On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, among other changes, amended the U.S. Investment Advisers Act of 1940 ("Advisers Act"). A year later, the Securities and Exchange Commission's ("SEC") implementing rules came into effect, bringing the oft-relied-upon Section 203(b)(3) exemption under the Advisers Act to its end. In its place, investment advisers generally may now rely on four new exemptions of varying scope: the Foreign Private Adviser Exemption, the Private Fund Adviser Exemption, the Venture Capital Fund Exemption, and the Family Office Exemption. For Asia-based investment advisers that do not represent themselves to investors as pursuing a venture capital strategy or do not serve a single family, the first two of these exemptions are most relevant. Absent an applicable exemption, Asia-based investment advisers may be subject to registration, reporting, recordkeeping, SEC examination, and other obligations under the Advisers Act as a result of their advisory activities in, or directed toward, the United States.
Foreign Private Adviser Exemption
The Foreign Private Adviser Exemption applies to any investment adviser that:
- has no place of business in the United States;
- has, in total, fewer than 15 clients in the United States and investors in the United States in private funds advised by the investment adviser;
- has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than US$25 million; and
- does not hold itself out generally to the public in the United States as an investment adviser.
Place of Business. Given the broad application of
the phrase "place of business," investment advisers
should examine closely their past and planned activities in the
United States. In addition to including an office at which it
provides investment advisory services, solicits, meets with, or
otherwise communicates with clients, a "place of
business" also includes any other location that an adviser
holds out to the general public as a place where it provides these
services. Offices from which an adviser conducts solely
administrative and back office activities will generally not fall
under this definition, assuming the adviser does not communicate
with clients from such location. However, temporary offices such as
a hotel or even an auditorium may be included depending on the
activities conducted there.
Counting Clients and Investors. For purposes of
applying the 15 U.S. clients and investors threshold, an adviser
generally must count as a client each natural person, managed
account, or company that it directly advises. An adviser must also
examine the private funds that it advises and count the beneficial
owners of such funds, which generally requires an adviser to
"look through" any master-feeder structures, nominee, or
intermediate accounts. A precise counting of clients and investors,
however, will also require reference to the well-developed analysis
of ownership under the U.S. Investment Company Act of 1940.
Whether such clients and investors are "in the United
States" and therefore count toward the limit will generally be
determined by reference to the Regulation S definition of a
"U.S. person," and will therefore turn on the residency
of natural persons and the jurisdiction in which a company has been
formed.
Assets Under Management. In order to determine
whether the US$25 million assets under management cap has been
reached, an adviser need only count those assets under management
attributable to clients in the United States and investors in the
United States in private funds advised by the investment adviser.
However, unlike the Private Fund Adviser Exemption discussed below,
the locale from which these assets are managed is immaterial.
Advisers must calculate the assets under management annually.
Scope of Exemption. Unlike the Private Fund
Adviser Exemption (and Venture Capital Fund Exemption), a Foreign
Private Adviser enjoys exemption from the registration, reporting,
recordkeeping, and SEC examination obligations under the Advisers
Act. Such an adviser will therefore not need to file Form ADV with
the SEC.
Private Fund Adviser Exemption
Different criteria apply to an investment adviser seeking to avail
itself of this exemption depending on whether its principal office
and place of business is in the United States. For those advisers
whose principal office and place of business is located outside the
United States, the Private Fund Adviser Exemption will apply
if:
- such adviser has no client that is a U.S. person except for one or more qualifying private funds; and
- all assets managed by the investment adviser at a place of business in the United States are solely attributable to private fund assets, the total value of which is less than US$150 million.
Principal Office and Place of Business. An
adviser's "principal office and place of business"
means its executive office from which its officers, partners, or
managers direct, control, and coordinate its advisory activities.
This would include the location where an adviser has ultimate
responsibility for the management of private fund assets, even if
daily management of certain assets takes place at another
location.
Solely Advises Private Funds. Although the Private
Fund Adviser Exemption does not limit the number of
clients or investors (indeed, a Private Fund Adviser may advise an
unlimited number of private funds), it does limit the type
of client to qualifying private funds only. As a result, a Private
Fund Adviser could not, for example, have a separately managed
account as a U.S. client. For advisers whose principal office and
place of business is located outside the United States, this
restriction applies only to its United States clients and such an
adviser may therefore avail itself of the exemption without regard
to the type or number of its non-U.S. clients.
Counting Assets. A foreign adviser need only count
the private fund assets that it manages from a place of business in
the United States. The focus here is on the specific locale from
which the adviser manages the relevant assets.
Scope of Exemption. It is important to note,
however, that although a Private Fund Adviser enjoys an exemption
from registration under the Advisers Act, such an adviser must
nonetheless comply with certain SEC reporting and recordkeeping
obligations. Specifically, a Private Fund Adviser must annually
file Part 1A of Form ADV and provide basic identifying information
about the adviser and its related persons, advisory affiliates,
private fund clients, and (direct and indirect) controlling
persons, as well as disciplinary history for the adviser and its
advisory affiliates.
Additional Exemptions
Although the Foreign Private Adviser and Private Fund Adviser
exemptions are likely of greater relevance to the majority of
Asia-based investment advisers, the Dodd-Frank Act and its
implementing regulations have provided additional exemptions.
Foreign advisers who solely advise venture capital funds may rely
on the venture capital exemption if all of their clients, whether
U.S. or non-U.S., are venture capital funds. The exemption requires
such advisers' funds to each (i) hold no more than 20 percent
of the fund's capital commitments in certain nonqualifying
investments, (ii) generally not borrow or otherwise incur leverage
other than limited short-term borrowing and certain other
exclusions, (iii) not offer investors redemption rights other than
in extraordinary circumstances, and (iv) represent itself as
pursuing a venture capital strategy. The exemption will not apply
to an adviser to venture capital funds that are registered
investment companies or business development companies. Under the
exemption, advisers to venture capital funds, like Private Fund
Advisers, would not need to register but would need to annually
file Part 1A of Form ADV with the SEC. However, unlike Private Fund
Advisers, an Asia-based adviser to a venture capital fund cannot
disregard its non-U.S. activities when determining whether it
solely advises venture capital funds.
Family offices, which have traditionally relied on the former
Section 203(b)(3) exemption, may still be exempt from SEC
registration if they meet the definition of a "family
office," which, under the new rules, requires that (i) the
adviser provide advice only to certain "family clients,"
(ii) family clients wholly own the family office and family members
control the office, and (iii) the adviser not hold itself out to
the public as an investment adviser. Such advisers will be excluded
from the definition of "investment advisers" under the
Advisers Act and therefore exempt from its registration and
reporting requirements.
Taking Stock and Planning Ahead
Advisers previously relying on the Section 203(b)(3) private adviser exemption and that cannot rely on one of the new exemptions must file the required Form ADV by February 14, 2012 at the latest in order to meet the March 30, 2012 registration deadline. Exempt reporting advisers that rely on the Private Fund Adviser Exemption or Venture Capital Fund Exemption must file their initial reports by March 30, 2012. Asia-based investment advisers should therefore reevaluate their current standing under the Advisers Act and take into consideration the new exemptions as they plan future fund launches. With careful planning, many currently unregistered foreign advisers should be able to remain unregistered or at a minimum limit their reporting obligations to Part 1A of Form ADV.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.