On January 18, 2012, the Securities and Exchange Commission’s Division of Investment Management staff issued a no-action letter in response to the American Bar Association’s (“ABA”) request for interpretive guidance
with respect to the registration of related entities of a registered investment adviser, in light of rule changes adopted pursuant to the Dodd-Frank Act. The SEC staff addressed two broad categories of issues: (1) questions relating to registration of certain special purpose vehicles (“SPVs”) established by investment advisers and (2) questions relating to multiple advisers collectively conducting a single advisory business. The staff explained that its December 8, 2005 letter to the American Bar Association’s Subcommittee on Private Investment Entities (the “2005 Letter”) continued to represent its position on registration of certain SPVs. The staff also enumerated the conditions under which it would not require separate registration of parallel advisory entities in a single control relationship. The no-action letter is available here
In the 2005 Letter, the staff stated that it would not recommend enforcement action under Section 203(a) or Section 208(d) of the Investment Advisers Act of 1940 against a registered adviser and an SPV if the SPV did not separately register as an investment adviser, provided the following conditions (the “2005 Conditions”) were met:
(i) The SPV was established by a registered investment adviser to act as a private fund’s general partner or managing member;
(ii) The SPV’s formation documents designated the registered investment adviser to manage the private fund’s assets;
(iii) All of the investment advisory activities of the SPV were subject to the Advisers Act and rules under the act, and the SPV was subject to SEC examination; and
(iv) The registered investment adviser subjected the SPV, its employees, and persons acting on its behalf to the registered adviser’s supervision and control.
In a letter dated January 18, 2012, the ABA asked the staff whether its position remained the same with respect to separate registration of SPVs, in light of the Dodd-Frank Act’s repeal of the registration exemption for advisers having fewer than 15 clients. The ABA also posed several questions relating to the registration of certain SPVs and separate advisers under common control.
Separate Registration Not Required for SPVs Established by Registered Investment Adviser to Act as Private Fund’s General Partner or Managing Member
The staff explained that the 2005 Letter continued to represent its position on registration of SPVs meeting the 2005 Conditions. It further explained that the 2005 Letter is not limited to a registered adviser with a single SPV but applies where a registered adviser has sponsored multiple funds and multiple SPVs each for a separate fund. Importantly, with respect to an SPV that employs directors independent of the registered investment adviser, the staff stated that it would not recommend an enforcement action if the registered adviser and SPV meet the 2005 Conditions provided that the independent directors are the only persons acting on the SPV’s behalf that the registered adviser does not supervise and control.
Staff Will Not Recommend Enforcement Action for Failure to Register by Separate Advisers Under Common Control Collectively Conducting a Single Advisory Business
The staff explained that Form ADV was not designed to combine information about separately formed advisers that conduct different advisory businesses, even if those advisers are related to one another because of a control relationship. It stated, however, that it would not recommend enforcement action against an investment adviser that files a single Form ADV on behalf of itself and each other adviser that is controlled by or under common control of the filing adviser that is registered through a single registration where the filing adviser and each relying adviser collectively conduct a single advisory business. Absent other facts suggesting that the advisers conduct different businesses, the staff stated that a single registration would be appropriate if:
(i) Such advisers advise only private funds and separate account clients that are qualified clients (as defined in Advisers Act rule 205-3) and are otherwise eligible to invest in the private funds advised by the adviser, and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds;
(ii) Each relying adviser, its employees, and the persons acting on its behalf are subject to the filing adviser’s supervision and control and, therefore, qualify as “persons associated with” the filing adviser within the meaning of section 202(a)(17) of the Advisers Act;
(iii) The filing adviser has its principal office and place of business in the United States;
(iv) The advisory activities of each relying adviser are subject to the Advisers Act and rules under the Act, and each relying adviser is subject to examination by the SEC;
(v) The filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with Advisers Act rule 204A-1 and a single set of written policies and procedures adopted and implemented in accordance with Advisers Act rule 206(4)-(7) and administered by a single chief compliance officer in accordance with that rule; and
(vi) The filing adviser discloses in its Form ADV that it and its relying advisers are together filing a single Form ADV in reliance on the position expressed in the staff’s no-action letter and that each relying adviser is separately identified in the appropriate sections and schedules.
We have had a conversation with the staff regarding whether hedge fund and private equity fund businesses are by definition separate businesses. The staff stated that although any conclusion as to registration would require analysis of the particular facts, hedge fund and private equity fund businesses may be treated as one business.
O’Melveny & Myers LLP is available to advise registered investment advisers to ensure registration practices consistent with the conditions set forth in the SEC’s no-action letter. For questions, please contact the attorneys listed above or any other O’Melveny & Myers LLP attorneys with whom you ordinarily work on related matters.