Consequences for Global Hedge Fund Managers of the “Foreign Private Adviser” Exemption Included in the Dodd-Frank Act
Private Equity Law Report
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Act), enacted on July 21, 2010, contains a general rule with respect to private fund adviser registration, and exemptions from that rule. The general rule is that private fund advisers, such as hedge fund advisers, must register as investment advisers with the U.S. Securities and Exchange Commission (SEC). The exemptions from that rule provide that certain categories of private fund advisers are not required to register. Exempted advisers include those that act as advisers solely to venture capital funds or small business investment companies, family offices, private fund managers with less than $150 million in assets under management (AUM) in the U.S. and so-called “foreign private advisers.” However, although styled a “limited exemption,” the narrowness of the foreign private adviser exemption may expand the range of non-U.S. hedge fund managers required to register with the SEC and broaden the SEC’s regulatory jurisdiction. This article examines in detail the foreign private adviser exemption and its implications for global hedge fund managers. In particular, this article: reviews the definition of “foreign private adviser” under Dodd-Frank; offers practitioner insight on how certain of the key concepts in the definition have historically been understood and are likely to be construed by the SEC; discusses the interaction between the foreign private adviser exemption and the exemption for private fund managers with less than $150 million in AUM; analyzes past SEC practice and precedent with respect to global sub-adviser and affiliate arrangements, including a discussion of a key no-action letter; discusses the SEC’s “registration lite” regime for non-U.S. managers of offshore funds with U.S. investors, as explained by the agency in the release accompanying the subsequently-vacated 2004 hedge fund adviser registration rule; explains the three ways in which non-U.S. hedge fund managers that are not eligible for the foreign private adviser exemption may nonetheless avoid registration; identifies the consequences to non-U.S. hedge fund managers who are not eligible for the foreign private adviser exemption and who nonetheless elect to remain in the U.S. market; and concludes with a discussion of the possibility that the narrowness of the foreign private adviser exemption may engender retaliatory protectionist moves by the European Union on hedge fund regulation, or at least may undermine the credibility of any U.S. objections to protectionist provisions in the EU’s Alternative Investment Fund Manager Directive.