US and Investment Advisors

There have been further developments in respect of the proposed Private Fund Investment Advisers Registration Act 2010 (see Regulatory Roundup 18 January and previous). Senator Christopher Dodd’s financial reform proposals passed the Senate Committee on Banking on 23 March with a 13-10 vote, without a single Republican voting for it.

Although Dodd had released his ‘Senate Proposal’ on 15 March, he introduced a manager’s amendment before the 13-10 vote was made-see the first link, left. Amongst the changes this time is a change in the definition of a ‘foreign private advisor’ (‘FPA’) as compared with HR 4173, the Wall Street Reform and Consumer Protection Act 2009, which was passed in the House of Representatives on 11 December 2009. (See the Regulatory Roundup of 18 January)

The 15 March Senate proposal removed from the FPA definition the ’12 month’ time period as in ‘during the preceding 12 months: has had fewer than 15 clients, etc…’. This suggests that the definition of a ‘foreign private adviser’ will now depend on criteria in the present only. In addition the change in criteria for a FPA of having less than $25m AUM attributable to US clients now, after the manager’s amendments, refers to US clients and US investors.

To appreciate the ‘current version’ of the proposal we suggest you look to pages 18 & 19 of the first link (‘Amendment’) which contains all the late amendments and use this as a reference when looking at the proposals contained within pages 365 to 383 of the second link (’15MarchProposal’). The third link is HR 4173, the document which passed through the House of Representatives, and can be used as a comparison.

Other Dodd amendments to the 15 March Senate Proposal included preventing the SEC defining the word ‘client’ to extend to an investor in a private fund managed by an investment advisor, if such private fund has entered into an advisory contract with such adviser.

However, this definition of client is limited to apply only for the purposes of sections 206(1) and 206(2) of the Investment Advisers Act 1940, the antifraud provisions of the act. It remains unclear which definition is applicable when considering the ’15 clients’ provision, although the reference mentioned above to ‘clients in the US and investors in the US’ does suggest that ‘client’ could well mean fund.

It is expected that the final version of the ‘Restoring American Financial Stability Act’ will be much more business friendly to win over Senator Richard Shelby, the banking panel’s top Republican. Although Republicans do want a bill this year, without their support the bill would struggle to pass the Senate floor, which could happen as early as mid April.