The SEC has now finalized the rules implementing
the Investment Advisers Act of 1940 (the "Advisers Act") changes,
which had been issued in proposed form near the end of 2010 following
passage of the Dodd-Frank Act earlier that summer. These rules went
into effect July 21, 2011. Fund managers who become obligated to register
must do so by March 30, 2012 by filing their applications on or prior to
February 14, 2012.
We are covering these new rules in the following series
of posts:
- Venture
Capital Fund Exemption (and grandfather rules)
- Private
Fund Advisers Exemption (Less Than $150 Million AUM in U.S.)
- Foreign
Private Adviser Exemption (This Article)
- Family Office Exemptions
- Reporting
Requirements of Exempt Fund Managers and Related Rules (article pending)
This article addresses the Foreign Private Adviser
Exemption. For any foreign fund managers reading this article - don't get
your hopes up, the exemption is very limited. The requirements are very
restrictive and we expect that very few foreign fund managers will be able to
qualify.
A significant benefit for those fund managers who do
qualify for this exemption, and one of the key differences between this
exemption and either the VC fund exemption (#1 above) or the Private Fund
Adviser Exemption (#2 above), is that fund managers exempt under the Foreign
Private Adviser Exemption have no exempt adviser reporting requirements (#5
above).
Requirements for Qualification:
- Does
not have a "place of business" in the United States.
- Has
less than $25 million in aggregate assets under management from U.S.
clients and private fund investors.
- Has
fewer than 15 clients and private fund investors.
- Does
not hold itself out generally to the public in the United States as an
investment adviser.
Place of business. To
qualify for this exemption, a foreign fund manager cannot have a U.S. place of
business (unlike the private fund adviser exemption). Whether an adviser has a
place of business will be determined in light of the relevant facts and
circumstances, which generally means any office where the investment adviser
regularly provides advisory services, solicits, meets with, or otherwise
communicates with clients, and any location held out to the public as a place
where the adviser conducts any such activities. The SEC has indicated that an
office from which an adviser regularly communicates with its clients (U.S. or
non-U.S.) or regularly conducts research would qualify as a "place of
business." By contrast, an office that solely provides administrative and
back-office activities generally would not be a "place of business" if such
activities are not intrinsic to providing investment advisory services and do
not involve communicating with clients. There is no presumption that a non-U.S.
adviser has a place of business in the U.S. solely because it is affiliated
with a U.S. adviser.
Investors the United States.
Whether a fund manager's clients are "U.S. persons" "in United States"
generally is governed by Regulation
S, with certain exceptions in the context of the foreign private adviser
exemption:
- If
an adviser reasonably believes that an investor or client is not "in the
U.S." at the time that they became an investor or client, the adviser
generally can treat such investor or client as not being "in the U.S."
Fund managers do not need to monitor the location of clients and investors
on an ongoing basis.
- Any
discretionary account owned by a U.S. person that is managed by a non-U.S.
dealer or professional that is affiliated with the foreign adviser
generally will be treated as "in the United States", to avoid
circumvention of the rule.
$25M Assets under management.
Assets are calculated under this exemption in the same manner as under the
private fund adviser exemption, by reference to the calculation of regulatory
assets under management (Item 5 of Form ADV). These calculations are summarized
in our private fund exemption summary, generally as follows:
Assets = (Market or Fair Value of Holdings) + (Uncalled Capital Commitments)
This calculation includes generally securities portfolios
to which the adviser provides continuous and regular supervisory or management
services, regardless of whether these assets are proprietary assets, and assets
managed without receiving compensation, or assets of foreign clients, including
uncalled capital commitments.
Fewer than 15 Clients and Private Fund
Investors. Essentially, this
test requires foreign fund managers to look through their private funds to
determine the number of underlying investors (e.g., the number of
limited partners in its funds). Advisers should determine the number of
investors in a private fund based on the facts and circumstances and in light
of the applicable prohibition not to do indirectly, what is unlawful to do
directly.
Clients.
Generally, an adviser may count as a single client a natural person and: (i)
that person's minor children (regardless of principal residency); (ii) any
relative, spouse, or relative of the spouse sharing a principal residence;
(iii) all accounts and trusts of which the natural person and/or any of the
persons listed above are the primary beneficiaries and share the same principal
residence. To avoid double-counting, an adviser need not count a the same
investor or client twice. Additionally, legal organizations with a singular
investment objective will be treated as a single client, as will two or more
legal organizations with identical shareholders, partners, members, or beneficiaries.
Similarly, an adviser need not count a person as an investor if the adviser
already counts such a person as a client of the adviser. The SEC has indicated
that it will, however, count persons advised without compensation against the
15 client cap.
Private Fund Investors includes
limited partners, shareholders, debt/equity securities holders, as well as any
person who would be included in determining the number of beneficial owners of
the outstanding securities of a private fund under section 3(c)(1) of the Investment Company Act, or
whether the outstanding securities of a private fund are owned exclusively by
qualified purchasers under section 3(c)(7) of that Act. In addition, a
beneficial owner of short-term paper issued by the private fund is also an
"investor", notwithstanding those exempted by 3(c)(1). However, knowledgeable
employees are not included in the definition of "investor". To avoid
double-counting, an adviser may treat as a single investor any person who is an
investor in two or more private funds advised by the investment adviser.
Holding itself out to the public as an
investment adviser. This is a facts and
circumstances analysis and few bright line rules are available. The rule
does clarify, however, that participation in a non-public offering in the U.S.
of securities issued by a private fund is not (by itself) holding yourself out
to the public as a U.S. investment adviser.
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