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
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.