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Draft SEC Rules Relating to Registration of Investment Advisers Announced: Many Asian and European Based Managers Will Still Need to Register with the SEC

January 1, 0001

 

Proposed rules (the “Release”)1 announced by the U.S. Securities and Exchange Commission (the “SEC”) on 19 November 2010 have provided some much awaited clarity to Asian, European and other non-U.S. investment advisers to private equity and other alternative investment funds as to whether they will need to register under the Investment Advisers Act of 1940, (the “Advisers Act”) as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). Such clarity is welcomed, since those investment advisers who need to register with the SEC will need to have done so by no later than July 21, 2011 and therefore will need to start planning their application process imminently.

Much has already been written regarding the likely implications for non-U.S. investment advisers to private equity and other alternative investment funds with respect to the Dodd-Frank Act. Notably, the Dodd-Frank Act removed a much relied upon exemption to the Advisers Act under which many U.S. and non-U.S. investment advisers to private funds were able to avoid registering with the SEC even if they were managing substantial amounts of U.S. money.

The focus to date has revolved around the so-called “Foreign Private Adviser Exemption” which provides an exemption from the Advisers Act registration for “foreign private advisers”, being any investment adviser that:  


  • has no place of business in the U.S.; 
  • has, in total, fewer than 15 clients in the U.S and investors in the U.S. in private funds advised by the investment adviser; 
  • has aggregate assets under management attributable to clients and investors in the U.S. 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 U.S. as an investment adviser.

Many non-US managers will be disappointed that the SEC has, for now, passed up the opportunity to raise the $25 million threshold, despite having been granted the discretion to do so, and we anticipate that this will be the subject of significant comment from non-US managers. As drafted, the provision means that some relatively small managers will need to register, even though it is clear that they would not pose any kind of systemic risk to the U.S. financial system. We note, with some irony, that some investment advisers who manage funds from the U.S. (and who are therefore more likely to be focused on investing into U.S. companies) will - in certain circumstances - currently be exempt from SEC registration where assets being managed from the US are less than US$150 million.2

On a more positive note, the Release does provide some helpful interpretive guidance regarding the Foreign Private Adviser Exemption. In particular, it is now clear that it will not be necessary to count any underlying U.S. investors in a non-U.S. fund-of-funds as investors or clients for the purposes of the various thresholds described above, provided the fund-of-funds is not specifically structured to avoid registration.

A more detailed summary of the De Minimis Exemption and Foreign Private Adviser Exemption can be viewed here. It is also worth mentioning that there is another exemption that can potentially be utilized by non-U.S. investment advisers, the “Venture Capital Exemption”. Whilst this also appears to be relatively limited in scope, it will be the subject of a further alert, to be issued shortly.

The SEC has requested comments on the Release on or before 45 days after the publication of the Release in the Federal Register, which we expect will occur during the week of November 22, 2010. During its open meeting to propose the Release, the SEC encouraged all affected U.S. and non-U.S. advisers to participate in the comment process. We are in the process of drafting a comment letter and would encourage you to contact us with any questions, comments or concerns you might have regarding the proposed rules. Xuan Zhang will coordinate comments on behalf of our Asian clients and contacts. Alasdair Gordon and Lauren Dunford are coordinating comments on behalf of our European, African and Middle Eastern clients and contacts.


1. A complete copy of the proposed rules is available at http://www.sec.gov/rules/proposed/2010/ia-3111.pdf.

2. This exemption, known as the “De Minimis Exemption”, has actually been extended to non-U.S. managers, but appears likely to be of limited value since in its current form it only benefits a very small sub-set of foreign investment advisers who also manage funds out of a secondary office in the U.S.