US regulation continues to extend to the Channel Islands: Challenges for asset managers and local administrators
By John Roche, Partner, PwC – Whilst everyone no doubt has their own view of the financial crisis, what is clear is that its knock on effect has been dramatic.
Now regulators, particularly in the US, are on the offensive, keen to deal with the criticism levied at them. The Dodd Frank Act is one principal US measure. This article will focus on how it may impact a significant number of asset managers using the Channel Islands.
The Dodd Frank Act eliminates the ‘Private Investment Adviser’ registration exemption for asset managers to private funds. Previously, asset managers relied on this exemption, which allowed them to avoid registration with the Securities & Exchange Commission (SEC) if they had fewer than 15 clients. As a result of the introduction of Dodd Frank, however, many US and non-US asset managers may now need to register with the SEC by their deadline of 21 July 2011.
Unhelpfully, the US definition of ‘private funds’ is broad, in effect capturing all non-US SEC registered mutual funds. In the Channel Islands, private equity funds, hedge funds, open and closed-ended institutional and retail funds are all caught by this definition. For a lot of fund business in the Channel Islands, US investors are vital.
The ongoing compliance requirements for fully registered advisers are onerous and will undoubtedly impact the operations of asset managers and the services offered by local administrators. Even if exemption is granted, there will still be certain SEC record keeping requirements and examinations.
All non-US asset managers need to ask “do I need to register now with the SEC?” and look very carefully at the exemptions available. Whilst Dodd Frank has an absolute registration requirement of 21 July, the SEC is only now dealing with the detailed rules and exemptions. Despite this, the expectation is that the asset manager is compliant in all respects on day one – there is no grace period.
The three key exemptions can be summarised as:
Foreign Private Adviser Exemption
To meet this exemption the asset manager must have:
1. no place of business in the US;
2. fewer than 15 US clients and investors in the private funds advised;
3. less than $25m in assets attributable to US clients and investors; and
4. not held itself out generally to the US public as an adviser
For most non-US asset managers this exemption will be the first place to look to, as there is no registration requirement and so no ongoing reporting obligations if this exemption is met. The problem, however, is that all four conditions must be met. Even a small office in the US, for example, is considered a ‘place of business’. So potentially a number of asset managers will need to look at the ‘Private Fund Advisers Exemption’.
Private Fund Adviser Exemption
This is a less desirable exemption as it can lead to certain reporting obligations to the SEC. Asset managers need to be careful too - if any US person who is not a private fund is separately advised, then this exemption cannot be relied upon. If all your clients are private funds and/or non-US persons, you then look to see if your asset management business is managing investments from a place of business in the US – even if it isn’t, there may still be a requirement to register with the SEC as a so called ‘Exempt Reporting Adviser’.
If the non-US asset manager does have a place of business in the US then there is a need to determine if investments are managed from that place of business. Basically, if the non-US asset manager manages more than $150m in assets from that US place of business, then there is a requirement to be fully registered with the SEC.
Venture Capital Adviser Exemption
Advisers that only manage venture capital funds are exempt from registration with the SEC. Their definition of a ‘venture capital fund’ is that it is a private fund which represents itself to investors as a venture capital fund; only invests in equity securities of private companies; is not leveraged at the fund or portfolio company level; provides significant managerial assistance or controls portfolio companies and does not offer redemption rights to investors.
There are grandfathering provisions proposed, so that existing funds which have had a final closing by 21 July and which make venture capital investments would generally be deemed to meet the proposed definition, provided they have represented themselves as venture capital funds. There is still a potential requirement to register with the SEC and be a so called ‘Exempt Reporting Adviser’.
The ‘Regulation Lite’ regime currently applies to existing non-US asset managers that are already registered with the SEC. At the moment, the SEC has taken a relaxed approach to the full application of the Advisers Act when looking at how the non-US asset manager deals with its non-US clients. Helpfully, a non-US private fund is a non-US client, even if US investors are in that fund.
A non-US asset manager presently registered or that is required to register will be required to keep certain records under the rules and will remain subject to examination. Thankfully, though, a lot of the provisions of the Advisers Act are not applied to the non-US asset managers’ dealings with non-US clients, presuming the non-US asset manager has no separate US clients.
If the SEC keeps its current approach, then there could be relief from a lot of the provisions of the Advisers Act for non-US registered asset managers in the future.
It is almost impossible to summarise all the implications for non-US asset managers of Dodd Frank but hopefully this article has provided a flavour of what we are currently presented with. It is fair to say that a large number of asset managers using the Channel Islands will either be required to fully register with the SEC or fall into the ‘Exempt Reporting Adviser’ bucket. As a result, compliance costs will increase, whilst business models and services of local administrators will need to adapt as asset managers using the islands will inevitably seek assistance with record keeping and other obligations.
Whilst there are still many details under consultation by the SEC, the clock is ticking towards that registration deadline of 21 July. And it is worth bearing in mind that the deadline is in fact even tighter, as the forms required should really be with the SEC 45 days before that date.
John Roche is a partner with PwC
This article first appeared in the Spring 2011 edition of the Channel Islands Stock Exchange Bulletin Board
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