The US President has this week signed the H.R. 4173 ‘Restoring American Financial Stability Act of 2010’ (which can be found via the link). Contained within ‘Title IV–Regulation of Advisers to Hedge Funds and Others’ (see section 401) ‘The Private Fund Investment Advisers Registration Act of 2010’ can be found. These provisions modify the Investment Advisers Act 1940 (the ‘1940 Act’) which sets out the requirements for registration with the SEC. The changes take effect 12 months from the President signing H.R. 4173. One effect of the Act will be that many non-US investment advisors will need to register with the SEC.
Under the amendments to the term ‘foreign private advisor’ in the 1940 Act, which forms the criteria for exemption from registration, the definition criteria will now include an investment advisor who ‘has, in total, fewer than 15 clients and investors in the United States in private funds advised by the investment adviser’. If a non-US asset manager has no place of business in the US, neither holds itself out generally to the public in the United States as an investment adviser nor advises registered investment companies or registered business development companies, has aggregate AUM attributable to US clients of less than $25m and has fewer than 15 US clients or investors then under the Act SEC registration would be not required. Non-US managers now face being required to conform to dual registration if they do not qualify for an exemption from registration.
Previous versions had not been clear on whether the ’15 clients’ included just the client(s) of the investment advisor – the fund – or the client(s) of that fund – the investors within the fund (see Regulatory Roundup #11, 7 & 5 for previous analysis). The lack of clarity over the definition of client for registration requirement purposes has therefore now been addressed by the inclusion of the word “investor” which the SEC would have power to define at a later date. However, the SEC will still have no power to define the word ‘client’ for the purposes of paragraphs (1) and (2) of section 206 of the 1940 Act (see section 406 of H.R. 4173 for these amendments), the antifraud provisions of the 1940 Act. On the same issue of definitions, the exemption for ‘venture capital fund advisors’ is present but the term is to be defined within a year from enactment by the SEC.
For US investment advisers, registration would not apply provided they have AUM in the US that is under $150m and if the investment advisor acts solely as an adviser to private funds (as per section 408 of H.R.4173). It is not entirely clear whether non-US advisors who do not qualify for the exemptions from registration as a foreign private advisor may benefit from this exemption or if this threshold applies per fund managed or per fund manager.