Private Fund Investment Advisers Registration Act of 2009

December 14, 2009


O'Melveny has issued a series of alerts about the Private Fund Investment Advisers Registration Act of 2009:



On December 11, 2009, the House of Representatives (the “House”) approved the Wall Street Reform and Consumer Protection Act of 2009 (the “Wall Street Reform Act”), which was originally introduced to the House for debate on December 2, 2009 by House Financial Services Committee Chairman Barney Frank (D-MA). Included within the Wall Street Reform Act is the Private Fund Investment Advisers Registration Act of 2009 (the “Approved PFIARA”).[1] We previously analyzed a proposed version of the PFIARA (the “Proposed PFIARA”) in an O’Melveny & Myers Client Alert dated December 8, 2009 (Click to read “Private Fund Investment Advisers Registration Act of 2009,” a December 2009 O’Melveny Client Alert).

On December 10, 2009, amendments were introduced in the House that changed portions of the Proposed PFIARA as analyzed in our prior Client Alert. Discussed below are those amendments that were approved by the House and that would limit the exemptions from registration available to investment advisers under the Proposed PFIARA. Also discussed below are new obligations imposed on registered investment advisers with respect to the custody of client assets.

The “Foreign Private Adviser” Exemption

The amendments limit the exemption from registration available to non-U.S. investment advisers and greatly restrict their ability to solicit U.S. capital without being subject to registration. The Proposed PFIARA exempted from registration under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) “foreign private advisers,” defined as investment advisers that (i) have no place of business in the U.S., (ii) do not generally hold themselves out to the public in the U.S., (iii) have fewer than 15 “clients” in the U.S., and (iv) have less than $25 million in assets under management that are attributable to U.S. “clients.” Under the current interpretation of the Advisers Act, the term “client” includes only persons or entities that have a direct advisory relationship with the adviser. In the case a private investment fund, the fund itself would be considered to be the client of the adviser, but the underlying investors in the fund would not be clients. The Approved PFIARA formally adopts this interpretation and prohibits the Securities and Exchange Commission from including the underlying investors of a private investment fund in the definition of “client” so long as such fund has entered into an advisory agreement with the adviser.

Consequently, a non-U.S. investment adviser would not be required to register under the Proposed PFIARA if it advised less than a combined 15 private investment funds in the U.S. (regardless of whether non-U.S. investment funds managed by the adviser include U.S. investors) and natural persons or entities in the U.S. who have a direct advisory relationship (e.g., through a managed account) with the adviser. Furthermore, in calculating the assets under management attributable to U.S. clients, in the event U.S. investors invest in a non-U.S. investment fund, such investments would not be deemed to be assets under management attributable to U.S. clients.

The Approved PFIARA narrows the “foreign private adviser” exemption by requiring the adviser to have (i) in total fewer than 15 clients and investors in the U.S. and (ii) less than $25 million aggregate assets under management attributable to clients and investors in the U.S. in private funds. As a result, a non-U.S. investment adviser would be required to register under the Advisers Act if it has more than 14 U.S. investors in non-U.S. private investment funds (including any U.S. investors which have direct advisory relationships with the adviser through a managed account), or if more than $25 million of assets in non-U.S. investment funds managed by the adviser consist of assets invested by U.S. investors.

Advisers with Assets Under Management of Less than $150 Million

Under the Proposed PFIARA, investment advisers would not be subject to registration as an investment adviser with the Securities and Exchange Commission if each “private fund” [2] that it managed had less than $150 million of assets under management. As a result, investment advisers would have been able to manage an unlimited number of “private funds” and not be subject to registration so long as each private fund remained below the $150 million assets under management threshold. Under the Approved PFIARA, this exemption would only be available to an investment adviser who solely provides advice to “private funds,” and who has less than $150 million in assets under management. As a result, investment advisers who have direct advisory relationships with clients (e.g., through managed accounts) or have assets under management of $150 million or more cannot rely on this exemption.

Custody of Client Assets

The Approved PFIARA would limit the ability of registered investment advisers to rely on the “privately offered securities” exemption from Rule 206(4)-2 of the Advisers Act (the “Custody Rule”). The Custody Rule generally provides that when a registered adviser has “custody”[3] of client assets, such assets must be maintained in the client’s name (or under the adviser’s name as agent or trustee) with a qualified custodian (generally a bank, trust company, or registered broker-dealer). Recognizing that certain securities acquired through privately negotiated transactions would be difficult to custody with a qualified custodian, the Custody Rule provides an exception for certain privately offered securities. Privately offered securities are exempt from the requirements of the Custody Rule, and include securities that are (i) acquired in a private offering, (ii) uncertificated, and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of the client, and (iii) transferable only with the prior consent of the issuer.

The Approved PFIARA would require the Securities and Exchange Commission to adopt a rule prohibiting registered investment advisers from maintaining custody of client funds or securities in excess of $10 million (including privately offered securities) unless (i) the funds and securities are maintained with a qualified custodian either in a separate account for each client under the client’s name, or in accounts that contain only client funds and securities under the name of the investment adviser as agent or trustee, and (ii) the qualified custodian does not directly or indirectly provide investment advice with respect to such funds and securities. Under the Approved PFIARA, the Securities and Exchange Commission would be able to provide exemptions to these requirements provided that clients annually receive a report from an independent person with a fiduciary responsibility to the client to verify that the assets in the client’s account are in accord with those stated in the client’s account statement.

[1] The Senate is in the process of reviewing a similar bill which was introduced by Senate Banking Committee Chairman Christopher Dodd (D-CT) on November 10, 2009 (the “Dodd Bill”). The Dodd Bill is still subject to a mark-up and final vote from the Senate.

[2] Both the Proposed and Approved PFIARA define a “private fund” as a fund that would be deemed an “investment company” under the Investment Company Act of 1940 (the “1940 Act”), but for the exceptions in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.

[3] The Custody Rule defines “custody” broadly and contemplates situations in which the adviser has only constructive custody over client assets. An adviser has custody over client assets (i) when it has physical possession of client assets (e.g., the adviser holds a client’s stock certificates), (ii) through an arrangement (e.g., a power of attorney) whereby the adviser is authorized to withdraw client assets maintained with a qualified custodian or deduct advisory fees or other expenses from client accounts maintained with a qualified custodian, or (iii) through a legal capacity or relationship of the adviser or a supervised person of the adviser (e.g., the general partner of a partnership).

Please contact Chris Salter at (202) 383-5371 if you would like to discuss the registration process and the various obligations you will be required to comply with once registered.

The attorneys in O'Melveny's global Investment Funds, Securitization, and Investment Adviser Regulation and Compliance practices are actively engaged in the key areas of law affecting investment funds, including corporate law, partnership law, tax, ERISA and U.S. and non-U.S. securities laws. To discuss these matters further, please contact any of the following lawyers, or your primary contact at O'Melveny & Myers LLP.


Dean Collins


John Daghlian


Harvey M. Eisenberg

(212) 408-2416

Deborah Festa

(213) 430-6323

Phillip Isom

(212) 408-2418

Ilan S. Nissan

(212) 408-2443

Daniel Passage

(213) 430-6618

Christopher Salter

(202) 383-5371

Kathryn Sanders

(213) 430-6376

Bill Satchell

(202) 383-5342

Barbara Stettner

(202) 383-5283

Kenneth J. Yellen

(202) 383-5228