+ 44 20 7408 2448
Are you exempt? SEC registration for non-US asset managers
It has been eight months since the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”), was signed by President Obama and the precise rules and implications are only beginning to become clear. The reform, a response to the financial crisis and the perceived inadequacy of regulation, removes, amongst other things, an exemption from SEC registration commonly used by investment advisers to private funds with the consequence that many more non-US fund managers and advisers will need to register with the US Securities and Exchange Commission (“the SEC”). To varying degrees any offshore fund manager that has raised funds in the US, manages assets in the US or has established managed accounts with US clients is likely to be impacted.
Non-US asset managers will come under the SEC’s ambit in some manner if they have more than $25m AUM attributable to US clients or if they have 15 or more US clients, irrespective of the related AUM. For these purposes, US clients includes US investors in a fund (i.e.US individuals, corporations, trusts etc).
Exempt Reporting Advisers
The SEC proposes to target registration on those managers that actually undertake investment management in the US and are of sufficient scale to warrant oversight. So, the SEC is currently consulting on a new category of “Exempt Reporting Advisor” (“ERA”) status that offers the prospect of a “Middle-Reg” regime instead of full registration. This would mean neither full exemption nor full registration with the SEC. ERA status applies to two types of investment manager:
- Managers of funds meeting a “Venture Capital” definition
- Managers (and advisers) of ‘Private Funds’ with less than $150m of assets managed (from a location) in the US.
Although the “benefit” of the ERA status is that the SEC is updating its disclosure regime to obtain the information it requires without requiring full registration, there are still likely to be record-keeping obligations and the threat of external SEC examination. Form filling, periodic updates and awareness programmes are likely to be unavoidable.
Obtaining SEC authorisation
The ERA status only applies to advisers and managers of private funds. So firms that operate just one managed account with a US investor or manage funds over $150m from a place of business in the US will find themselves subject to full SEC regulation under the proposed rules.
Full SEC applicants will need to prepare ADV Forms Part I and Part II. ERAs will prepare a subset of the ADV Part 1, which will comprise mainly of informational disclosures with the sting in its tail of locking the firm into SEC record keeping and examination requirements. Part II discloses biographies of officers, directors and portfolio managers and the firm’s key policies and procedures.
The application for registration is made by submitting ADV Part I through the Investment Advisor Registration Depositary (“IARD”) system. The SEC generally has 45 days after receipt of the Form ADV to declare an applicant's registration effective or not. Effectively the timeline for submitting an application for full registration is therefore early June.
What must firms do now?
The first priority is to determine whether and how the firm may be subject to SEC oversight. Our current view is that many European-based alternative fund managers will be ERAs. Otherwise, unless the firm has less than $25m under management or advice attributable to US clients or less than 15 US clients and can take advantage of the limited foreign adviser exemption, the Firm will need to register with the SEC. Then, the Firm will need to determine which policies and procedures will need to be adapted to the more prescriptive SEC requirements and how it will demonstrate compliance under independent examination.
The bar is higher for full SEC registration, but either way there is a bar to be reached. Expect cultural clashes over the more prescriptive SEC requirements and aghast at the detail of reporting information particularly under full SEC examination. However, firms should avoid re-papering en masse; just because the SEC is using a sledgehammer there’s no need for FSA authorised managers to do the same. Existing compliance infrastructures should be enhanced to meet requirements not pulled down and re-built and firms should certainly avoid establishing two sets of manuals and procedures depending on which regulator knocks at the door.
Living with the SEC
Having filed an ADV, whether as an ERA or a full registrant, the firm will have made a formal commitment to meet the SEC’s record keeping responsibilities, so senior management should establish oversight arrangements which provide confirmation that requirements are being met. This is likely to require an extension of the existing compliance monitoring scope to cover SEC matters. Additionally, Form ADV information must be updated within 90 days of the manager’s year-end and promptly if it becomes materially inaccurate in the course of the year.
Of course, the primal fear of SEC oversight is the potential for detailed examination, without any prior experience of what the SEC expects or wants. Firms should not register and then forget about the SEC. They will need to establish the SEC as a component in their overall compliance programme and obtain support and advice because rules and their interpretation can, of course, change.
As to the likelihood of SEC inspection visits in London? The SEC is under its own budget restrictions so it is hard to imagine plane loads of inspectors arriving at Heathrow. However, joint FSA themed visits that put global regulatory co-operation to work while Europe centralises? That’s certainly a possibility.
By Jonathan Wilson
Originally published on www.complinet.com © Thomson Reuters, 10th February 2011
