On November 19, 2010, the United States Securities and Exchange Commission proposed new rules and rule amendments under the Investment Advisers Act of 1940 (the “Advisers Act”) to implement provisions of the Dodd-Frank Act. On November 23 Bingham issued a Client Alert entitled “SEC Proposes Rules Implementing Dodd-Frank Act Provisions on Investment Adviser Registration,” providing an initial outline of the proposals.
This follow-up Client Alert focuses on issues of particular interest to non-U.S. advisers relating to the proposals on exemptions from Advisers Act registration requirements and related Dodd-Frank Act matters. This Client Alert does not repeat all the information in the November 23 Client Alert, so you may wish to review this Client Alert after reading the November 23 Client Alert.
References in this Client Alert to the “release” are to the so-called “Exemptions Release” entitled “Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers” issued by the SEC on November 19, 2010.
Foreign Private Adviser Exemption — Perhaps Broader Than it First Appeared
The Dodd-Frank Act establishes a new exemption from Advisers Act registration for “foreign private advisers.” However, as set forth in the Advisers Act the scope of the foreign private adviser exemption is quite narrow, and the exemption did not appear particularly helpful for a non-U.S. adviser with a more than incidental U.S. advisory business. As set forth in the Dodd-Frank Act, a non-U.S. adviser would qualify for the foreign private adviser exemption only if it meets all of the following principal conditions:
(i) It has no place of business in the United States.
(ii) It has, in total, fewer than 15 clients in the United States and investors in the United States in private funds1 advised by the investment adviser.
(iii) It has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than US$25 million.
(iv) It does not hold itself out generally to the public in the United States as an investment adviser.
The SEC proposals include definitions of several of the terms used in the foreign private adviser exemption that are, at least in some respects, potentially helpful for non-U.S. advisers that seek to qualify for the foreign private adviser exemption. Several of these definitions, as well as other points in the proposal relevant to the foreign private adviser exemption, are outlined below.
Who is “in the United States?”
The SEC proposes for purposes of the conditions to the foreign private adviser exemption set forth in paragraphs (ii) and (iii) above to define clients and investors “in the United States” generally to mean any “U.S. person” as defined in Regulation S under the Securities Act of 1933 (the “1933 Act”). However, any discretionary account held for the benefit of a U.S. person by a non-U.S. fiduciary that is related to the adviser seeking to qualify as a foreign private adviser shall be treated as a U.S. person (this exception, the “Offshore Account Exception”).
Accordingly, under the proposed rule a non-U.S. adviser need only count clients and fund investors towards the 15-client/investor limit in paragraph (ii) above if they are “U.S. persons” as defined in Regulation S, subject to the Offshore Account Exception. Similarly, a non-U.S. adviser need only count assets under management towards the US$25 million limit in paragraph (iii) above if those assets are attributable to “U.S. persons” as defined in Regulation S. This means that, among others, the following types of clients and investors, which are outside the Regulation S definition of “U.S. person,” and assets under management attributable to them, need not be counted towards these limits:
(i) A U.S. citizen who is not resident in the United States.
(ii) A partnership or company formed under non-U.S. law and owned by U.S. institutions (other than estates or trusts) that are “accredited investors” as defined in Regulation D under the 1933 Act, provided the partnership or company is not formed as part of a plan for improperly avoiding Advisers Act registration.
(iii) A partnership or company formed under non-U.S. law and owned by any U.S. “accredited investors” as defined in Regulation D under the 1933 Act, provided both (A) the partnership or company was not formed for the purpose of investing in securities not registered under the 1933 Act, and (B) the partnership or company is not formed as part of a plan for improperly avoiding Advisers Act registration.
(iv) A discretionary account (other than for an estate or a trust) held for the benefit of a non-U.S. person by a bank, trust company, brokerage house, or similar professional fiduciary organized in the United States.
(v) A discretionary account held for the benefit of a U.S. person by a non-U.S. bank, trust company, brokerage house, or other fiduciary that is not related to the investment adviser seeking to qualify as a foreign private adviser. However, any discretionary account held for the benefit of a U.S. person by a non-U.S. fiduciary that is related to the investment adviser seeking to qualify as a foreign private adviser shall be treated as a U.S. person.
(vi) An agency or branch of a U.S. entity located outside the United States that (A) operates for valid business reasons, and (B) is subject to substantive banking or insurance regulation where it is located.
(vii) The International Monetary Fund, the World Bank, the United Nations, and similar international organizations, together with their affiliates and pension plans even if they are located in the United States.
In addition, the proposed rules provide that a client or private fund investor that was not a U.S. person, as defined in Regulation S, at the time the client or investor became a client or acquired fund securities need not be treated as a client or investor in the United States even if the client or investor subsequently moves to the United States or otherwise becomes a U.S. person, as defined in Regulation S.
What is a place of business in the United States?
The SEC proposes for purposes of the condition to the foreign private adviser exemption set forth in paragraph (i) under the heading “General” above to define “place of business” to mean any office where an investment adviser regularly provides advisory services or solicits, meets with, or otherwise communicates with its clients, and any location held out to the public as a place where the adviser conducts any such activities. Thus, a U.S. office at which a non-U.S. adviser only conducts, and only holds itself out as conducting, other non-advisory activities would not be “a place of business in the United States” that would, by itself, prevent the non-U.S. adviser from relying on the foreign private adviser exemption.
Who counts as a single client?
At present Rule 203(b)(3)-1 under the Advisers Act sets forth helpful rules for counting an adviser’s clients in order to determine whether the adviser may rely on the private adviser exemption. Under the Dodd-Frank Act the general private adviser exemption will no longer apply after July 21, 2011, to be replaced, in small part, by the foreign private adviser exemption. Accordingly, the proposal includes rules for counting a non-U.S. adviser’s U.S. clients in order to determine whether the non-U.S. adviser may rely on the foreign private adviser exemption.
These proposed rules would mirror Rule 203(b)(3)-1 in some, but not all, respects. The proposed rules would allow an adviser to treat as a single client a natural person and (i) his or her minor children regardless of whether they share the same principal residence; (ii) any other relatives, spouse, and spouse’s relatives who have the same principal residence; and (iii) related accounts and trusts. Multiple legal entities with identical shareholders, partners, limited partners, members, or beneficiaries may be counted as one client.
An adviser may treat as one client a company, partnership, or other organization to which the adviser provides advice based on the organization’s investment objectives rather than the individual investment objectives of its shareholders, partners, or other members (together “investors”), provided (i) to avoid double-counting, an adviser need not count a private fund as a client if the adviser counted any investor in the private fund as an investor for purposes of determining the availability of the foreign private adviser exemption, and (ii) an adviser must treat an investor as a separate client if the adviser provides the investor with investment advice separate and apart from the advice provided to the organization.
Unlike the current Rule 203(b)(3)-1, the proposed rule would require advisers to count as clients U.S. persons for whom the adviser provides advisory services without compensation.
Will the US$25 million threshold be increased?
After the enactment of the Dodd-Frank Act, there was speculation that the SEC would increase the US$25 million assets under management threshold in the foreign private adviser exemption, perhaps to US$100 million. This would make the foreign private adviser threshold consistent with the US$100 million threshold at which U.S. advisers must generally register with the SEC under the Advisers Act, absent an exemption from registration. The Dodd-Frank Act expressly authorizes the SEC to increase the US$25 million threshold in the foreign private adviser exemption. Moreover, it may seem at least a little odd to generally set the assets under management registration threshold for U.S. advisers at US$100 million while setting the assets under management registration threshold for non-U.S. advisers at US$25 million, although U.S. advisers with less than US$100 million in assets under management (i) may be required to register with state authorities, and (ii) may be required to register with the SEC if they are not subject to state investment adviser regulation and examination by state authorities and have at least US$25 million in assets under management.
In the release the SEC notes that the Dodd-Frank Act provides it with the authority to increase the US$25 million threshold in the foreign private adviser exemption but goes no further. Footnote 268 in the release mentions, in another context and without comment, a suggestion by a group of New York lawyers that the SEC raise the threshold to US$150 million for the sake of consistency with the private fund adviser exemption discussed below. Otherwise, not a word on the possibility of increasing the US$25 million threshold despite the clear statutory authority to do so, and not even an invitation to comment on the issue.
Absent some indication from the SEC that it plans to propose a rule increasing the US$25 million threshold, it is prudent for non-U.S. advisers to assume that this threshold will not be increased in considering whether they will be able to rely on the foreign private adviser exemption after July 21, 2011, the date on which the expanded Advisers Act registration requirements under the Dodd-Frank Act come into effect.
Private Fund Adviser Exemption — More Helpful Than Expected
The Dodd-Frank Act instructed the SEC to issue a rule exempting from Advisers Act registration any adviser solely to private funds that has less than US$150 million in assets under management in the United States. The SEC declares in the release that this will be known as the “private fund adviser exemption.”
The proposed rules divide the private fund adviser exemption into two exemptions: one for advisers with their principal office and place of business in the United States (the “U.S. Private Fund Adviser Exemption”) and the second for advisers with their principal office and place of business outside of the United States (the “Non-U.S. Private Fund Adviser Exemption”). For this purpose “principal office and place of business” means an adviser’s executive office from which its officers, partners, or managers direct, control, and coordinate its activities. Thus an adviser headquartered outside the United States apparently could still have a substantial, non-headquarters office in the United States while relying on the Non-U.S. Private Fund Adviser Exemption.
The U.S. Private Fund Adviser Exemption provides that an adviser with its principal office and place of business in the United States is exempt from the registration requirements of the Advisers Act if it both (i) acts solely as an investment adviser to one or more private funds, and (ii) manages private fund assets of less than US$150 million.
The Non-U.S. Private Fund Adviser Exemption is more interesting: an adviser with its principal office and place of business outside the United States is exempt from the registration requirements of the Advisers Act if both (i) the adviser has no client that is a United States person except for one or more private funds, and (ii) all assets managed by the adviser from a place of business in the United States are solely attributable to private fund assets with a total value of less than US$150 million. Several key points to note:
(i) An adviser with its principal office and place of business outside the United States may rely on the Non-U.S. Private Fund Adviser Exemption if it has clients other than private funds, provided that those clients are not United States persons. The Regulation S definition of “U.S. person,” which is discussed above, applies subject to the Offshore Account Exemption, also discussed above. Thus, as noted by the SEC, a non-U.S. adviser could enter the U.S. market and rely on the Non-U.S. Private Fund Adviser Exemption without regard to the type or number of its non-U.S. clients.
(ii) The US$150 million threshold in the Non-U.S. Private Fund Adviser Exemption applies only to assets managed from a place of business in the United States. Thus, it would appear that under the Non-U.S. Private Fund Adviser Exemption as currently proposed, a non-U.S. adviser with no office or place of business in the United States would presumably, under any normal circumstances, automatically fall beneath this threshold. Further, a non-U.S. adviser could rely on the Non-U.S. Private Fund Adviser Exemption while still managing substantial assets from U.S. sources provided these assets are managed outside the United States. Conversely, managing any assets from a U.S. place of business for clients other than private funds would make the Non-U.S. Private Fund Adviser Exemption unavailable.
(iii) The SEC proposes for purposes of the Non-U.S. Private Fund Adviser Exemption to use the definition of “place of business” discussed above under the heading “What is a place of business in the United States?” Under this definition if a non-U.S. adviser has a U.S. office at which it does not regularly provide advisory services, solicit, meet with, or otherwise communicate with its clients, or hold itself out to the public as conducting these activities, that office would under the proposals not constitute a “place of business” in the United States. Thus, if a non-U.S. adviser has a U.S. office (A) at which it conducts only investment research, analysis, and trading, and (B) which is not held out as a location for providing advisory services, solicitations, meetings or other client communications, assets managed from that office presumably would not count towards the US$150 million threshold in the Non-U.S. Private Fund Adviser Exemption.
In short, as proposed, the Non-U.S. Private Fund Adviser Exemption appears to offer some flexibility for non-U.S. fund managers to avoid the requirement to register under the Advisers Act. For example, a fund manager with its principal office and place of business outside of the United States could rely on the Non-U.S. Private Fund Adviser Exemption while managing over US$150 million in assets from U.S. sources as long as the manager does not manage those assets from a U.S. place of business. However, these are only proposed rules, and the final rules may offer less flexibility.
A U.S. adviser that is a subsidiary of a non-U.S. adviser may not be permitted to rely on the Non-U.S. Private Fund Adviser Exemption if the subsidiary has its principal office and place of business in the United States. If such a U.S. subsidiary is to rely on the private fund adviser exemption, it is likely that it will be required to rely on the U.S. Private Fund Adviser Exemption.
Investment advisers that rely on the U.S. Private Fund Adviser Exemption or the Non-U.S. Private Fund Adviser Exemption may still be subject to SEC reporting requirements as outlined in our November 23 Client Alert.
Venture Capital Fund Exemption
The Dodd-Frank Act established an exemption from Advisers Act registration for advisers that only manage venture capital funds and directed the SEC to define “venture capital fund” for purposes of this exemption. Our November 23 Client Alert contains a general discussion of the “venture capital fund” definition proposed by the SEC. Here are a few points relating to the proposal that may be of particular interest to non-U.S. advisers.
The definition of “venture capital fund” proposed by the SEC recognizes that venture capital funds often need to invest unused cash on an interim basis before applying it to venture investments, fund expenses, or distributions to investors. Accordingly, the proposed definition permits a venture capital fund to invest in cash, cash equivalents, and U.S. Treasuries with a remaining maturity of 60 days or less. A venture capital fund whose manager relies on this exemption is not permitted to invest in debt issued by non-U.S. governments (except for debt that qualifies as a cash equivalent). Since U.S. Treasuries are denominated only in U.S. dollars, non-U.S. venture funds with a functional currency other than the U.S. dollar may need to accept U.S. currency risk if they wish to hold interim balances in anything other than cash or cash equivalents.
The proposed “venture capital fund” definition is not limited to funds that invest solely in U.S. companies. The release notes that the Dodd-Frank Act’s legislative record does not indicate that the U.S. Congress intended to limit the venture capital fund exemption to advisers that invest only in U.S. companies. However, the release invites public comment on whether the exemption should be limited to advisers to venture capital funds that invest exclusively or primarily in U.S. companies. While it is not possible to predict the actions of the SEC, we think it unlikely, in the absence of any indication in the legislative record that the U.S. Congress intended to limit the exemption to advisers to funds investing solely in U.S. companies, that the final SEC rule will incorporate such a limitation. Nonetheless, non-U.S. advisers that plan to rely upon the venture capital fund exemption should remain alert for any indications that the SEC will change course on this point, and may wish to consider submitting a comment to the SEC on this issue.
As proposed, non-U.S. advisers would not be permitted to rely on the venture capital fund exemption if they have advisory clients other than venture capital funds — even if those clients were located outside the United States. This is somewhat inconsistent with the Non-U.S. Private Fund Adviser Exemption discussed above and upon which a non-U.S. adviser may rely without regard to the type or number of its non-U.S. clients. The SEC invites public comment on whether non-U.S. advisers should be allowed to rely on the exemption for venture capital fund managers if they advise clients other than venture capital funds, as long as those clients are not U.S. persons. Again, it is not possible to predict the actions of the SEC. However, if the exemption for venture capital managers were modified in this manner, it would offer additional flexibility for non-U.S. advisers to rely on the venture capital fund manager exemption while managing non-venture assets outside of the United States.
Investment advisers that rely on the exemption for venture capital fund managers may still be subject to SEC reporting requirements as outlined in our November 23 Client Alert.
Will “SEC Lite” Survive?
In 2004 the SEC issued rules requiring many hedge fund managers to register under the Advisers Act (the “2004 Hedge Fund Manager Rules”). The 2004 Hedge Fund Manager Rules were vacated by the court of appeals in Goldstein vs. SEC, 451 F. 3rd 873 (D.C. Cir. 2006). In the 2004 Hedge Fund Manager Rules the SEC redefined “client” for purposes of the Advisers Act to include certain hedge fund investors so that hedge fund managers would be unable to rely on the private adviser exemption from Advisers Act registration. The court of appeals rejected the SEC’s approach:
That the [Securities and Exchange] Commission wanted a hook on which to hang more comprehensive regulation of hedge funds may be understandable. But the Commission may not accomplish its objective by a manipulation of meaning. Id at 882.
Congress effectively overturned the Goldstein decision when the Dodd-Frank Act removed the private adviser exemption from the Advisers Act effective July 21, 2011.
In order to limit their extraterritorial impact, the SEC included among the 2004 Hedge Fund Manager Rules a rule stating that a non-U.S. adviser to a non-U.S. private fund was permitted to treat the fund (and not its investors) as the adviser’s client for most purposes under the Advisers Act. Thus, because the SEC has a long-standing policy of not applying most of the substantive provisions of the Advisers Act to the non-U.S. clients of a non-U.S. adviser registered under the Advisers Act and because the non-U.S fund would be a non-U.S. client, the 2004 Hedge Fund Manager Rules provided that the Advisers Act generally would not apply to a registered non-U.S. adviser’s dealings with the non-U.S. fund. This arrangement was often referred to as “SEC Lite.”
When the Goldstein decision vacated the 2004 Hedge Fund Manager Rules, there was some concern that it also vacated the rule that a registered non-U.S. adviser to a non-U.S. private fund was permitted to treat the fund (and not its investors) as the advisor’s client for most purposes under the Advisers Act. This made the legal status of SEC Lite unclear. Helpfully, the Division of Investment Management of the SEC issued a letter dated August 10, 2006 to the American Bar Association (the “ABA Letter”) clarifying that SEC Lite would continue for non-U.S. fund managers registered under the Advisers Act. In pertinent part the ABA Letter states as follows:
We agree that, under principles laid out in prior staff guidance and letters, the substantive provisions of the [Advisers] Act do not apply to offshore advisers with respect to such advisers’ dealings with offshore funds and other offshore clients to the extent described in those letters and the Adopting Release [for the 2004 Hedge Fund Manager Rules]. An offshore adviser registered with the Commission under the Advisers Act must, of course, comply with all of the Act and the Commission’s rules thereunder with respect to any U.S. clients (and any prospective U.S. clients) it may have.
The fairly sweeping nature of the Advisers Act amendments included in the Dodd-Frank Act casts doubt on whether SEC Lite will remain in effect after July 21, 2011, when for the most part the amendments will take effect. The SEC does not in its November 19 proposals expressly address SEC Lite. However, the SEC release refers to the ABA Letter when discussing the exemption for advisers to venture capital funds and even restates, without comment, the substance of the quotation from the ABA Letter set forth above. If the SEC objects to continued reliance on SEC Lite by non-U.S. advisers, it seems unlikely that they would have restated without comment in the release the wording from the ABA Letter that extended SEC Lite in the wake of the Goldstein decision.
Moreover, as noted above under the caption “Who counts as a single client?”, the proposed rules state that a non-U.S. adviser counting the number of its clients for purposes of determining whether it is eligible for the foreign private adviser exemption may treat as a single client a corporation, partnership, or other legal organization to which the adviser provides investment advice based on the organization’s investment objectives rather than the individual investment objectives of the organization’s investors. As a technical matter this proposed rule governs only the procedure for counting clients for purposes of the foreign private adviser exemption, and so does not address the question of whether for other Advisers Act purposes a non-U.S. adviser may treat the funds it manages, rather than investors in those funds, as its clients. However, one might infer from the rule that a non-U.S. adviser may treat the funds it manages, rather than their investors, as its clients for other purposes. As a practical matter, if the SEC expects that for purposes other than counting clients under the foreign private adviser exemption a non-U.S. adviser would treat U.S. investors in funds that it manages as its clients, the SEC in all likelihood would have included a statement to this effect in the release so as to prevent lawyers from drawing precisely the inference being drawn by this paragraph.
These tea leaves suggest, albeit not definitively, that SEC Lite still has a pulse.
The Unibanco No-Action Letter — Down the Memory Hole?
The SEC has in recent decades taken different positions on the circumstances in which an adviser in determining whether it is exempt from Advisers Act registration must take into account the activities of its affiliates, including affiliates in other countries. This is a topic of particular interest to non-U.S. advisers. A non-U.S. adviser may be reluctant to open a U.S. office or establish a U.S. subsidiary to provide advisory services in the United States if by doing so the non-U.S. adviser is required to register under the Advisers Act.
In the Richard Ellis no-action letter (September 17, 1981), the SEC staff stated that a U.S. subsidiary of a non-U.S. adviser would be regarded as having a sufficiently separate existence from its non-U.S. parent so that the parent would not be required to register under the Advisers Act by reason of the U.S. subsidiary’s activities only if the subsidiary satisfied the following five conditions, which were known as the “Ellis conditions”:
(i) The subsidiary must be adequately capitalized.
(ii) The subsidiary must have a “buffer” between its personnel and the non-U.S. parent, such as a board of directors, a majority of whose members are independent of the parent.
(iii) The subsidiary must have employees, officers, and directors who, if engaged in providing advice in the day-to-day business of the subsidiary, are not otherwise engaged in the non-U.S. parent’s advisory business.
(iv) The subsidiary must itself make decisions on the investment advice provided to, or used for, its clients and must have and use sources of information other than its non-U.S. parent.
(v) The subsidiary must keep its investment advice confidential until communicated to its clients.
If the Ellis conditions were not met, the non-U.S. parent, if not registered under the Advisers Act, might be found in violation of the Act for indirectly conducting an investment advisory business in the United States without being registered under the Act.
In 1992 there was a remarkable change of direction. The SEC Division of Investment Management published a report entitled Protecting Investors: A Half Century of Investment Company Regulation (the “1992 Report”). This report included a discussion of the extra-territorial reach of the Advisers Act featuring quite harsh criticism of the Ellis conditions as follows:
While the Ellis conditions were designed to ameliorate the problems created by the Division’s interpretations of the reach of the Advisers Act, they pose great difficulties in practice. The separate personnel requirement, in particular, has harsh effects. A foreign parent adviser may be unable to employ its most talented portfolio managers on United States accounts, since such portfolio managers may be required to bring their specialized expertise to bear on a larger proportion of business represented by non-United States accounts served by the parent. It is probably unrealistic to expect that a foreign adviser would make a valuable portfolio manager unavailable to its non-United States clients by transferring the manager to a subsidiary registered under the Advisers Act. Finding another portfolio manager with equivalent expertise to work in the registered subsidiary is inefficient and may be impossible. Thus, as a practical matter, because of the Ellis conditions, United States clients may have limited access to advisory personnel with expertise in particular specialized markets.
The Ellis conditions concerning the flow of information also may have deleterious consequences. While portfolio managers working in a registered subsidiary have the benefit of research materials generated by the parent, and may participate in some circumstances in discussions with personnel of the parent concerning current trends and allocation of portfolios between industries and national markets, the conditions may prohibit day-to-day exchanges of ideas and discussions between portfolio managers of the parent and subsidiary. As a result, a foreign adviser’s ability to provide the best available service to United States clients likely is impeded.
In addition, while Ellis requires the registered subsidiary of a foreign adviser to be adequately capitalized, Ellis does not provide any guidance as to what constitutes adequate capitalization. Investment advisers do not have to meet capital requirements under the Advisers Act. Finally, assuming that an adequate level of capital could be determined, this condition nonetheless requires a foreign adviser to divide its capital for seemingly artificial purposes. 1992 Report at 225-227.
In the wake of this self-criticism, the SEC staff issued a series of no-action letters providing assurance that a U.S. subsidiary and a non-U.S. parent would be sufficiently separate for purposes of the Advisers Act registration requirements if (i) they are separately organized (i.e., two distinct legal entities); (ii) the registered adviser is staffed with personnel (whether physically located in the United States or abroad) who are capable of providing investment advice; and (iii) a number of other conditions concerning consent to SEC oversight, SEC access to records of non-U.S. affiliates, and regulatory compliance are met. See, e.g., Uniao de Bancos de Brasileiros S.A., SEC No-Action Letter (July 28, 1992) (the “Unibanco Letter”). Based on the Unibanco Letter and several subsequent no-action letters, numerous non-U.S. advisers have, without themselves registering under the Advisers Act, established U.S. subsidiaries that registered under the Advisers Act and undertook investment advisory business in the United States.
After the enactment of the Dodd-Frank Act, several groups of lawyers penned letters to the SEC seeking confirmation that the Dodd-Frank Act would not affect the Unibanco Letter. This correspondence noted there would be little utility in requiring large numbers of non-U.S. advisers to register under the Advisers Act simply by reason of their affiliations with registered U.S. advisers and that numerous international financial institutions had structured their affairs based on the Unibanco Letter and subsequent SEC staff guidance.
In the release the SEC referred in footnote 271 to these requests relating to the Unibanco Letter. It pointedly declined to provide the requested assurances, at least at this time, and instead observed unhelpfully that “such determinations will depend on the particular facts and circumstances of non-U.S. advisers.” Unhelpfully, footnote 270 comments:
The determination of whether the advisory business of two separately formed affiliates may be required to be integrated is based on the facts and circumstances. Our staff has taken this position in Richard Ellis, Inc., SEC Staff No-Action Letter (September 17, 1981) (discussing the staff’s views of factors relevant to the determination of whether a separately formed advisory entity operates independently of an affiliate).
Is the SEC, without explanation, rehabilitating the Ellis conditions that the 1992 Report so vigorously criticized? Footnote 270 makes no reference to the Unibanco Letter or the no-action letters that followed it. This is remarkable since, among other things, the Unibanco Letter and the no-action letters following it are more recent than the Ellis no-action letter and are, as the SEC well knows, widely relied upon. Does this indicate, without explanation, that the SEC has withdrawn the Unibanco Letter and those that followed it?
Any non-U.S. advisers with affiliates that are registered under the Advisers Act should take careful note of footnotes 270 and 271 in the release. They create substantial uncertainties as to whether non-U.S. affiliates of advisers registered under the Advisers Act may continue to rely after July 21, 2011, upon the Unibanco Letter and the no-action letters that followed it or must instead meet the Ellis conditions.
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We will continue to monitor these proposals and may update this Client Alert to reflect significant developments. The release can be found at http://www.sec.gov/rules/proposed/2010/ia-3111.pdf.
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This article was originally published by Bingham McCutchen LLP.