Saturday, January 08, 2011

SEC Proposals Implementing Dodd-Frank Hedge Fund Mandates Provide Important Clarifications for Foreign Fund Exemptions

The hedge fund and private equity fund registration requirements of Dodd-Frank, as implemented by the SEC, will be a ``major compliance headache’’ for many EU private equity firms, in the opinion of the European Private Equity & Venture Capital Association (ECVA). Since Congress left much of the details of registration exemptions to the SEC, recent SEC proposed regulations filling in the interstices of the Dodd-Frank provisions are of intense interest to the EU hedge fund community. The ECVA said that the SEC has provided important and helpful clarifications in the proposals.

Dodd-Frank may require many US and non-US private equity fund managers and advisers to register with the SEC by July of 2011. The most significant exemptions for non-US fund advisers and managers are for certain foreign private advisers and for advisers with less than $150 million assets under management in the US. But the ECVA mentioned that EU funds qualifying for an exemption from registration may still be subject to reporting obligations.

Foreign private advisers are exempt if they have no place of business in the US, fewer than 15 clients and investor in the US, less than $25 million under management attributable to US clients and investors, and do not hold themselves out to the US public as an investment manager or adviser and do not manage or advise registered investment companies or business development companies. According to the ECVA, the SEC proposals provide some helpful clarifications to the meaning of some terms in the exemption.

For example, the proposed definition of client seeks to ensure that there is no double counting by clarifying that a private fund adviser need not count a private fund as a client if the adviser counted any investor in that fund as an investor for purposes of determining if the exemption is available. The proposals also clarify that the question of whether an investor is in the US is determined at the time at which the investor acquires the securities in the fund and a fund manager or adviser does not have to count a non-US person who later moves to the US. With this clarification, the SEC recognizes that it would be unduly burdensome for a hedge fund adviser to have to monitor the location of investors on an ongoing basis. Indeed, absent this clarification, an EU hedge fund might have to choose between SEC registration or terminating itselationship with any client that moved to the United States, or redeeming the interest in the private fund of any investor that moved to the United States.

As proposed by the SEC, the exemption for fund advisers with less than $150 in assets under management in the US would apply to a non-US adviser with a principal office and place of business outside the US so long as the non-US adviser does not manage or advise any accounts for US clients that are private funds and the aggregate assets of all private funds managed by the non-US adviser from a place of business in the US are less than $150 million.

According to the ECVA, this means that under the SEC’s proposal, a non-US adviser will only have to count towards the $150 million limit those assets that it manages from a place of business in the US. So long as a private fund is not managed from a place of business in the US, a non-US adviser may be able to benefit from the exemption even if it manages more than $150 million from US investors in either a US or non-US private fund. The ECVA emphasized that the SEC is not seeking to defining assets under management in the US by reference to the commitments of US investors into non-US funds, although the Commission offers that as an alternative approach upon which it invites comments.