Photograph of David Guin from Withers LLPDAVID GUIN, WITHERS

The Dodd-Frank Act is expected to
significantly increase the number of non-US investment advisers,
who will be subject to registration with, and regulation by, the US
Securities and Exchange Commission (SEC).

But this could have major cost
implications for existing foreign private advisers.

Dodd-Frank amends the US Investment
Advisers Act (the ‘Advisers Act’) by, among other things, repealing
the private adviser exemption that currently exempts advisers with
fewer than 15 clients.

Non-US investment advisers and fund
managers with US clients will need to identify a new exemption
under the Advisers Act with the repeal of the private adviser
exemption, which comes into effect on 21 July 2011.


How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

foreign private adviser exemption explained

Dodd-Frank creates several new
exemptions, one of which is for foreign private advisers.

Dodd-Frank defines a foreign
private adviser as an investment adviser that has no place of
business in the US, fewer than 15 US clients and investors in
“private funds” advised by the adviser, and less than $25m in
assets under management (AuM) from US clients and investors.

The SEC issued a proposed rule on
19 November that will, when final, implement the foreign private
adviser exemption.

Non-US investment advisers and fund
managers will find the foreign private adviser requirements, as
interpreted by the SEC, more difficult to satisfy than the current
private adviser exemption. A foreign private adviser may not have
any place of business in the US.

The SEC has proposed a very broad
definition of “place of business” that would include any fixed
location where investment advisers regularly provide advisory
services, solicit, meet with, or otherwise communicate with clients
or investors, and any location held out to the public as a place
where advisers or fund managers conduct such activities.


US client and investor
threshold of

Non-US investment advisers, and
particularly fund managers, will also find it more difficult to
satisfy the 15 US client and investor limitation due to the need to
count investors in private funds.

The proposed rule carries forward
current practices, allowing investment advisers to count
individuals together with their minor children and certain other
relatives who share the same principal residence as a single

Investment advisers may also treat
a legal organisation as a single client, to which the adviser
provides investment advice based on the organisation’s investment
objectives and two or more legal organisations that have identical
owners or beneficiaries.

However, if the legal organisation
is a “private fund” (any collective investment vehicle excluded
from the definition of “investment company” by Sections 3(c)(1) or
3(c)(7) of the US Investment Company Act of 1940), each investor in
the private fund must be counted.


Guidance on when a client
or investor is “in the US”

In order to determine whether the
clients and investors are “in the US”, the proposed rule looks to a
place of residence for individuals, jurisdiction of formation for
companies, status of trustees and executors for trusts and estates
and, generally, the status of the beneficial owners for managed

Again, these rules are more
restrictive than those used under the current private adviser
exemption. In order to avoid requiring investment advisers and fund
managers to monitor the ongoing location of clients and investors,
the proposed rule allows the determination to be made once, when
the individual or entity first becomes a client or private fund

As such, the proposed rule would
not require investment advisers to monitor the movement of their


Advisers face higer
SEC costs if unable to prove foreign status

The final Dodd-Frank requirement
for foreign private advisers is that investment advisers and fund
managers have less than $25m in AuM from US clients and investors,
without regard to the number of such clients or investors.

Investment advisers and fund
managers will need to attribute investments in private funds to
each client and private fund investor in the US.

Non-US investment advisers and fund
managers that do not satisfy the foreign private adviser
requirements (or another Advisers Act exemption) will be subject to
the same requirements as US-domestic investment advisers.

These requirements include filing a
Form ADV, adopting required policies and procedures, and satisfying
SEC-mandated recordkeeping, custody and marketing. This move will
again force non-US wealth managers to decide if they want to hold
onto their American clients.

David Guin is head of US securities practice at Withers