SEC Adopts Final Rules Regarding Exemptions from Investment Adviser Registration Applicable to Non-US Investment Advisers and Amends Form ADV

The Securities and Exchange Commission ("SEC") has adopted final rules under the US Investment Advisers Act of 1940, as amended ("Advisers Act"), that are designed to implement and give effect to the provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act").1 The final rules, adopted on 22 June 2011 by the SEC ("Final Rules"), among other things: (i) establish new exemptions from Advisers Act registration and reporting requirements for certain advisers; (ii) extend the compliance date for registration of certain previously unregistered advisers until 30 March 2012; and (iii) amend Form ADV.

Background

Effective 21 July 2011, the Dodd-Frank Act repealed the "private adviser exemption" on which many non-US advisers2 have relied in order to avoid registration with the SEC under the Advisers Act. The private adviser exemption has historically allowed a non-US adviser to avoid SEC registration if, among other requirements, the non-US adviser did not hold itself out to the public in the United States as an investment adviser and had fewer than 15 US clients during the preceding 12 months. A private fund typically qualified as a single client for purposes of the private adviser exemption. Thus, non-US advisers to private funds avoided registration under the Advisers Act by limiting themselves to advising a maximum of 14 private funds organised in the United States and other US client accounts. With the elimination of the private adviser exemption, non-US advisers to one or more US clients or with one or more US investors in any fund they advise generally will be required to register with the SEC, unless they can rely on another exemption.

The Dodd-Frank Act offers three new exemptions that are available to certain advisers that previously relied on the private adviser exemption. This DechertOnPoint focuses on the substantive obligations and reporting requirements for non-US advisers under two of those new exemptions: the "foreign private adviser exemption" and the "private fund adviser exemption".

Foreign Private Adviser Exemption Terms of Exemption

The first new exemption from registration for non- US advisers is an exemption for so-called "foreign private advisers" (the "Foreign Private Adviser Exemption"). Non-US advisers relying on the Foreign Private Adviser Exemption will be exempt from all registration, reporting and recordkeeping requirements of the Advisers Act but will continue to be subject to the anti-fraud rules and pay-to-play rules under the Advisers Act. Because these are the same requirements as applied to advisers previously relying on the former private adviser exemption, non-US advisers able to rely on the Foreign Private Adviser Exemption will experience little in the way of substantive change as result of the repeal of the prior exemption.

The Dodd-Frank Act defines a "foreign private adviser" as any investment adviser that, among other requirements:

has no place of business in the United States;3 has, in total, fewer than 15 US clients and US investors in private funds (regardless of where the fund is domiciled) advised by the adviser; has aggregate "Regulatory AUM" (as defined below) of less than $25 million attributable to US clients and US investors in private funds advised by the adviser; does not hold itself out generally to the public in the United States as an investment adviser; and does not advise US registered investment companies or US registered business development companies. Under the Final Rules, a "private fund" is any issuer that would be an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), but for the application of Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.4

This includes hedge funds, UCITS, OEICs and other types of funds organised outside the United States if they have US investors or are offered to US investors.

The Final Rules define certain other key terms used by Congress in the Dodd-Frank Act by generally using familiar rules and concepts already in use under the federal securities laws. For instance, the manner in which an adviser must count "US clients" and "US investors" refers to concepts such as how a non-US adviser would count the number of US beneficial owners for purposes of the 100 person limit in Section 3(c)(1) of the 1940 Act or limiting US investors to "qualified purchasers" for purposes of Section 3(c)(7) of the 1940 Act.5 Specifically, US clients and US investors are, subject to certain exceptions, to be identified based on the definition of "US person" in Regulation S under the Securities Act of 1933, as amended.6

Because the concept of being "in the United States" is integral to the Foreign Private Adviser Exemption, the Final Rules codify the existing interpretation that a person is only considered "in the United States" if such person is deemed to be in the United States at the time the person becomes a client of an adviser or, in the case of an investor in a private fund, each time the investor acquires securities of the fund. Advisers may treat an investor as being not "in the United States" if the adviser has a reasonable belief that an investor was not in the United States at the relevant measurement points (i.e., at the time the investor becomes a client or, in the case of a fund, each time an investor makes an investment).

Additionally, the Exemptions Release sets forth circumstances where an adviser must "lookthrough" certain structures and count as US clients and US investors for purposes of the 15-person threshold: (i) each beneficial owner of an investor that is a nominee account; (ii) each US investor in a feeder fund, if the feeder fund is formed or operated for the purpose of investing in the master fund; and (iii) each holder of a total return swap or other instrument that effectively transfers the risk of investing in the private fund to the holder.7

Foreign Private Adviser Exemption Likely to be of Limited Use

While attractive due to the limited requirements imposed on advisers relying on the exemption, the Foreign Private Adviser Exemption is quite narrow and likely will be unavailable to most non-US advisers that generally accept US persons as clients or investors in private funds. Each of the strict conditions of the Foreign Private Adviser Exemption must be met in order for an adviser to rely on the exemption. As a result, a foreign private adviser must monitor and limit both (i) the number of clients and investors in the United States and (ii) the amount of assets attributable to such clients and investors.8

The limit on assets attributable to clients or investors in the United States may...