Non-US Managers Need To Be Ready For Sweeping US Regulations - SEI

Harriet Davies

23 February 2011

As the climate for non-US investment advisors managing US assets changes at a fast pace, it is important managers are aware of the implications of new regulations and are ready for “the long reach of Uncle Sam”, SEI says.

The changes tie in with what SEI has identified as three key themes transforming the industry at the moment: the era of the investor, which is seeing power transferred from the manager to the investor; the renaissance of operations and the back-office; and “the rise of the bureaucrat”, as sweeping regulatory reforms are implemented.

One example of the latter is the Dodd-Frank Act. In the past, non-US advisors have been able to avoid the compliance burden that goes with registering with the Securities and Exchange Commission; they did this through the exemption in the Investment Advisors Act 1940. This is applicable to those with fewer than 15 clients in the preceding 12 months, among other requirements.

One of the main advantages of the exemption in this form is that the investment manager does not have to count investors in private funds on which they advise against the 15-client limit.

However, this broad exemption is set to be replaced by two much narrower ones, according to the SEC’s proposal to implement Title IV of the Dodd-Frank Act.

Key changes to the exemption rules in their proposed form are: private clients invested in a fund advised on will each count against the limit of 15, and a $25 million limit will apply to assets under management attributed to US clients and US investors in private funds advised by the investment advisor.

For an advisor not meeting these requirements, another option is the “Private Fund Adviser Exemption”. This has less stringent limitations, to the extent that it provides a higher threshold for AuM of $150 million, but consequently comes with some record-keeping and reporting requirements. It is also unavailable to any advisor managing a separate account for a US client.

Essentially, the private fund exemption provides for fairly “light-touch” regulation from the SEC, but gives the regulator the advantage of having some information and powers of inspection.

According to Steven Whittaker, partner, financial services at the law firm Simmons & Simmons, the dawning reality is one where advisors will have to tell regulators a lot more information. However, he adds that “this is a trend and one has to go with it”.