Published: 9th August 2010

Following on from Regulatory Roundup #17 we have had requests for further details on the regulatory developments within the US.

As you will know, the ‘Dodd Bill’ was enacted on 21 July which will have an impact on both certain US investment advisers and non-US investment advisers that have US clients. The full title of the Act was recently renamed the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘DF Act’). It is a large Act (848 pages) and covers many areas.

Out of the 1601 sections in the Act, this article provides an overview on sections 401 to 416 (‘Title IV – Regulation of Advisers to Hedge Funds and Others’). Based on the linked document provided, the relevant sections start on page 195. What is of interest to us in these sections are the changes to the ‘Investment Advisers Act of 1940’.

The SEC refers to the Investment Advisers Act of 1940 (‘IA Act’) as found at Cornell University Law School as a ‘more current version’ than others (see link). The IA Act as it currently stands can be found in Subchapter II. Unfortunately there is currently no one document that shows the ‘before and after’ effect of the DF Act on IA Act.

When quoting legislation in this article a reference to ‘Sec’ refers to the relevant areas of the DF Act; references to ’80a’ or ’80b’ refer to the relevant area of the IA Act.

The definition of an ‘investment adviser’ (together with a list of exclusions such as ‘an engineer or teacher’ within that definition) is included (11) among 28 definitions in 80b-2. The DF Act changes will add to the definitions: ‘private fund’ (29) (which in turn requires reference to 80a-3) and ‘foreign private adviser’ (30).Corresponding changes are made to 80b-3(b) e.g. the private adviser exemption is removed.

Before the DF Act, the private adviser exemption meant any adviser that had fewer than 15 clients in the preceding 12 months and who didn’t hold themselves out generally to the public as an investment adviser did not need to be registered.

The SEC v Goldstein case of 2006 reaffirmed that the definition of ‘clients’ as including funds managed and not the investors in those funds.

As mentioned above, the Dodd-Frank Act removes the private adviser exemption. The effect for US advisers is that is that it is going to require many of them to register, but not necessarily with the SEC (see below).

There is some exemption from SEC registration for non-US (‘Foreign’) advisers provided they (a) have no place of business in the US; (b) have in total fewer that 15 clients and investors in the US in private funds advised by the investment adviser; (c) has aggregate assets under management attributable to clients and investors in the US of less than $25m; and (d) do not hold themselves out generally to the public in the US. Reference should be made to the Act for the precise wordage.

Note that the above exemption now refers to ’15 clients and investors’. Hence before the DF Act, a hypothetical foreign adviser of one fund with 100 investors would be exempt from SEC registration as, post Goldstein, it would have been deemed to have ‘fewer than 15 clients’. However post DF Act the foreign adviser would fail the ‘fewer than 15 clients and investors in the US’ test and will require SEC registration.

Currently, under 80b-3a advisers that have assets under management of less than $25m and that are (State) regulated in their home State are not allowed to register with the SEC. Sec 410 of DF Act effectively increases this level to $100m.Note that there are exemptions to this including if adherence to this requirement would mean having to register in 15 or more States. The effect of this is that a (one State) US adviser advising a fund of, say $50m, would not have to register with the SEC whilst a foreign adviser advising a similar sized fund would have to register with the SEC.

Under the DF Act, advisers that only advise Venture Capital Funds (not yet defined) will be exempt from the registration requirements (Sec 407).However they will be subject to record keeping and reporting requirements (yet to be established).

Advisers that only advise ‘private funds’ (see earlier in this paper) will be exempt from registration requirements provided assets under management are less than $150m.However they will be subject to record keeping and reporting requirements (yet to be established).

Family Offices (not yet defined) will be excluded from the definition of ‘investment adviser’ and the need to register.

Those advisers that are required to register with the SEC should refer to Sec 404 ‘Collection of systemic risk data; reports; examinations; disclosures’. Records and reports required include ‘trading practices’ and ‘amount of assets under management and use of leverage, including off-balance-sheet leverage’.

Note that there is a one year transitional period before the registration provisions come into effect. During this time the SEC will have to issue final rules including those defining certain terms e.g. ‘venture capital fund’.

Summary

Advisers advising less than $100massets under management (‘AUM’) will not be required (or permitted) to register with the SEC and instead will be subject to State registration (unless it would involve having to register with 15 or more States in which case registration with the SEC can be effected).

Advisers advising AUM more than $100mthat do not qualify for the private funds exemption will have to register with SEC.

Advisers advising solely ‘private funds’ with AUM less than $150mwill not have to register with the SEC.

Family Offices and advisers to Venture Capital Funds will be exempt from registration.

Note that even if an exemption applies the adviser may still be subject to reporting and record keeping requirements.

Advisers that can satisfy all the following criteria will not need to register with the SEC: (a) have no place of business in the US; (b) have in total fewer that 15 clients and investors in the US in private funds advised by the investment adviser; (c) has aggregate assets under management attributable to clients and investors in the US of less than $25m; and (d) do not hold themselves out generally to the public in the US. Reference should be made to the Act for the precise wordage.

How Complyport can help

Complyport can assist firms seeking SEC authorisation and, where necessary, can bring in help in association with Ascendant Compliance Management, (“ACM”), a leading US compliance consultancy with which we have a long-standing relationship. Complyport already has a strong track record of helping firms gain SEC authorisation and can draw on ACM’s expertise should firms require assistance with more complex US regulatory queries.

Please contact us at info@complyport.co.uk or call +44 (0)20 7399 4980 to discuss your requirements.

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