A month after approving rules requiring the registration of hedge fund advisers under the US Investment Advisers Act of 1940 in a 3-2 decision, the US Securities and Exchange Commission has published the final text of the rules.
Rule 203(b)(3)-2 was adopted largely as proposed and requires registration under the Advisers Act for many advisers to hedge funds and other private investment funds. The Advisers Act requires investment advisers who make use of US jurisdictional means to register with the SEC unless an exemption from registration is available.
Currently, while some hedge fund advisers choose to register voluntarily, most advisers to hedge funds do not register under the Advisers Act and instead rely on the private adviser exemption from registration for investment advisers with 14 or fewer clients in any 12-month period who do not hold themselves out generally to the public as investment advisers by structuring their client relationships through separate pooled investment vehicles.
The Rule requires advisers to “private funds” to “look through” the funds to count the number of investors as clients for purposes of the private adviser exemption. Advisers to fourteen or more clients during the course of the preceding 12 months are not eligible for the private adviser exemption under the Act.
Under the Rule, a private fund is defined as a fund that is exempt from registration under the US Investment Company Act of 1940 pursuant to Section 3(c)(1) or Section 3(c)(7) of that act; permits investors to redeem their interests within two years of purchase and offers interests based on the investment advisory skills, ability or expertise of the adviser.
An investment adviser whose principal office and place of business is outside the US must register with the SEC if it has more than 14 clients resident in the United States. In response to comments, the SEC has clarified that a non-US adviser should determine whether an investor is a US resident at the time of investment in the private fund.
In an accommodation to non-US advisers, the SEC will permit a non-US adviser whose principal office and place of business is outside of the United States to treat the fund (and not the investors) as its client for most purposes under the Advisers Act. Importantly, the SEC has clarified that this would require a non-US adviser to register, comply with certain recordkeeping requirements and remain subject to SEC examinations. Other requirements, including the Adviser Act’s compliance rule, custody rule and proxy voting rule, would not apply to a non-US adviser who is required to register solely as a result of the Rule. The Rule will become effective on February 10, 2005. Advisers may elect to register with the SEC now, but will not be required to register until February 1, 2006. Once effective, the Rule will be applied prospectively.