A recent March 2017 Information Update from the SEC outlines several undertakings they state are necessary for a non-U.S. affiliated advisor to maintain its status as a "participating affiliate" to a U.S. registered adviser under the relief described in the 1992 no action letter granted to Uniao de Banco de Brasileiros S.A. and subsequent no action letters (collectively the Unibanco Letters). The recently published information update is described by the SEC as a response to questions it periodically receives on (i) how multinational firms should document their reliance on the Unibanco Letters and (ii) what information, if any, should be submitted to the SEC to faciliate its ability to monitor and enforce the participating affiliate's obligations.
Documenting the Participating Affiliate Arrangement:
Unless an exemption or other relief applies, investment advisers, whether they are located in the U.S. or abroad, who provide advice to U.S. clients must register with the SEC. Some financial firms choose to rely on the SEC's positions in the Unibanco Letters regarding the extra-territorial reach of the Advisers Act. Over the course of these Letters, the staff has assured the affiliates of registered investment advisers that they would not recommend enforcement action if the affiliate shares personnel with, and provides certain services to, the U.S. clients of the SEC registered adviser without the affiliate registering with the SEC. Generally, the relief granted in the Unibanco Letters requires that the following be documented:
- the unregistered participating affiliate and the registered adviser are separately organized;
- the registered adviser is staffed with personnel (located in the U.S. or abroad) who are capable of providing investment advice;
- all personnel of the participating affiliate involved in U.S. advisory activities are deemed "associated persons" of the SEC registered adviser; and
- the SEC has adequate access to trading and other records of the participating affiliate and to its personnel to the extent necessary to enable it to identify conduct that may harm U.S. clients or markets.
In addition to the above, the U.S. registered adviser may need to make additional disclosures on its Form ADV, including the names of each fund manager, individuals and participating affiliates, involved in generating advice given to the SEC registered adviser's clients, and the required biographical and ownership information for these individuals and participating affiliates.
Information to be Submitted:
In addition to the internal documentation discussed above, reliance on the relief is conditioned on advisers submitting certain representations and undertakings, including maintaining certain records, appointing a U.S. agent for service of process, and providing the SEC access to personnel located outside of the U.S. Where the participating affiliate is sharing personnel with the registered adviser, the SEC has always focused on the ability to monitor the activities of the non-U.S. personnel. As a result, the SEC staff recommends that the following submissions be made:
- The name of the participating affiliate and registered adviser, and a representation that the participating affiliate is an associated person of the registered adviser within the meaning of Section 202(a)(17) of the Advisers Act.
- Documentation of the appointment of an agent for service of process by a participating affiliate, including the name and contact information of the agent.
- A representation that the participating affiliate is under the jurisdiction U.S. courts for actions arising directly or indirectly under U.S. Securities laws or the securities laws of any state in connection with any of the following for U.S. clients:
- investment advisory activities;
- related securities activities arising out of or relating to any investment advisory services provided by the participating affiliate through its registered adviser; and
- any related transactions.
- A representation that the participating affiliate has designated and appointed a U.S. agent who can be served with process, pleadings, or other papers relating to: any investigations or administrative proceeding conducted by the SEC; and any civil suit or action brought against the registered adviser or the participating affiliate or in which the participating affiliate has been joined as defendant or respondent.
- Acknowledgement that any civil suit or action or administrative proceeding may be commenced by the service of process upon the chosen agent and such service shall be taken and held in all courts and administrative tribunals to be valid and binding as if personal service has been made.
- A representation that the participating affiliate will appoint a successor agent, if the participating affiliate or any person discharges their registered agent or the agent is unwilling or unable to accept service on behalf of the participating affiliate at any time until six years have elapsed from the date of the last investment advisory activity. Additionally, the participating affiliate undertakes to advise the SEC promptly of any change to the registered agent's name or address during the applicable period.
- A representation that the participating affiliate will promptly, upon receipt of an administrative subpoena, demand, or request for voluntary cooperation made during a routine or special inspection or otherwise, provide to the SEC or its staff any and all of the books and records requires to be maintained in accordance with staff guidance, and make available for testimony before, or other questioning by the SEC or its staff the employees of the participating affiliate (other than clerical or ministerial personnel) involved in the investment advisory activities or related securities transaction at such place as the SEC may designate in the U.S. or, at the SEC's option, in the country where the records are kept or such personnel reside.
- A representation that the participating affiliate will produce, pursuant to an administrative subpoena or a request for voluntary cooperation, any documents in accordance with staff guidance.
It should be noted that most of the undertaking are representations that can be made in a letter to the SEC. Submissions can be made directly to the SEC by email at IMOCC@sec.gov.
Compliant participating affiliate structures take time and expertise to set up. Consideration should be given to all of the points above as well as to your compliance policies and procedures.