The Securities and Exchange Commission ("SEC") on June 22, 2011 adopted new rules and rule and form amendments under the 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 Among other changes, the final rules adopted by the SEC ("Final Rules"): (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 March 30, 2012; (iii) amend Form ADV; and (iv) reallocate regulatory responsibility for advisers between the SEC and the states.

Background

Effective July 21, 2011, the Dodd-Frank Act repeals the "private adviser exemption" currently set forth in Section 203(b)(3) of the Advisers Act, which many advisers to private funds and certain other clients have relied on in order to avoid registration with the SEC under the Advisers Act. The private adviser exemption has allowed an investment adviser to avoid SEC registration if, among other requirements, the adviser did not hold itself out to the public as an investment adviser and had fewer than 15 clients during the preceding 12 months. A private fund typically qualified as a single client for purposes of the private adviser exemption.

Thus, advisers to private funds avoided registration under the Advisers Act by limiting themselves to advising a maximum of 14 private funds and other client accounts.2 With the elimination of the private adviser exemption, these advisers 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.3 The following discussion reviews those exemptions and the table in Appendix A highlights the differing substantive obligations and reporting requirements under the Advisers Act for advisers relying on any of these exemptions.

Venture Capital Fund

Exemption Terms of Exemption

One exemption created by the Dodd-Frank Act is available to advisers that solely advise venture capital funds ("Venture Capital Fund Exemption"). The Final Rules define a "venture capital fund" as a private fund that:

  • represents to investors that it pursues a venture capital strategy;
  • holds, at the time of acquisition of any asset other than "qualifying investments" and shortterm holdings, no more than 20% of the amount of the fund's aggregate capital contributions and uncalled committed capital ("Total Capital") in assets (other than short-term holdings) that are not "qualifying investments" ("Miscellaneous Assets");
  • does not borrow, incur indebtedness, provide guarantees or otherwise incur leverage in excess of 15% of the fund's Total Capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days;4
  • does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; and
  • is not registered under the Investment Company Act of 1940, as amended ("1940 Act") and has not elected to be treated as a business development company.

Comments Shaped Final Rules

The proposed rules relating to the Venture Capital Fund Exemption drew significant comments suggesting that the proposal was too rigid and likely would prevent advisers to legitimate venture capital funds from relying on the Venture Capital Fund Exemption. To address these concerns, the Final Rules depart from the proposed rules in a number of important respects. Among the key features of the Final Rules are:

  • Introduction of a 20% Bucket for Miscellaneous Assets. A number of comments to the proposed rules related to limitations on investments and the definition of a "portfolio company". By seeking to reflect a balance between (i) commenters' concerns that the rigidity of the proposed rules could result in inadvertent violations by venture capital funds, unnecessary limits on the investment discretion of advisers to venture capital funds or interfere with existing or evolving business practices and (ii) the SEC's concerns that "the cumulative effect of revising the rule to reflect all of the modifications supported by commenters could . . . expand the exemption beyond what we believe was the intent of Congress", the Final Rules allow a venture capital fund to make limited investments beyond qualifying venture capital investments and still be deemed a "venture capital fund" under the Final Rules. Thus, under the Final Rules, a venture capital fund may hold Miscellaneous Assets, provided that, immediately after the acquisition of any Miscellaneous Asset, a fund's Miscellaneous Assets (other than short-term holdings) represent no more than 20% of the venture capital fund's Total Capital. A venture capital fund may choose whether to calculate this 20% limit on Miscellaneous Assets based on the cost or fair value of its assets. But, once a method is chosen by a fund, it must be consistently applied to the fund's assets. Importantly, because the measurement of the 20% limit is made at the time of acquisition of a Miscellaneous Asset, a venture capital fund would not be required to dispose of a Miscellaneous Asset as a result of an increase in the value of that asset after acquisition. However, if the fund has chosen to base the measurement of its 20% limit on fair value rather than cost, increases in the fair value of existing Miscellaneous Assets could have the effect of filling the 20% Miscellaneous Asset bucket, thereby restricting the fund from acquiring new Miscellaneous Assets until existing Miscellaneous Assets are sold or depreciate in value.5
  • Qualifying Portfolio Companies. Under the Final Rules, a "qualifying portfolio company" is any company that: (i) at the time of any investment by the venture capital fund, is not reporting or foreign-traded6 and does not control, is not controlled by, or is not under common control with another company, directly or indirectly, that is reporting or foreign-traded; (ii) does not borrow or issue debt obligations in connection with the fund's investment in such company and does not distribute to the venture capital fund the proceeds of such borrowing or issuance in exchange for the venture capital fund's investment; and (iii) is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by Rule 3a-7 under the 1940 Act, or a commodity pool.7 The last prong of this definition is meant to ensure that qualifying portfolio companies are operating companies as opposed to investment companies.8 While other types of entities excepted from the definition of an investment company under Section 3 of the 1940 Act could be qualifying portfolio companies, the Exemptions Release suggests that a fund whose strategy involves investment in the types of issuers that are excepted from the definition of an "investment company" (other than through Section 3(c)(1) or Section 3(c)(7) of, or Rule 3a-7 under, the 1940 Act) may bar its adviser from relying on the Venture Capital Fund Exemption.9
  • Qualifying Investments. As under the proposed rules, not all investments in a qualifying portfolio company are qualifying investments.10 Instead, qualifying investments must be equity securities11 issued by: (i) a qualifying portfolio company and acquired directly from the qualifying portfolio company (a "directly acquired equity"); (ii) the qualifying portfolio company in exchange for a direct equity investment in that same qualifying portfolio company (an "exchanged equity investment"); or (iii) a company of which the qualifying portfolio company is a majority owned subsidiary or predecessor company, if acquired in exchange for directly acquired equity or an exchanged equity investment.12 The inclusion of the latter two categories allows venture capital funds to participate in reorganizations of a portfolio company or mergers or acquisitions of a portfolio company. In the case of a merger or acquisition, the Final Rules enable a venture capital fund to hold as a "qualifying investment" securities of a reporting or foreign-traded company. However, following the merger or reorganization, any further purchases of interests of a reporting or foreigntraded company, as well as any secondary market purchases, would need to be held as Miscellaneous Assets.13
  • Short-Term Holdings: Inclusion of Money Market Fund Shares. As under the proposed rules, the Final Rules allow a venture capital fund to invest in short-term holdings, generally for cash management purposes, and such short-term holdings will not be counted as part of the 20% bucket of Miscellaneous Assets. Short-term holdings, as proposed, would have included only cash, bank deposits, certificates of deposit, bankers acceptances and similar bank instruments, and U.S. Treasuries with remaining maturities of 60 days or less. Although the SEC generally was not receptive to commenters' requests to expand the types of instruments that would qualify as shortterm holdings,14 the SEC did expand the definition of short-term holdings to include shares of registered money market funds. All other instruments used for cash management purposes could be held by a venture capital fund, as long as they are included in the 20% bucket of Miscellaneous Assets.
  • "Holding Out". Whereas the proposed rules focused on whether the fund was held out as a "venture capital fund", the Final Rules instead require that the fund "represents to investors and potential investors that it pursues a venture capital strategy."15 Among the concerns raised by commenters was that the proposed requirement would have focused too much on the fund's name, in conflict with the practice of many venture capital funds to "avoid[] referring to themselves as 'venture capital funds'." The Final Rules do not require that the fund include the term "venture capital" in its name or explicitly prohibit an adviser from including terms like "private equity" or "growth capital" in the fund name. Rather, the Exemptions Release clarifies that the determination of whether a fund represents itself as a venture capital fund focuses on "all of the statements (and omissions) made by the fund to its investors and prospective investors. While this includes the fund name, it is only part of the analysis." As a result, advisers to venture capital funds that desire to rely on the new Venture Capital Fund Exemption should carefully review the fund's marketing materials and disclosure documents in light of the SEC's expectation that "an investor's understanding of the fund and its investment strategy must be consistent with an adviser's reliance on the exemption."16
  • No Managerial Assistance Requirement. The Final Rules do not, as the proposed rules would have, require the venture capital fund's adviser to "have a significant level of involvement in developing a fund's portfolio companies."
  • Exclusion of Certain Guarantees from Leverage Time Limits. In response to commenters' concerns that the proposed rules' strict 120-day limitation on leverage could interfere with a venture capital fund's ability to guarantee certain obligations of portfolio companies (that often secure longer term borrowings for working capital), the Final Rules exclude such guarantees (up to the value of the venture capital fund's investment in the portfolio company). However, these guarantees remain subject to the 15% of Total Capital limitation on fund borrowings.17
  • Restrictions on Liquidity. The Final Rules retain the proposed restrictions on providing liquidity. Thus, venture capital funds are limited, except in extraordinary circumstances, from providing liquidity (i.e., withdrawal, redemption or repurchase rights) beyond pro rata distributions to investors. While stressing that whether "specific redemption or 'opt out' rights for certain categories of investors under certain circumstances should be treated as 'extraordinary' will depend on the particular facts and circumstances," the Exemptions Release provides some guidance as to the types of rights that do (or do not) raise concerns. In this regard, the SEC indicated that both (i) periodic withdrawal rights, even if subject to an initial lock-up or other restrictions, or (ii) "regularly identifying potential investors on behalf of fund investors seeking to transfer or redeem fund interests" would be inconsistent with this criterion. By contrast, consents to transfer "to accommodate an investor's internal corporate restructurings, bankruptcies or portfolio allocations rather than to provide investors with liquidity from the fund" as well as rights that are contingent on changes in law or fact that are foreseeable, but unexpected as to timing or scope (e.g., tax law changes or regulatory or legal changes that prohibit an investor from participating in certain fund investments), generally would be permissible.

Application to Non-U.S. Advisers

The Exemptions Release specifies that a "non-U.S. adviser" (i.e., an adviser whose principal office and place of business18 is outside the United States) may rely on the Venture Capital Fund Exemption, provided that it solely advises funds that are venture capital funds or Grandfathered Funds.19 Accordingly, such an adviser may not rely on the Venture Capital Fund Exemption if it advises other client accounts, even if such clients are outside of the United States. The Final Rules clarify that an adviser may treat as a "private fund"20 for purposes of the Venture Capital Fund Exemption any non-U.S. fund that is not offered in the United States but that would be a private fund if the issuer were to conduct a private offering in the United States. However, the adviser would be required to treat the fund as a private fund for all purposes under the Advisers Act.21

Private Fund Adviser Exemption

Terms of Exemption

A second exemption provided by the Dodd-Frank Act exempts from registration any adviser that acts solely as an adviser to certain private funds, provided such adviser's "Regulatory AUM" (as described further below) in the United States are less than $150 million ("Private Fund Adviser Exemption"). Consistent with the current rule for counting clients,22 which requires U.S. advisers to count all clients worldwide while allowing non-U.S. advisers (i.e., those advisers with a principal office and place of business outside the United States) to count only their U.S. clients for this purpose, the Final Rules require non-U.S. advisers to count only "qualifying private fund" assets that are managed from a place of business within the United States,23 while requiring a U.S. adviser to consider all of its management activities worldwide. Specifically, under the Private Fund Adviser Exemption, a U.S. adviser: (i) would not be permitted to advise any client that is not a qualifying private fund; and (ii) could not exceed $150 million in total "Regulatory AUM", regardless of where the adviser's qualifying private funds are domiciled or where the management activity occurs. By contrast, a non-U.S. adviser: (i) would be permitted to manage an unlimited amount of qualifying private fund assets provided its principal office and place of business is outside the United States and it does not manage any assets for U.S. persons other than qualifying private funds and (ii) would count only those qualifying private fund assets that are managed at a place of business in the United States toward the $150 million "Regulatory AUM" limit. Thus, non-U.S. advisers that manage more than $25 million in assets for U.S. persons (the amount allowed under the Foreign Private Adviser Exemption (as discussed below)) will be required to register with the SEC if any of the advised accounts is not a qualifying private fund, even if the non-U.S. adviser does not have a place of business in the United States. Such an adviser will be unable to qualify for either the Private Fund Adviser Exemption or the Foreign Private Adviser Exemption.24 Additionally, the SEC was equivocal in its views about whether a single-investor fund would be viewed as a qualifying private fund or a non-qualifying separately managed account by noting that any such determination will be based on the relevant facts and circumstances.

Regulatory AUM

Given the relevance of an adviser's assets under management ("AUM") with respect to certain of the new registration and exemption thresholds under the Dodd- Frank Act, the Final Rules require every adviser to calculate Regulatory AUM using a new uniform methodology.25 An adviser's Regulatory AUM will be based on the value of the securities portfolios for which the adviser provides continuous and regular supervisory or management services, inclusive of proprietary assets,26 assets managed without receiving compensation, and assets of non-U.S. clients (if managed from the United States), each of which an adviser may currently exclude in calculating its AUM.27 Regulatory AUM also includes: (i) the value of any private fund over which an adviser exercises continuous and regular supervisory or management services; (ii) the amount of any uncalled capital commitments of any private fund (a new concept intended to capture, among others, private equity fund managers); (iii) the fair value (as opposed to the cost basis) of private fund assets;28 and (iv) the value of any assets managed for no compensation or for knowledgeable employees.

Practical Applicability of Exemption

A non-U.S. adviser would not be precluded from relying on the non-U.S. adviser aspects of the Private Fund Adviser Exemption by maintaining an office or place of business in the United States, provided that its principal place of business remains in a non-U.S. jurisdiction. However, given the global operations of many large advisers, advisers with a principal place of business outside the United States should be careful to limit any activities that occur within the United States such that no U.S. office is deemed to be (i) its principal office or (ii) a place of business at which assets above the permissible limit or clients other than private funds are managed. In this regard, a non-U.S adviser should (i) limit U.S. office advisory activities to conducting due diligence and research and (ii) formulate and implement investment decisions solely from a non-U.S. office.29

Advisers relying on the Private Fund Adviser Exemption are required to file certain information with the SEC and remain subject to limited substantive requirements under the Advisers Act as well as SEC examination authority. In this regard, the SEC's treatment of non- U.S. advisers is similar to the current "Regulation Lite"30 approach, under which a non-U.S. adviser registered with the SEC has been able to avoid many of the substantive provisions of the Advisers Act with respect to its management of non-U.S. client accounts. Under the Final Rules, a non-U.S. adviser can rely on the Private Fund Adviser Exemption, while managing any number of U.S.-domiciled qualifying private funds (but not other U.S. clients) together with any number and kind of clients that are not U.S. persons, provided that: (i) without regard to where management activities take place, every client that is a U.S. person is a qualifying private fund; and (ii) with respect to assets managed from within the United States, all such assets are attributable to qualifying private funds and the total value of such assets does not exceed $150 million. As a result, this exemption may be available to non-U.S. advisers that do not service U.S. clients other than private funds, but are unable to meet the more restrictive Foreign Private Adviser Exemption (discussed below) because, for example, the adviser has significant investments by U.S. persons in an offshore fund.

Footnotes

1 The Final Rules were presented in two releases: Rules Implementing Amendments to the Investment Advisers Act of 1940, Release No. IA-3221 (June 22, 2011) ("Implementing Release"), available at www.sec.gov/rules/final/2011/ia-3221.pdf and Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Release No. IA-3222 (June 22, 2011) ("Exemptions Release"), available at www.sec.gov/rules/final/2011/ia-3222.pdf. At the same time, the SEC adopted rules implementing the "Family Office Exception" provided by the Dodd-Frank Act: Family Offices, Release No. IA-3220 (June 22, 2011), available at http://www.sec.gov/rules/final/2011/ia-3220.pdf. The family office rule will be discussed in a separate DechertOnPoint.

2 See also Rule 203(b)(3)-1 (which was repealed by the Final Rules). In 2004, the SEC adopted rules that required advisers to "look through" certain funds to their investors in order to count the number of clients for purposes of the private adviser exemption in an attempt to subject many private fund advisers to SEC registration under the Advisers Act. However, in Goldstein et al. vs. Securities and Exchange Commission, Slip Op. No. 04-1434 (D.C. Cir. June 23, 2006), the Court of Appeals for the District of Columbia vacated those rules on the basis that the SEC had exceeded its authority to promulgate interpretive rules under the Advisers Act.

3 New Rule 203-1(e) provides transition relief allowing an adviser, in effect, to continue to rely on the private adviser exemption until March 30, 2012, provided that the adviser complies with the terms of that exemption (i.e., has not had 15 or more clients during the prior 12 month period, does not hold itself out to the public as an investment adviser, and does not advise a registered investment company or business development company). Advisers whose business or marketing activities change before March 30, 2012, will need to consider whether they can continue to rely on the transition guidance. Earlier registration may be required in order to accept additional clients or engage in broader marketing efforts. Additionally, the SEC noted that these new exemptions are not mandatory and, therefore, an adviser may register with the SEC if it meets the other registration criteria, even if such adviser may rely on an exemption.

4 As discussed below, certain guarantees are not subject to the 120 calendar day limit.

5 Because the 20% will be applied to current investments of the venture capital fund, liquidated Miscellaneous Assets are excluded from the calculation.

6 For these purposes, a reporting or foreign-traded company is any company that is subject to the reporting requirements under Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), or that has any security listed or traded on any exchange or organized market in a foreign jurisdiction, except in certain limited circumstances as discussed below.

7 This definition was adopted substantially as proposed, except that the Final Rules modify the qualifying portfolio company leverage criterion to define a qualifying portfolio company as any company that does not both (i) borrow (or issue debt) in connection with the venture capital fund's investment in the portfolio company and (ii) distribute the proceeds of such borrowing or issuance to the venture capital fund in exchange for the fund's investment. In effect, this allows a venture capital fund to provide financing, or a portfolio company to incur leverage, to be used for operational purposes such as financing inventory or equipment or meeting payroll. The SEC explained that the purpose of this change was to "adequately distinguish[ ] between venture capital funds and leveraged buyout funds and provide[ ] a simpler and clearer approach to determining whether or not a qualifying portfolio company satisfies the definition." Exemptions Release at 49. Rather than make significant changes to the definition of qualifying portfolio company, the SEC indicated that holdings that do not fit within the definition may be held in the 20% Miscellaneous Assets bucket.

8 The requirement that a qualifying portfolio company must be an operating company is intentionally designed to exclude venture capital fund-of-funds from the definition of a venture capital fund. However, a venture capital fund may hold interests in other venture capital funds in the 20% Miscellaneous Assets bucket.

9 See Exemptions Release at n. 203 ("Under the holding out criterion . . . a fund that represents itself as pursuing a venture capital strategy to investors implies that the fund invests primarily in operating companies and not for example in entities that hold oil and gas leases.") Because companies that hold oil and gas leases may be excepted from the definition of an investment company under Section 3(c)(9) of the 1940 Act, the SEC's note could be read as requiring advisers to putative venture capital funds to more closely examine companies relying on Section 3(c)(9) or other exceptions from the 1940 Act to assure that the business in question is that of an operating company.

10 Rather than expand the types of securities or nature of transactions that could be a qualifying investment, the SEC indicated that the 20% Miscellaneous Assets bucket would be available for securities or transactions that did not fit within the qualifying investment definition. Thus, for example, debt securities or secondary market purchases of equity securities of a qualifying portfolio company could be held only as Miscellaneous Assets. The Exemptions Release also identified the following instruments that would be classified as Miscellaneous Assets: shares of other venture capital funds, non-convertible debt (including bridge loans of a portfolio company) and publicly traded securities.

11 For these purposes, the Final Rules adopt the definition of an "equity security" in Section 3(a)(11) of the Exchange Act i.e., limited partnership interests, common stock, preferred stock, warrants and other securities convertible into any such equity security). The SEC describes this definition as "broad . . . providing venture capital funds with flexibility to determine which equity securities in the portfolio company capital structure are appropriate for the fund." Additionally, any security received as a dividend in respect of a qualifying investment would be a qualifying investment for purposes of the Venture Capital Fund Exemption. Exemptions Release at n. 97.

12 Additionally, the SEC confirmed that "a fund may disregard a wholly owned intermediate holding company formed solely for tax, legal or regulatory reasons to hold the fund's investment in a qualifying portfolio company" for purposes of determining whether the holding is a qualifying portfolio company. Exemptions Release at 51.

13 The continued exclusion of securities acquired in secondary transactions from the category of qualifying investments ensures that a venture capital fund primarily deploys its capital for operating and business purposes.

14 In particular, the SEC refused to extend the definition of short-term holdings to allow venture capital funds to invest in U.S. Treasuries with more than 60 days to maturity, foreign sovereign debt, repurchase agreements and commercial paper.

15 An identical change was made to the grandfathering provision, which allows a private fund in existence and with third-party investors prior to December 31, 2010, that does not fully meet the definition of a venture capital fund under the Final Rules, to be treated as a venture capital fund provided that it conforms to the holding out requirement and does not sell interests, or accept any committed capital, after July 21, 2011 ("Grandfathered Funds").

16 While generally taking a facts and circumstances approach, the SEC emphasized that certain actions, such as "identify[ing] a fund as a 'hedge fund' or 'multistrategy fund' [or including] the fund in a hedge fund database or hedge fund index", would be inconsistent with the adviser's ability to rely on the Venture Capital Fund Exemption. Exemptions Release at 65. Thus, while the SEC did not explicitly preclude fund names that refer to recognized, non-venture, investment strategies (e.g., "multi-strategy funds"), the Exemptions Release suggests that advisers to so-named funds may have some difficulty in demonstrating compliance with the "holding out" requirement.

17 Despite commenters' requests, the SEC determined not to otherwise expand a venture capital fund's ability to borrow or use leverage for other purposes (such as capital call lines of credit or borrowings to satisfy fee or expense obligations) or to generally increase the 15% or 120-day limitations. In particular, the SEC expressed concerns that advisers to leverage buyout funds should not be able to rely on the Venture Capital Fund Exemption.

18 An adviser's principal office and place of business is the location where the adviser controls, or has ultimate responsibility for, the management of assets. Exemptions Release at text accompanying n. 385. As discussed below, this will typically be the office at which investment decisions are formulated and implemented and not an office where the only investment-related functions relate to research or due diligence activities.

19 By contrast, the Private Fund Adviser Exemption requires an adviser to consider only those funds or accounts that are managed (i) at a place of business in the United States or (ii) for U.S. persons. As a result, a non-U.S. venture capital fund adviser who provides additional services in its home jurisdiction may be able to rely on the Private Fund Adviser Exemption (assuming the conditions for that exemption, described below, are met) but not the Venture Capital Fund Exemption.

20 The Dodd-Frank Act amended the Advisers Act to define a "private fund" as any issuer that would be an "investment company" under the 1940 Act but for Section 3(c)(1) or 3(c)(7) of the 1940 Act. This definition of a "private fund" appears to effectively exclude any non-U.S. fund that does not use U.S. jurisdictional means to offer its securities (i.e., is not offered in the United States), but would otherwise be a "private fund" if it was privately offered in the United States.

21 This would require the non-U.S. adviser to report such funds on the Amended Form ADV (as discussed below) and would subject disclosures made by the adviser to investors in such funds to Rule 206(4)-8 under the Advisers Act, which generally prohibits advisers to pooled investment vehicles from engaging in any fraudulent, deceptive or manipulative act with respect to any investor or prospective investor in a pooled investment vehicle.

22 See Rules 203(b)(3)-1 and 203(b)(3)-2 under the Advisers Act, each of which was rescinded by the Final Rules.

23 A "qualifying private fund" is defined as any private fund that is not registered under the 1940 Act and has not elected to be treated as a business development company. Under the Final Rules, an adviser may also include as a "private fund" any fund that qualifies for an exclusion from the definition of an "investment company" in the 1940 Act (in addition to the exclusions in Sections 3(c)(1) and 3(c)(7)). See Final Rule 203(l)-1 and Exemptions Release at text accompanying n. 299. This expanded approach from the proposed rule, which limited "qualifying private funds" to private funds that rely on the exclusions provided by Sections 3(c)(1) or 3(c)(7), now assures that advisers to funds that could rely, for example, on Section 3(c)(5)(C) (certain real estate funds) or Section (3)(c)(9) (oil, gas, or mineral fund) of the 1940 Act or Rule 3a-7 (asset-backed issuers) under the 1940 Act will not be precluded from relying on the Private Fund Adviser Exemption. If an adviser elects to treat such a fund as a private fund for this purpose, however, the adviser must treat such fund as a private fund for all purposes under the Advisers Act.

24 Advisers seeking to rely on either the Private Fund Adviser Exemption or the Foreign Private Adviser Exemption must fully meet each element of the respective exemption. Advisers may not "mix-and-match" elements of the exemptions. Please see Appendix B for a matrix detailing the circumstances in which advisers to private funds and separately managed accounts based in popular jurisdictions (i.e., New York, Connecticut and London) would be required to register with the SEC or, if applicable, their home state in reliance on the Private Fund Adviser Exemption.

25 While the uniform calculation for Regulatory AUM is required for various purposes under the Advisers Act, registered advisers are able to use a different AUM calculation method for purposes of disclosure to clients in their narrative brochure required by Part 2 of Form ADV and for marketing or other purposes.

26 In response to comments criticizing the inclusion of proprietary capital (as well as assets not managed for compensation) in Regulatory AUM on the basis that the definition of "investment adviser" requires, among other things, that advice be provided "to others" and "for compensation", the SEC noted that "[a]lthough a person is not an 'investment adviser' for purposes of the Advisers Act unless it receives compensation for providing advice to others, once a person meets the definition (by receiving compensation from any client to which it provides advice), the person is an adviser, and the Act applies to the relationship between the adviser and any of its clients (whether or not the adviser receives compensation from them)." Exemptions Release at text accompanying n. 343. Thus, it would appear clear that gratis accounts are entitled to the full protections of the Advisers Act. Importantly, however, the Implementing Release does not indicate that proprietary accounts should be treated as "clients" for other purposes under the Advisers Act. Instead, the SEC justifies inclusion of proprietary assets on the basis that management of a significant amount of assets (whatever the source) "may suggest that the adviser's activities are of national concern or have implications regarding . . . systemic risk." Implementing Release at text accompanying at n. 75. Consistent with this approach, the SEC staff recently granted no action assurance allowing a U.S. domiciled, wholly-owned subsidiary of a foreign insurance cooperative to advise certain private funds without registration under the Advisers Act where the funds consisted solely of the parent's assets, and the subsidiary did not advise other clients or hold itself out to the public as an investment adviser. The staff based its relief on the assertion that the subsidiary was not "engaged in the business of 'advising others'" and indicated that relief would not apply if the parent were, itself, a private fund. Moreover, the incoming letter indicated that "[n]o policy holder [of the parent] will be deemed a beneficial owner of a [f]und." Zenkyoren Asset Management of America Inc. (pub. avail. June 30, 2011).

27 Notably, accounts other than private funds are considered securities portfolios only if 50% or more of the total value of such account consist of securities. As a result, client accounts that hold more than 50% of their AUM in "nonsecurities", such as collectibles, commodities or real estate, can be excluded entirely from Regulatory AUM, whereas the entire value of a private fund must be attributed to an adviser's Regulatory AUM, even if such private fund similarly contains more than 50% of "nonsecurities". Further, Regulatory AUM requires that client assets be calculated on a "gross" basis. As described by the SEC, Regulatory AUM requires an adviser to include total assets under management and reflected on a client's balance sheet, without regard to any corresponding liabilities incurred to acquire or carry the assets. See Implementing Release at 22.

28 The fair value of a private fund's assets may be calculated in accordance with generally accepted accounting principles ("GAAP"), another international accounting standard or some other fair valuation standard, including any such procedure identified in the private fund's governing documents.

29 See Exemptions Release at text accompanying n. 401. 30 See ABA Subcommittee on Private Investment Companies (pub. avail. Aug. 19, 2006). Regulation Lite requires non- U.S. advisers to maintain records (and upon request provide such records to the SEC) with respect to non-U.S. funds and clients and subjects a non-U.S. adviser's non- U.S. client activities to inspection, without subjecting such non-U.S. client activities to other provisions of the Advisers Act. Although the SEC did not withdraw Regulation Lite, its usefulness is now limited given that most advisers that previously relied upon Regulation Lite will be able to rely on the Private Fund Adviser Exemption or Foreign Private Adviser Exemption. Additionally, the Private Fund Adviser Exemption allows a non-U.S. adviser to advise U.S.-domiciled private funds, which is not possible under Regulation Lite.

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