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SEC Proposed Rules Aim at Removing Confusion about the Registration of Affiliated Investment Advisers – Umbrella Registrations

For various tax and regulatory reasons, investment advisers to private funds routinely establish multiple entities which effectively comprise and operate as a single advisory business.[2] Dodd-Frank often requires these affiliated entities to register in their own right as investment advisers. Since the current Form ADV is designed for a single adviser, this has led to multiple ADV filings and registrations, which in the US Securities Exchange Commission’s (“SEC”) view has or can lead to distortions and confusion.

In 2012, the SEC wrote to the American Bar Association (“2012 ABA Letter”) and provided guidance with regard to the affiliated adviser issue. The Release continues the core principles of the 2012 ABA Letter and expands upon it. That said, the SEC will continue to treat two or more affiliated advisers that are separate legal entities but are operationally integrated as a single adviser, but it plans to revise Form ADV to accommodate these organizational structures and add a new Schedule R for affiliate advisors. The proposal is geared towards US investment advisers; however, treatment of non-US investment advisers is also addressed in this article.

Key Definitions

Three key definitions in understanding the Umbrella Registration rules set out in the Release:[3]

  1. “Umbrella Registration”: a single registration by a Filing Adviser and one or more Relying Advisers who collectively conduct a single advisory business and meet the conditions set forth in the Release.
  2. “Filing Adviser”: an investment adviser eligible to register with the SEC that files a single umbrella registration on behalf of itself and each of its Relying Advisers.
  3. “Relying Adviser”: an investment adviser eligible to register with the SEC that relies on a Filing Adviser to file a single Umbrella Registration on its behalf. The Relying Adviser would continue to be required to register in its own right.

SEC’S 2015 Proposal – US Based Advisers

Under the Release, an Umbrella Registration will be available to a Filing Adviser and one or more Relying Advisers that operate as a single private fund advisory business and each Relying Adviser is controlled by or under common control of the Filing Adviser. Additionally, the following proposed conditions must also be met to file as Umbrella Registration:

  1. The Filing Adviser and each Relying Adviser advise only private funds or both funds and separately managed accounts for clients that are “Qualified Clients” (as defined in Rule 205-3). In addition, such Qualified Clients are eligible to invest in the private funds advised by the Filing Adviser or a Relying Adviser and whose separate accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those of the private funds.[4]
  2. The Filing Adviser has its principal office and place of business in the US and all of the substantive provisions of the Advisers Act apply to the Filing Adviser and each Relying Adviser, regardless of whether or not such advice is to a US Person. Non-US advisers will continue to look to the SEC’s Unibanco ruling and its progeny as to affiliate registrations.[5]
  3. Each Relying Adviser and its employees are subject to the Filing Adviser’s supervision and control, as such that they are “associated” with the Filing Advisers
  4. Both Filing Adviser and the Relying Adviser are subject to examination by the SEC
  5. Filing and Relying Advisers share the same Code of Ethics and written policies and procedures as required by the Advisers Act.

An adviser relying on Umbrella Registration would need to file a Form ADV that contains information about itself and each Relying Adviser and would file a Schedule R with regard to each Relying Adviser.

Non-US Based Advisers – Unibanco

Unibanco refers to a SEC no-action letter, and a series of follow on no-action letters, involving a non-US entity that is an investment adviser with US clients and is therefore usually required to register with the SEC as a registered investment adviser (“RIA”).[6] Unlike the 2012 ABA Letter, which indicates that the affiliates are investment advisers and need to register through an umbrella registration, Unibanco concludes that under the circumstances set out below, affiliates of a RIA do not need to register.[7]

In Unibanco, SEC Staff set forth an “independent affiliate” test that is used to determine whether an unregistered foreign adviser is considered independent from an affiliated SEC registered investment adviser (and therefore would not have to register with the SEC). Staff stated that conditions were to be followed by both the US registered entity as well as all of its unregistered advisory affiliates, referred to as participating affiliates (“Participating Affiliates”).[8] According to Unibanco, Staff will recognize the separateness of two affiliated entities and will not require a Participating Affiliate to register if:

  1. The affiliated companies are separately organized (e.g. two distinct entities);
  2. The registered entity is staffed with personnel (whether physically located in the US or abroad) who are capable of providing investment advice;
  3. All persons involved in US advisory activities are deemed “associated persons” of the registrant [9]; and
  4. The SEC has adequate access to trading or other records of each affiliate involved in US advisory activities, and to its personnel, to the extent necessary to monitor and police conduct that may harm US clients or markets. (Investor identities may be kept confidential.)

The Unibanco letter sets forth requirements for any foreign entity regarding what information a Participating Affiliate must disclose to the SEC.

  1. All Participating Affiliates must maintain all books and records as described in the Advisers Act for all transactions (including non-US transactions).[10]
  2. Each Participating Affiliate must also maintain appropriate books and records in accordance with Advisers Act Rule 204-2(a)(3) and (7) (information on specific securities transactions and recommendations) with regard to all transactions specifically involving US clients.[11]
  3. All Participating Affiliates must also maintain trading records as set forth by Advisers Act Rule 204-2(a)(12) for all of its “advisory representatives” that are involved in providing advice to US clients. These books and records must either be kept in English or, in the alternative, must be translated into English upon a reasonable amount of advance notice by the SEC or Staff.
  4. Finally, all books and records of any Participating Affiliate must also be maintained and preserved in an “easily accessible place” in the country where its books and records are kept for a period of at least five (5) years from the end of the fiscal year of the last entry on any particular book or record.[12]

Under the Unibanco doctrine, Participating Affiliates must make all applicable books and records listed above available for inspection by the SEC and Staff upon receipt of an administrative subpoena, a demand or a request for cooperation made during a routine or special inspection.[13] A Participating Affiliate must also make its personnel (including clerical or ministerial staff[14]) available for testimony or questioning by the SEC, but only in relation to the advice given to US clients and any related transactions involving those US clients. Finally, all Participating Affiliates must submit to the jurisdiction of US courts for any actions arising out of the US securities laws in connection with their investment advisory activities. Based on the guidelines set forth under the Unibanco doctrine, the extent to which a Participating Affiliate will have to submit certain books and records requirements as well as inspection demands will depend greatly on whether or not each Participating Affiliate engages in investment advisory services in the US.

After the enactment of the Dodd-Frank Act, the SEC staff stated that “[n]othing in the rules we are [adopting] is intended to withdraw any prior statement of the [SEC] or the views of the staff as expressed in the Unibanco letters.”15 And the current Release is silent on the Unibanco principles so it appears that those concepts continue. Perhaps the Final Rules will remove any doubt.

There is the opportunity to comment formally to the SEC during the next month or so with regard to the Proposal. Accordingly your comments are more than welcome.


[1] Release No. IA-4091 May 20,2015 (the “Release”)

[2] And, as the SEC points out: “… appear to investors and regulators to be - a single advisory business.” Release, p.27.

[3] Continued from the 2012 ABA Letter.

[4]
Note that this arrangement only relates to private fund advisers and not to advisers that manage solely managed accounts. Similarly, a single ADV is not available for exempt Reporting Advisers. See Release, n. 56.

[5] See below: “Non-US Based Advisers.”

[6] See Uniao de Bancos de Brasileiros S.A., SEC No-Action Letter (Jul. 28, 1992).

[7] Note the different emphasis for US versus non-US advisers – Unibanco deals with separateness of the affiliates but the new Release and the 2012 ABA Letter focus on integration of the affiliates.

[8] Participating Affiliates can include an unregistered parent company, a subsidiary, or an affiliate under common control with the US-registered entity.

[9] This is derived from the statutory definition of a “person associated with an investment adviser” under Advisers Act Section 202(a)(17), and the implication is that a registered investment adviser entity must generally supervise the activities of all “associated persons.”

[10] See Kleinwort Benson Investment Management Limited, SEC No-Action Letter (Dec. 15, 1993) (“Kleinwort Benson”); see also Mercury Asset Management plc, SEC No-Action Letter (Apr. 16, 1993) (“Mercury”).

[11] See Kleinwort Benson; Mercury.

[12] See Kleinwort Benson; Mercury.

[13] See Kleinwort Benson.

[14] The SEC originally excluded clerical and ministerial personnel from this requirement but later withdrew this exclusion. See Royal Bank of Canada.


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BulletPoint® is a newsletter of Tannenbaum Helpern Syracuse & Hirschtritt LLP’s Investment Management practice. It is an alert covering recent regulatory and tax developments impacting the financial services industry. To subscribe for the newsletter, send email to marketing@thsh.com.

06.03.2015  |  PUBLICATION: BulletPoint  |  TOPICS: Investment Management, Securities

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