Member Article

On 2 December 2004, the U.S. Securities and Exchange Commission (SEC) published a new rule and rule amendments under the Investment Advisers Act of 1940 (IAA), with significant implications for hedge fund advisers within and outside the U.S. The new rules require investment advisers to “look through” the funds they manage and count investors in the funds as clients for the purpose of determining whether an adviser is exempt from registration under the “private adviser exemption”. Under the IAA, investment advisers with fewer than 15 clients in a twelve-month period are exempt from the requirement to register and the compliance requirements of the IAA. Investment advisers whose principal office and place of business are both located outside the United States may also be required to register but they need to count only investors that are U.S. residents for the purposes of this exemption. Investment advisers must also look through fund of fund investors in the funds they manage to determine whether the 15 client limit is exceeded. The definition of “private fund” under the new rules excludes private equity and venture capital or other funds which impose a two-year “lock-up”. Foreign public funds are also excluded. For overseas advisers, there will be a “lighter touch” regime which permits non-U.S. advisers to avoid many of the requirements of the new SEC registration if their only U.S. clients are investors in offshore funds. However, registered offshore advisers will be subject to SEC examination.