who are relying on the foreign private adviser exemption are not subject to these requirements.

No, non-US advisers remain potentially subject to the Advisers Act‘s antifraud provisions, including in the case of exempt reporting advisers to those applicable to reports filed with the SEC.

If none of the relevant exemptions from registration are available, the non-US adviser will need to consider either (i) restructuring its business to ensure an exemption is available or (ii) registering itself or one of its affiliates with the SEC or alternatively, in certain circumstances, the state in which the adviser maintains its principal office and place of business in the United States.

Given the substantive requirements and the costs and on-going burdens of being registered under the Advisers Act, SEC registration should not be undertaken lightly. Preparing for registration can take three or four months (and sometimes significantly more) as the adviser must be fully compliant with the requirements of the Advisers Act from the date of effectiveness of registration. The formal process involves filing and SEC review of a complete Form ADV (not just the more limited information described above). Once the adviser has filed the form, the SEC is generally required to approve the registration or commence the denial of the registration within 45 days.

An adviser that was relying on, and was entitled to rely on, the private adviser exemption may delay registering with the SEC until 30 March 2012, although because initial applications for registration can take up to 45 days to be approved, advisers should file a complete application by 14 February 2012 at the latest.

It should be noted that SEC generally does not require registered non-US investment advisers to comply with many of the substantive requirements of the Advisers Act in respect of its non-US clients.

Under the Dodd-Frank Act, from 21 July 2011, an investment adviser generally will not be permitted to register with the SEC if: (i) it has between $25 million and $100 million under management; (ii) it is required to be registered as an investment adviser in the state in which it has its principal office and place and (iii) it will be subject to examination as an investment adviser by the relevant state securities commissioner. As a consequence, some investment advisers will be required to register with one or more state regulators instead of the SEC.

Under the Dodd-Frank Act, the new foreign private adviser and private fund adviser exemptions are both effective from 21 July 2011. As discussed above, however, advisers relying upon the private fund adviser exemption will not have to file their initial Form ADV until between 1 January and 30 March 2012 and advisers registering for the first time will have until 14 February 2012 to file a complete Form ADV in order to receive SEC approval by 30 March 2012.