Proposed Rule 202(a)(30)-1 Pursuant to Dodd-Frank Act
The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. The following proposed new rule 202(a)(30), among other things, defines the terms “client” and “investor” for the purposes of new Section 202(a)(30) of the Advisers Act which requires “foreign private advisers” to register with the SEC.
New section 202(a)(30) of the Advisers Act defines “foreign private adviser” as an investment adviser that
- has no place of business in the United States,
- has fewer than 15 clients in the United States and investors in the United States in private funds advised by the adviser, and
- less than $25 million in aggregate assets under management from such clients and investors.
For the purposes of Section 202(a)(30)-1, a single “client” generally means:
- a natural person, family members of the same household and accounts for such persons
- an entity and not the “owners” of an entity (two entities with exactly the same ownership can, together, be counted as a single client)
Other rules with respect to the “client” definition:
- an “owner” will be deemed to be a client separate from an entity if advisory services are provided to the owner separately from the entity
- managers to a hedge fund or other private fund do not necessarily need to count the individual investors in the fund as a client
- a fund entity will be a client of the manager of the fund entity
For the purposes of Section 202(a)(30)-1, the term “investor” will generally mean a “beneficial owner” (if the fund is a 3(c)(1) fund) or a “qualified purchaser” (if the fund is a 3(c)(7) fund). With respect to any “client” or “investor,” the term “in the United States” generally means any person who is a deemed to be a “U.S. person” as it is defined in Rule 902(k) of Regulation S under the Securities Act of 1933 (which is premised on residence in the United States, regardless of any temporary presence outside the United States).
The full proposed rule is reprinted below.
§ 275.202(a)(30)-1 Foreign private advisers.
(a) Client. You may deem the following to be a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)):
(1) A natural person, and:
(i) Any minor child of the natural person;
(ii) Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;
(iii) All accounts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries; and
(iv) All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries;
(i) A corporation, general partnership, limited partnership, limited liability company, trust (other than a trust referred to in paragraph (a)(1)(iv) of this section), or other legal organization (any of which are referred to hereinafter as a “legal organization”) to which you provide investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries (any of which are referred to hereinafter as an “owner”); and
(ii) Two or more legal organizations referred to in paragraph (a)(2)(i) of this section that have identical owners.
(b) Special rules regarding clients. For purposes of this section:
(1) You must count an owner as a client if you provide investment advisory services to the owner separate and apart from the investment advisory services you provide to the legal organization, provided, however, that the determination that an owner is a client will not affect the applicability of this section with regard to any other owner;
(2) You are not required to count an owner as a client solely because you, on behalf of the legal organization, offer, promote, or sell interests in the legal organization to the owner, or report periodically to the owners as a group solely with respect to the performance of or plans for the legal organization’s assets or similar matters;
(3) A limited partnership or limited liability company is a client of any general partner, managing member or other person acting as investment adviser to the partnership or limited liability company; and
(4) You are not required to count a private fund as a client if you count any investor, as that term is defined in paragraph (c)(1) of this section, in that private fund as an investor in the United States in that private fund.
Note to paragraphs (a) and (b): These paragraphs are a safe harbor and are not intended to specify the exclusive method for determining who may be deemed a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)).
(c) Definitions. For purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)),
(1) Investor means any person that would be included in determining the number of beneficial owners of the outstanding securities of a private fund under section 3(c)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1)), or whether the outstanding securities of a private fund are owned exclusively by qualified purchasers under section 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(7)), except that any of the following persons is also an investor:
(A) Any beneficial owner of the private fund that pursuant to § 270.3c-5 of this title would not be included in the above determinations under section 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1), (7)); and
(B) Any beneficial owner of any outstanding short-term paper, as defined in section 2(a)(38) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(38)), issued by the private fund.
Note to paragraph (c)(1): You may treat as a single investor any person that is an investor in two or more private funds you advise.
(2) In the United States means with respect to:
(i) Any client or investor, any person that is a “U.S. person” as defined in § 230.902(k) of this title, except that any discretionary account or similar account that is held for the benefit of a person in the United States by a dealer or other professional fiduciary is in the United States if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.
Note to paragraph (c)(2)(i): A person that is in the United States may be treated as not being in the United States if such person was not in the United States at the time of becoming a client or, in the case of an investor in a private fund, at the time the investor acquires the securities issued by the fund.
(ii) Any place of business, in the United States, as that term is defined in § 230.902(l) of this title; and
(iii) The public, in the United States, as that term is defined in § 230.902(l) of this title.
(3) Place of business has the same meaning as in § 275.222-1(a) of this title.
(4) Assets under management means the regulatory assets under management as determined under Item 5.F of Form ADV (§ 279.1 of this title).
(d) Holding out. If you are relying on this section, you shall not be deemed to be holding yourself out generally to the public in the United States as an investment adviser, within the meaning of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)), solely because you participate in a non-public offering in the United States of securities issued by a private fund under the Securities Act of 1933 (15 U.S.C. 77a).
Bart Mallon, Esq. is a hedge fund attorney and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.