1 November 2010Memorandum To:               Asset Management Group Friends and ClientsFrom:                        Nathan ...
Page 2      •   3 June 2011 – Last filing date under which Firm can be assured approval of its          registration by SE...
Page 3           companies’ 25% owners), types of clients, assets under management, compensation           arrangements, o...
Page 4C.       SEC Examinations         The SEC has authority to conduct examinations of all of the activities and books a...
Page 5IV.      U.S. STATE LAW ISSUES        An SEC-registered adviser is not subject to any “registration” or substantive ...
U S T  H O A2  Gothic  Architecture  P P T
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U S T H O A2 Gothic Architecture P P T

  1. 1. 1 November 2010Memorandum To: Asset Management Group Friends and ClientsFrom: Nathan J. Greene (ngreene@shearman.com) U.S. Registration Requirements for Non-U.S. Investment Advisers Recently enacted U.S. legislation, the Dodd-Frank Act, effectively eliminated most exemptionsfrom U.S. Securities and Exchange Commission (“SEC”) registration requirements applicable tosecurities investment advisers. The deadline for registering as a result of these expanded requirements(see below for additional color) is July 21, 2011. The U.S. Investment Advisers Act of 1940 (the “Advisers Act”) and related rules are the primaryfederal sources of investment adviser regulation.1 It is important to note that the Advisers Act, withlimited exceptions (e.g., a prohibition on buying property from or selling property to a client without theclient’s specific consent), does not restrict trading and investment practices of registered advisers. Also,unlike many countries, U.S. federal law does not establish qualification requirements for registeredinvestment advisers or their personnel (although it does disqualify persons with certain disciplinaryhistories) and does not set capital requirements. Of interest to non-U.S. investment advisers is that not every provision of the Advisers Act appliesto them. Aspects of the Advisers Act that relate to the non-U.S. firm’s client relationships apply only todealings with U.S. clients. Aspects that are “internal” to a firm, such as the compliance programdescribed below, apply to the firm as a whole and therefore cannot be readily carved back jurisdictionally. For newly registering advisers, a likely timetable for the registration process is as follows: • Today – Firm is generally considering options, educating itself about requirements and identifying a senior management point person and legal/compliance advisers • 1 Feb. 2011 – Firm has given the registration “go-ahead” to its internal and external legal/compliance teams • 1 March 2011 – Firm is making additional business decisions in advance of registration (e.g., who will be the chief compliance officer?) • 15 April 2011 – Firm is working diligently on its Form ADV and compliance policies/procedures; employee to serve as chief compliance officer has been identified1 While the Advisers Act is the primary U.S. law in this area, many other legal frameworks can be relevant depending on the circumstances. For a select overview of other relevant U.S. laws, see ”Private Offerings to U.S. Investors by Non-U.S. Investment Funds” at http://www.shearman.com/am-043009-private- offerings-to-us-investors-by-non-us-investment-funds/.NYDOCS01/1242812.3
  2. 2. Page 2 • 3 June 2011 – Last filing date under which Firm can be assured approval of its registration by SEC by the mandated deadline: Firm should file its Form ADV by this date and have all internal policies/procedures finished; training should be under way • 21 July 2011 – Absolute deadline for new registrations to be approved by SEC: Ongoing compliance monitoring and testing activities are in place • Throughout 2011 and thereafter – Employee training; compliance monitoring and testing • During 2012 – First annual compliance review (undertaken internally by the Firm’s chief compliance officer) is completed and reported to senior managementI. SCOPE OF THE ADVISERS ACT – AN OVERVIEW Under the Advisers Act, an investment adviser is anyone who is compensated for providingsecurities advice or recommendations, or for issuing reports or furnishing analyses regarding securities,either directly or through publications. The most significant exemptions from this definition have beenthose for certain banks and for “private advisers,” i.e., those who do not hold themselves out to the publicin the United States as being “in the business” and who service no more than 14 clients, with a fundtypically counted as a single client and non-U.S. firms typically counting only their U.S. clients. This private adviser exemption will, however, be revoked in its entirety, effective July 21, 2011.A very limited exemption will be available for non-U.S. advisers having minimal U.S. contacts, meaningno U.S. place of business and de minimis assets under management (currently proposed to be less thanUS$25 million) attributable to U.S. clients or U.S. investors in the firm’s advised funds. There also willbe a new exemption for venture capital firms.2 SEC rulemaking expected over the remainder of 2010 will be critical to understanding these newregistration requirements and related exemptions. Shearman & Sterling will monitor these developments.II. THE REGISTRATION PROCESS Any person subject to the Advisers Act must file and keep current a registration form, FormADV, with the SEC.3 An applicant’s registration is usually accepted automatically within 45 days,typically with only minimal SEC comment. There is a “pre-filing” process that takes a week or twobefore an applicant can access the filing system. Form ADV consists of two parts: • Part 1 contains general, “check-the-box” information about the adviser’s operations, including ownership and organization of the firm (showing 25% owners and, if applicable, those2 For a more detailed discussion of these law changes, see “Private Fund Manager Registration Provisions of the Dodd-Frank Bill” at http://www.shearman.com/private-fund-manager-registration-provisions- of-the-dodd-frank-bill-06-29-2010/.3 As a technical matter, some firms will be too small to register with the SEC (generally, these are firms having less than US$100 million in assets under management) and therefore fall under U.S. state law adviser registration rules, but a non-U.S. investment adviser is eligible for SEC registration regardless of size. Federal registration is generally viewed as preferable.NYDOCS01/1242812.3
  3. 3. Page 3 companies’ 25% owners), types of clients, assets under management, compensation arrangements, other business activities and affiliations, brokerage arrangements and transactions with clients, and disciplinary history. • Part 2 is substantially longer and more “free-form” in nature. It serves as a detailed disclosure statement containing information relating more specifically to investment products and services offered by the adviser. Unlike Part 1, Part 2 has not been filed with the SEC or otherwise required to be made public to date, but public filing and availability of all parts of Form ADV will be required effective January 1, 2011.4 A registered adviser generally must furnish a copy of Part 2 of its current Form ADV to eachclient or prospective client at or prior to entering into an advisory agreement with the client. A registeredadviser annually must deliver, or offer in writing to deliver, a copy of Part 2 of its current Form ADV toeach of its clients. There is no established practice as to whether Form ADV information is given toinvestors in a fund manager’s advised funds.III. SUBSTANTIVE RULES AND COMPLIANCE RESPONSIBILITIES UNDER THE ADVISERS ACTA. Compliance Programs A registered adviser must adopt and maintain detailed written policies and procedures. Inaddition to a “code of ethics” governing personal trading and conduct by employees, SEC guidancestrongly favors formal written policies and procedures to address a wide range of issues, such as tradingpractices, marketing and advertising, accuracy of the firm’s disclosures, safeguards for the privacy ofclient information, and misuse of material, non-public information (i.e., insider trading). Collectively, the policies and procedures are referred to as an adviser’s “compliance program.”5Most applicants seeking to become a registered investment adviser prepare the compliance programbefore filing an initial Form ADV with the SEC. Registered advisers also are required to designate achief compliance officer.B. Advisory Agreements A client agreement must provide that the adviser may not assign the agreement without theclient’s consent. (An “assignment” includes any direct or indirect transfer of a controlling block of theadviser’s voting securities under the Advisers Act.) A registered adviser also is generally prohibited fromcharging performance fees, except to certain high net-worth U.S. residents and for non-U.S. residentsgenerally. Other limitations on agreement terms also apply.4 Form ADV Part 2 has also just undergone a complete revamp in format. See “SEC Finalizes Ten-Year Effort to Overhaul Form ADV for Investment Advisers” at http://www.shearman.com/sec-finalizes-ten-year- effort-to-overhaul-form-adv-for-investment-advisers-08-05-2010/.5 For a series of papers on investment adviser compliance programs, see “Compliance Programs of Investment Companies and Investment Advisers” at http://www.shearman.com/am_0304/, “Implementing and Reviewing SEC-Mandated Compliance Programs” at http://www.shearman.com/am_0305/, and “Compliance Program Annual Reviews – The Second Season,” at http://www.shearman.com/am_022007/.NYDOCS01/1242812.3
  4. 4. Page 4C. SEC Examinations The SEC has authority to conduct examinations of all of the activities and books and records of aregistered adviser. An examination is conducted with relatively short notice (no notice is required) andcan last from a week or two to several months. Non-U.S. advisers cannot count on their jurisdiction to“shield” them from these examinations.D. Recordkeeping Requirements The recordkeeping requirements under the Advisers Act could expand significantly under SECrules that are authorized by the new reform law, but in any case are quite detailed already. While notnecessarily “required records,” SEC examiners routinely request large volumes of email during theirexaminations.E. Fiduciary Duties; Anti-Fraud Rules In the eyes of the SEC and the U.S. courts, every investment adviser, whether or not registered, isa fiduciary with respect to its clients and as such has an affirmative duty of utmost good faith, and full andfair disclosure of all material facts, towards its clients, as well as an affirmative obligation to employreasonable care to avoid misleading clients.F. Anti-Money Laundering Policies and Procedures U.S. Treasury Department rules requiring investment adviser anti-money laundering policieswere proposed but never adopted. Many U.S. advisers, however, comply voluntarily with the rules asthey were proposed, generally for reputational reasons.G. Advertising; Solicitation Payments In addition to stating the commonsense principle that advertising may not be misleading, theAdvisers Act anti-fraud rule relating to advertising sets a number of less intuitive limitations. Amongthese are strict guidelines for the presentation of investment performance data. Solicitation payments –the payment of cash fees for client referrals – are closely regulated and require specified disclosures.H. Custody Detailed rules apply to the custody of client assets, including fund assets.6I. General Prohibition The Advisers Act makes it unlawful to do indirectly anything that would be unlawful for a personto do directly. This provision may, for example, prevent an affiliate of the adviser from engaging inconduct that the adviser could not engage in directly.6 For a summary of the custody rules, see “SEC Amends Investment Adviser Custody Rules” at http://www.shearman.com/sec-amends-investment-adviser-custody-rules-01-07-2010/.NYDOCS01/1242812.3
  5. 5. Page 5IV. U.S. STATE LAW ISSUES An SEC-registered adviser is not subject to any “registration” or substantive requirementsimposed by any of the U.S. states. However, any U.S. state where the registered adviser does businessmay investigate and bring enforcement actions for fraud and deceit against the registered adviser. Inaddition, a state in which the firm has an office or clients may require a “notice” filing and related fees. * * * * We welcome the opportunity to assist you further and look forward to a discussion of your firm’sspecific needs or circumstances. Meanwhile, we trust this memorandum, which we emphasize is of onlya summary nature, has been of assistance. We also trust that you recognize this memorandum is not legaladvice, which can only be given in the course of an established legal relationship and full discussion ofrelevant facts. Finally, as the footnotes to this memorandum should make clear, we write regularly on assetmanagement topics and post updates to www.shearman.com/publications frequently. We encourage youto use our website as a resource.NYDOCS01/1242812.3

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