Regulatory matters in the United States affect non-US investment advisers
render investment advisory services to clients in the US. This article
addresses key registration requirements and related matters that are relevant
to non-US investment advisers with a US clientele.
US Investment Adviser Legislation
The Investment Advisers Act of 1940, as amended, ("Advisers Act")
defines an investment adviser as 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, or selling securities, or who, for compensation
and as part of a regular business, issues or promulgates analyses or reports
concerning securities. The Advisers Act is within the purview of the Securities Exchange Commission
The regulatory scheme calls for registration of investment advisers with
a nexus to the US, subject to a number of exemptions. Assuming an adviser
is not holding itself out to the public as an investment adviser nor is
it advising registered investment companies (mutual funds) or business
development companies, its ability to fall within an exemption from registration
is generally based on three data points:
The amount of regulatory assets it has under management ("RAUM")
from US sources. Note that the RAUM computation is different from the
"assets under management" (“AUM”) computation or
the Net Asset Value computation (“NAV”) as two terms are generally
used in the industry;
- The arrangement utilized to provide the services (e.g. a managed account
or mandate versus a private fund structure); and
- Whether or not the adviser has a "place of business" in the US.
"Place of business" refers to the location where investment
discretion is exercised from which clients are communicated and solicited.
This is a broad definition, especially insofar as communication or solicitation
is concerned. Whether or not the location constitutes a "place of
business" is a question of fact to be determined on a case-by-case basis.
The impact of these three points will become apparent as the exemptions
Foreign Private Adviser Exemption
The rules contain an exemption for “foreign private advisers.”
If the investment adviser is a foreign private adviser, it is exempt not
only from registration requirements of the Advisers Act, but also form
the need to make a notice filing to the SEC, called an Exempt Reporting
Adviser (“ERA”) report.
The term 'foreign private adviser' refers to an investment adviser that:
- Has no place of business in the US; and
- Has fewer than 15 clients and investors in the US in private funds advised
by the investment adviser; and
Has RAUM attributable to clients and investors in the US in private funds
advised by the investment adviser of less than $25 million. RAUM includes assets not only from outside clients but also from principals,
assets for which no compensation is charged, and assets from so called
"knowledgeable employees" and
- Neither (i) holds itself out generally to the public in the US as an investment
adviser; nor (ii) acts as (a) an investment adviser to any investment
company registered under the Investment Company Act of 1940, as amended
("Company Act") or (b) an investment adviser to a business development company.
When applying the provisions of the foreign private adviser exemption,
it is important to consider the following:
The method of counting to 15 clients is a departure from the way it has
traditionally been done in the US. Previously, there was no look-through
with respect to a fund-the fund was counted as a single "client."
In computing the number for purposes of this exemption, clients andinvestors in the US are taken into account so one needs to count each of the
investors in a private fund for purposes of the foreign private adviser exemption.
An adviser can treat as:
- a single client
- a natural person as well as (i) that person's minor children; (ii)
any relative, spouse, or a person with the same principal residence as
such client; and (iii) all accounts and all trusts of which that person
and/or the person's minor child or relative, spouse or relative of
the spouse with the same principal residence are the only primary beneficiaries.
Advisers can also treat as a single client a corporation, general or limited
partnership, trust or other legal organization to which the adviser provides
legal advice, as well as two or more legal organizations that have identical
shareholders, partners, limited partners, member or beneficiaries.
- In the case of a master-feeder arrangement, the count is to occur at the
first feeder level and not beyond.
- Unfortunately, the rules are silent as to the ability of an adviser to
rely on representations or certifications of others as to the presence
or lack thereof of US Persons in a fund, or behind a nominee arrangement,
et al. Presumably a good faith standard prevails.
- The definition of US Person follows the definition used in Regulation S
(governing non-US sales of securities).
If the foreign private adviser exemption is not available (because perhaps
the adviser has a place of business in the US or more likely has RAUM
attributable to US clients and investors in excess of $25 million), one
of several of the following exemptions may provide a separate route to
exemption from registration. These however require ERA filings.
Commodity Trading Advisers - Coordinating With the Commodity Futures Trading
Traders in commodities continue to face registration with the CFTC and
the National Futures Association ("NFA") as in the past.
There are numerous exemptions available. Those are set forth at:
http://www.cftc.gov/ IndustryOversight/Intermediaries/CPOs/cpoctaexemptionsexclusions and not repeated here.
Other Items to Keep In Mind
- Generally, private equity funds and managers are covered by these rules
but venture capital managers are not. There are special definitions and
guidelines relating to venture capital.
- There are short-selling rules calling for monthly disclosure of relevant
data to the SEC.
- Also to be considered are rules with regard to swaps and derivatives, the
regulation of which is divided between the SEC (in the case of security-based
swaps) and the CFTC (in the case of all other swaps).
- FATCA and other tax requirements need to be observed.
Exempt Reporting Advisers
The SEC has reporting requirements for investment advisers claiming an
exemption from federal registration which requires them to fill out and
file certain portions of Form ADV on an annual basis. Any adviser claiming an exemption under the Advisers
Act (other than a foreign private adviser) must submit an initial Form
ADV within sixty (60) days of relying on such exemption. In addition,
any exempt reporting adviser must file an updated Form ADV annually within
ninety (90) days of the end of the adviser's fiscal year. An exempt
reporting adviser must also file more frequent updates if certain Form
ADV responses become inaccurate. Finally, an adviser must file an amendment
to its Form ADV to indicate that it is filing a final report once it no
longer relies on an exemption from registration.
Even if a non-US adviser takes advantage of one of the exemptions from
SEC registration discussed above, it will still be subject to the US securities
laws' anti-fraud provisions. Section 206 of the Advisers Act makes
it unlawful for any investment adviser to, directly or indirectly:
employ any device, scheme, or artifice to defraud any client or prospective client;
- engage in any transaction, practice or course of business that operates
as a fraud or deceit upon any client or prospective client;
- act as principal for his own account, knowingly to sell any security to
or purchase any security from a client, or acting as broker for a person
other than such client, knowingly to effect any sale or purchase of any
security for the account of such client, without disclosing to such client
in writing before the completion of such transaction the capacity in which
he is acting and obtaining the consent of the client to such transaction.
These prohibitions do not apply to any transaction with a customer of
a broker or dealer if such broker or dealer is not acting as an investment
adviser in relation to such transaction; or
engage in any act, practice, or course of business which is fraudulent,
deceptive, or manipulative.
While the rules affecting non-US investment advisers that deal with US
Persons are complex, they are becoming more defined, such that with the
appropriate advice compliance is quite manageable.
For more information on the topic discussed, contact
Michael G. Tannenbaum at
firstname.lastname@example.org or at 212-508-6701 or the partner with whom you deal at the law firm.
Michael G. Tannenbaum, is a founding partner of Tannenbaum Helpern Syracuse & Hirschtritt
LLP in New York and is co-head of its Financial Services, Private Funds
and Capital Markets Practice.
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 Exempt reporting advisers must complete Items 1, 2.B., 3, 6, 7, 10 and
11 of Form ADV.
 For the purpose of the anti-fraud provisions of the Advisers Act, a “client”
does not include an investor in a private fund managed by an investment adviser.
 The SEC is required to define, and prescribe means reasonably designed
to prevent, such acts, practices, and courses of business as are fraudulent,
deceptive, or manipulative.
 Advisers Act Section 202(a) (ll). Certain categories of persons and entities
are specifically excluded from this definition, such as banks, broker-dealers
whose investment advisory services are solely incidental to their regular
business, service providers such as lawyers and accountants and publishers
of newspapers and other periodicals. And there is a family office exception
imbedded within the definition.
 RAUM includes all securities portfolios for which an investment adviser
"provides continuous and regular supervisory or management services,
regardless of whether these assets are family or proprietary assets, assets
managed without receiving compensation, or assets of foreign clients."
Moreover, the RAUM computation starts with gross assets, without subtracting
any liabilities. Clearly it differs from NAV.
 The SEC has the authority to increase this amount but as yet has chosen
not to so.
 This is a term used under the Investment Company Act when applying section 3(c)(7).