Client Update: New US registration requirements for fund managers and investment advisers
23 August 2010
In brief: Managers and advisers of investment funds with clients or assets in the United States may face new registration and reporting obligations with the US Securities and Exchange Commission. Partner Robert Clarke (view CV) and Senior Associate Marc Kemp consider the impact of the US Dodd-Frank Wall Street Reform and Consumer Protection Act.
On 21 July 2010, US President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. Title IV of the Dodd-Frank Act introduces the Private Fund Investment Advisers Registration Act of 2010 (the Registration Act), which eliminates exemptions currently allowing many investment advisers to operate without registering with the US Securities and Exchange Commission (the SEC).
From 21 July 2011, investment advisers (as defined in section 202 of the Investment Advisers Act of 19401) will no longer be able to rely on the 'private adviser' exemption from SEC registration. Although the definition is open to interpretation, it appears (under US law) to include fund managers (ie managers of funds with a discretionary or non-discretionary mandate) and general partners of limited liability partnerships, as well as investment advisers (ie advisers to a fund or individual). By analogy with general partners, the SEC could also regard trustees or responsible entities of managed investment schemes as 'investment advisers'.
If you are a non-US investment adviser, you may be required to register with the SEC unless you are able to rely on s403 of the Registration Act, which exempts 'foreign private advisers' from SEC registration if they have:
- no place of business in the US;
- fewer than 15 clients and investors in the US in private funds advised by the investment adviser. (Investment advisers can no longer count a fund as a single client, but must count each investor in that fund towards the 15-client limit);
- aggregate assets under management attributable to clients or investors in the US of less than US$25 million; and
- not promoted themselves to the public as investment advisers, or acted as an investment adviser to an investment company registered under the US Investment Company Act of 1940.
The Act also exempts advisers:
- to private funds with assets under management in the US of less than US$150 million; and
- of venture capital funds.2
In both cases, advisers relying on these exemptions will still be required to maintain records and provide reports to the SEC as it may require for investor protection.
If you are required to register with the SEC as an investment adviser, you will be subject to increased reporting obligations as well as more rigorous regulatory oversight. Some of these responsibilities will include:
- the provision of records, reports and other prescribed information setting out in extensive detail a fund's activities and financial standing to the SEC as requested;
- the possibility of periodic and special examinations by the SEC; and
- new filing and record maintenance requirements.
The Registration Act appears to be part of a trend also exemplified by the proposed European Union Directive on Alternative Investment Fund Managers to regulate the activities of non-US (or non-European Union) fund managers more closely3.
Some provisions of the Registration Act are to be the subject of SEC clarification before 21 July 2011. In the meantime, organisations that may fall within the definition of 'investment advisor' and have clients, investors or assets in the US should consider if they need to register with the SEC before 21 July 2011 to avoid civil and criminal sanctions. Fund managers in the process of structuring funds or raising capital should also consider the implications of the proposed EU Directive on Alternative Investment Fund Managers.
- Subject to limited exceptions, s202 of the US Investment Advisers Act of 1940 defines as an 'investment adviser' 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.
- Section 407 of the Private Fund Investment Advisers Registration Act of 2010. 'Venture capital fund' is undefined. The SEC is required to provide further guidance on this before 21 July 2011.
- See our previous updates on the proposed European Union Directive in our Focus: March 2010 and Focus: June 2009.
- Robert ClarkePartner,
Ph: +61 3 9613 8034
- John BeckinsalePartner,
Ph: +61 7 3334 3520
- Mark CerchéPartner,
Ph: +61 3 9613 8872