Cross-Border Concerns In Offering Services As An Investment Adviser In The United States: 10 Questions To Help Foreign Financial Advisors Analyze The Impact Of U.S. Investment Adviser Laws

The purpose of this article is to provide a framework for analysis and a summary overview of the application of U.S. investment adviser laws for foreign financial advisors who offer their services in the U.S. The following 10 questions will help foreign advisors through an analysis of the regulatory restrictions that may apply to their operations in the U.S.

1. Will you be an "investment adviser" under U.S. law?

   The federal Investment Advisers Act of 1940 (Advisers Act) and the rules and regulations of the Securities and Exchange Commission (SEC) are the principal source of regulation for financial advisors in the U.S. An analysis of the application of U.S. regulation to financial advisors begins with the meaning of the term "investment adviser" as it is defined under the Advisers Act.

   An investment adviser is any person who:

   for compensation engages in the business of

   advising others, either directly or through publications or writings,

   as to the value of securities or as to the advisability of investing in, purchasing and selling securities.

   The term also includes any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

   Generally, the SEC broadly interprets the concept of "engaging in the business" of advising, and if the adviser gives advice on a basis that constitutes a business activity and provides the advice with some regularity, then the adviser is "engaging in the business." The frequency of the activity is viewed as a factor but is not determinative. The staff of the SEC has also determined that for the purpose of determining investment adviser status, it is sufficient if the adviser gives general advice about the value or securities, such as market timing advice; the advice does not have to be about specific securities.

   References: Advisers Act section 202(a)(11); Investment Advisers Act Release No. 1092 (October 8, 1987).

2. Will you be you acting as an investment adviser in the U.S.?

   Under the literal wording of the requirement for investment advisers to register that is contained in the Advisers Act, the requirement would apply even to foreign investment advisers serving their foreign clients if they make use of any U.S. jurisdictional means (i.e., the U.S. mail or any means or instrumentality of interstate commerce) in connection with giving investment advice. Nevertheless, the staff of the SEC has interpreted the Advisers Act so as to regulate the activity of foreign advisers only where advisory conduct occurs within the U.S. or where the activity outside the U.S. produces substantial effects within the U.S. The U.S. is not viewed as having a significant regulatory interest in a relationship that involves neither clients nor advisory services within its borders.

   Under this "conduct and effects" theory, the Advisers Act does not govern the relationship between a foreign adviser and its clients that reside outside the U.S. The staff of the SEC has also generally taken the position that registration is not required where a foreign adviser uses a jurisdictional means solely to obtain research or to place orders for securities with U.S. registered brokers but does not use a jurisdictional means to solicit clients or give investment advice.

   Of course, under this approach if a foreign investment adviser uses a jurisdictional means to give investment advice from within the U.S. to foreign clients, or if a foreign investment adviser uses a jurisdictional means to give investment advice to clients within the U.S., then the Advisers Act will apply.

   References: Advisers Act section 203; Division of Investment Management, U.S. Securities and Exchange Commission, Protecting Investors, a Half Century of Investment Company Regulation, 227 (1992); Forty Four Management, Ltd., CCH Fed. Sec. L. Rep., 77,373 (Dec. 30, 1982).

3. Will you be exempted or excluded from U.S. federal investment adviser registration requirements?

   The Advisers Act provides that unless an investment adviser is registered, or unless the adviser is exempted or excluded from registration, it is unlawful for the adviser to use any jurisdictional means in connection with its business as an investment adviser.

   For foreign investment advisers who act as investment advisers in the U.S., the principal exemption that may apply is the exemption for private investment advisers, which generally exempts any investment adviser that had fewer than 15 clients during the course of the preceding 12 months and that does not holds itself out to the public as an investment adviser. If the adviser has its...