“Foreign private advisers” are exempt from registration under the Advisers Act. A “foreign private adviser” is an investment adviser that: (1) has no place of business in the U.S.; (2) has, in total, fewer than 15 clients and investors in the U.S. in private funds advised by the adviser; (3) has less than $25 million of aggregate assets under management attributable to such clients and investors;3 and (4) neither holds itself out generally to the public in the U.S. as an investment adviser nor advises mutual funds or business development companies.
The new rules, which were adopted substantially as proposed, define or explain the following terms that are central to the definition of “foreign private adviser”:
- “Place of Business.” The “place of business” of an investment adviser is defined as (1) an office at which the adviser regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients; and (2) any other location that is held out to the general public as a location at which the adviser conducts any such activities. This definition leverages an existing regulation but, in response to comments, the SEC clarified that an office at which an adviser regularly communicates with its clients, whether U.S. or non-U.S., or an office where an adviser regularly conducts research, would qualify as a “place of business.” However, an office at which the adviser solely provides administrative and back-office activities would not qualify as a “place of business,” if such activities are not intrinsic to providing investment advisory services and do not involve communicating with clients. Accordingly, whether an investment adviser has a place of business in the U.S. is dependent on the relevant facts and circumstances, and not all offices will constitute a “place of business.”
- “Client.” The new rules provide a safe harbor for purposes of counting clients of a foreign private adviser. A foreign private adviser may deem the following to constitute a single “client”: (1) a natural person, together with such natural person’s minor children (regardless of whether they share the same principal residence), relatives, spouse, spousal equivalent or relative of the spouse or spousal equivalent, in each case who has the same principal residence as such natural person, and accounts and trusts for which such natural person and/or the foregoing persons are the only primary beneficiaries; and (2) a partnership, limited liability company, corporation or other legal organization (or two organizations with identical ownership) to which the adviser provides advice based on the organization’s investment objectives, rather than the individual objectives of the organization’s owners.
An adviser is not permitted to disregard a person as a “client” because the adviser provides services for such person without compensation.
A general partner or managing member or similar person acting as an investment adviser to a partnership or limited liability company is required to count the partnership or limited liability company as a “client.”
To avoid double counting: (1) an adviser is not required to count a private fund as a client if it counts an investor in the private fund as a client; (2) an adviser is not required to count a person as an investor in a private fund if it counts the private fund as a client; and (3) an adviser may count an investor in two private funds advised by the investment adviser as a single “investor.”
The new rules are non-exclusive safe harbors, and there may be other situations in which multiple persons constitute a single “client.”
- “Investor.” An “investor” of a private fund generally includes a classic “limited partner” or “shareholder” (of an offshore fund), as well as any other person who would be taken into account when determining whether the private fund came within the exclusions from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 (the “1940 Act”), except that holders of short-term paper4 issued by a private fund count as “investors” (even if they are not counted for purposes of Section 3(c)(1) or Section 3(c)(7)). In a change from the proposed rules, knowledgeable employees of an adviser do not count as investors. Accordingly, a foreign adviser with senior managers based in the U.S. who qualify as knowledgeable employees does not need to count such managers as investors, but should consider whether it may need to count holders of short-term paper as investors. Advisers should determine the number of investors in a private fund based on the facts and circumstances and in light of the general prohibition on doing indirectly what cannot be done directly. Accordingly, an adviser may be required to “look through” certain intermediate accounts through which investors invest in a private fund. By way of example, holders of interests in feeder entities within a master-feeder structure would be counted as investors in the master fund.
- “In the U.S.” A place of business is treated as being “in the U.S.” if it is treated as located in the “United States” as defined in Regulation S. An investor or client generally is treated as being “in the U.S.” if that investor or client is a “U.S. person” for purposes of Regulation S, except with respect to certain discretionary or similar accounts that are held for the benefit of U.S. persons by certain non-U.S. dealers or other non-U.S. professional fiduciaries. However, if a person was not actually in the U.S. at the time the person became an investor or client (including each time that an investor in a private fund acquires securities in such fund), that person may be treated for purposes of this rule as not being in the U.S. Under this exception, if subscriptions for private fund interests were submitted and accepted such that the applicable securities were acquired when the applicable investors were outside the U.S., those investors (and the related subscription amounts) would be excluded from the adviser’s assets and investors attributable to the U.S. even if, for example, the investors subsequently relocated to the U.S. (although future subscriptions or future acquisitions of securities would be analyzed by reference to the location of the investors at the time such subscriptions were submitted and accepted). The SEC has indicated that 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 then the adviser can treat such investor or client as not being “in the U.S.”
The chart available here summarizes certain registration and ERA reporting requirements that may be relevant to non-U.S. advisers.
3 The Advisers Act authorizes the SEC to raise this $25 million threshold if it deems appropriate, and the SEC has indicated that it will evaluate whether it is appropriate to do so in the future.
4 “Short-term paper” means “any note, draft, bill of exchange, or banker’s acceptance payable on demand or having a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof payable on demand or having a maturity likewise limited; and such other classes of securities, of a commercial rather than an investment character, as the SEC may designate by rules and regulations.”