Mandatory SEC Registration for Investment Advisers: the What, Who & When, April 2010

In 2004 the U.S. Securities and Exchange Commission (the SEC) issued a requirement for hedge fund advisers to register with the SEC, which was later contested and overturned in 2006 (for further details please read our article on these events). In 2009, the Obama Administration re-introduced proposals to require advisers to hedge funds and possibly other private pools of investments to register with the SEC. The proposals will be affected under the Private Fund Investment Advisers Registration Act 2009 (“the Act”).

Impact for UK Firms

Generally an “investment adviser” is any person who, for compensation:

i) engages in the business of advising others either directly through publications or writings as to the value of securities, or as to the advisability of investing in, purchasing, or selling securities; or

ii) as part of a regular business, issues or promulgates analyses or reports concerning securities.

This means that UK based investment advisers may be caught by the proposed SEC registration requirements, unless they are able to avail of the foreign adviser exemption or another exemption.

In 2004 the U.S. Securities and Exchange Commission (the SEC) issued a requirement for hedge fund advisers to register with the SEC, which was later contested and overturned in 2006 (for further details please read our article on these events). In 2009, the Obama Administration re-introduced proposals to require advisers to hedge funds and possibly other private pools of investments to register with the SEC. The proposals will be affected under the Private Fund Investment Advisers Registration Act 2009 (“the Act”).

Exemptions to registration

Under the Act, there is a blanket exemption for investment advisers who:

• have no place of business in the U.S.;
• during the preceding twelve months have had:
  • fewer than 15 clients in the U.S. (the SEC will be granted authority to determine the definition of a client and therefore the expectation is this will look through to the underlying investors) and
  • assets attributable of less than U.S.$25m (this figure may increase subject to SEC determination) and
• neither hold out generally to the public in the U.S. as an investment adviser nor acts as an investment adviser to any registered investment company or business development company.

These requirements are cumulative and therefore firms must satisfy each element in order to obtain a foreign adviser exemption. There are also proposals to exclude advisers to venture capital or private equity pools and family offices from the registration requirements.  Which of these exemptions will be adopted will ultimately be decided upon enactment of the law.

Record Keeping Requirements for Registered and Exempt Firms

Under the current proposals, investment advisers, both registered and exempt, will be required to maintain records and file with the SEC reports regarding the private funds “as are necessary or appropriate in the public interest, for the protection of investors and for the assessment of systemic risk”.

Registered firms will more specifically be required to maintain and file, inter alia:

• AUM
• Use of leverage (including off-balance sheet)
• Counterparty risk exposures
• Trading and investment positions
• Trading practices

All records would be subject to review and examination by the SEC.

Registered and exempt investment advisers will also be required to implement certain compliance policies such as codes of ethics and risk inventories.

Registration Process

The SEC registration process is expected to take 2 – 4 months. It is expected that there will be no fee, given that this is a registration not a licence application, or that any such fee will be nominal.

Initially, a firm will be required to file Form ADV Part I with the Investment Advisor Registration Depositary (IARD). This information will then be screened by the SEC and in the absence of any issues arising registration will be effective within 45 days.  The information must then be updated annually.

Firms must also prepare Form ADV Part II (a disclosure on compliance arrangements, conflicts arrangements, fees, affiliates) which is provided to clients when an account is opened, annually and upon material changes.

Participating Affiliates

Currently, firms that provide advice to an SEC registered firm, whether or not that firm is based in the U.S., rely upon a participating affiliate agreement between the two entities to avoid the SEC registration requirement.  The SEC registered firm discloses details of the affiliate through its annual submission, including information on executives with decision making abilities. The SEC monitors the activities of the non-registered firm and its compliance with record keeping and reporting requirements through the registered affiliate.

The participating affiliate arrangements are set to continue under these proposals.

Next Steps

The Act is not expected to impact firms until Q2 2011 at the earliest. IMS continues to monitor developments and will be advising firms as to the applicability of these requirements as time progresses.  In conjunction with our New York office we can provide firms subject to these requirements with advice and support in submitting a registration, completion of ADV forms and drafting appropriate compliance policies and documentation.

If you would like to discuss further how we can assist you on this matter please contact Peter Moore, Jade Cornell, or your usual IMS Consultant.

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22nd April 2010