This note discusses the principal aspects of the U.S. regulatory regime applicable to non-U.S. asset managers and funds and sets out a framework for reducing or eliminating the full scope of U.S. regulation on a fund manager seeking to attract U.S. investor capital. We have also produced a white paper that discusses in greater detail U.S. regulation of non-U.S. asset managers and the framework for reducing or eliminating U.S. regulatory requirements, including additional U.S. regulatory issues that we do not discuss in this note, such as political law issues with respect to “pay-to-play” and lobbying laws, ERISA issues, Volcker Rule issues, and U.S. tax issues including FATCA.
As a general matter, non-U.S. asset managers seeking capital in the United States are subject to the same legal and regulatory issues that U.S. managers face, and can therefore structure their operations pursuant to the same framework of exemptions that
U.S. managers use to minimize the full scope of U.S. regulation to which they would otherwise be subject. In many cases, however, U.S. managers, as a result of being located in the United States will be subject to stricter regulatory requirements than non-U.S. managers and will have fewer exemptions available.
U.S. regulation of money managers, including non-U.S. managers, and the funds they manage is a complex regime that has changed significantly since the implementation of the Dodd-Frank Reform and Consumer Protection Act of 2010 and continues to evolve as a result of, among other things, the Jumpstart Our Business (JOBS) Act enacted in 2012, the final Volcker Rule passed in December 2013, and U.S. regulatory agencies’ continued interpretation of the same. These changes and developments generally make more dramatic an already complex regulatory regime and provide an opportunity to revisit the scope of regulation a non-U.S. fund manager must consider
in seeking to approach U.S. investors as a way to increase assets under management. That scope ranges from manager licensing requirements under multiple regulators to regulation of a manager as a broker-dealer/placement agent to fund structuring and offering restrictions.
Non-U.S. managers nonetheless can navigate these requirements by using a framework of exemptions designed to accommodate both U.S. and non-U.S. managers willing to limit some of their activities, including activities in the United States. This framework, which we describe in more detail below, can significantly reduce – and in some cases eliminate – the full scope of regulation imposed on asset managers, funds and broker-dealers/placement agents. This is critical, as the United States continues to be a significant source of investor capital for non-U.S. managers, and U.S. investors increasingly seek to diversify through
exposure to non-U.S. asset classes and managers. Many non-U.S. managers, in fact, have recently undertaken a renewed interest in the United States markets, launching funds designed to accommodate
U.S. investors looking to capitalize on emerging markets, European commercial real estate and global life sciences investments. Careful planning and structuring by non-U.S. managers can thus result in both business flexibility and consistent conformance with applicable laws.
Regulatory Triggers and
Framework to Reduce Regulation
Non-U.S. fund managers will typically trigger U.S. regulatory and legal issues when conducting the activities below in the United States or with respect to U.S. investors. We have set out for each triggering activity a framework for avoiding or reducing, to the extent possible, U.S. regulation, and attach as Appendix A a diagram illustrating how these triggers lead to one or more U.S. legal requirements.
Each framework below represents the general approaches fund managers typically use to reduce the effects of U.S. regulation on their activities. The frameworks below are not a full analysis of the issues presented and should not be relied upon as legal advice.
Trigger: Managing Assets for U.S. Funds or Non-U.S. Funds with U.S. Investors
A non-U.S. manager that manages assets for a fund domiciled in the United States (e.g., a Delaware limited partnership), or for a non-U.S. domiciled fund that has or seeks U.S. investors, will be required to analyze whether it has the proper licensing (or an exemption
Framework to Reduce Regulation:
from licensing) with the U.S. Securities and Exchange Commission (SEC) under the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act), and the
- Commodity Futures Trading Commission (CFTC) under the U.S. Commodity Exchange Act (CEA).1
If no investment advisory business operations in the United States: (1) ensure that all U.S. clients are private funds + file short form ADV with the SEC, or (2) have no more than 15 U.S. investors in all funds + such U.S. investors account for fewer than USD25 million + do not hold out as an invest- ment adviser publicly in the United States,
or (1) Manage less than USD150m from advisory
operations in the United States,
(2) ensure that all U.S. clients are private funds and (3) file short-form ADV with the SEC.
Ensure that swaps/derivatives use is de minimis
or (aggregate initial margin and premiums < 5% of
Do not use swaps/derivatives,
the fund’s asset liquidation value, or aggregate net
notional value of swaps/derivatives < 100% of the fund’s asset liquidation value.
- Any non-U.S. manager affiliated with a bank that is a “banking entity” for purposes of the Volcker Rule must also consider the effects the Volcker Rule may have on sponsoring certain types of private funds offered to U.S. investors, while all managers must consider whether a bank can invest in the funds they manage subject to Volcker Rule limitations on banks as investors. We discuss these aspects of the Volcker Rule in the white paper.
Trigger: Fundraising for U.S. Funds, from the United States, or from U.S. Investors
A non-U.S. manager that engages in fundraising, marketing or solicitation activity (a) for funds domiciled in the United States; (b) from the United States; or (c) in pursuit of U.S. investors for non-U.S. funds must
determine whether it should seek a license from the SEC and the Financial Industry Regulatory Authority (FINRA), under the U.S. Securities Exchange Act of 1934 (the Exchange Act).
Framework to Reduce Regulation:
Use an SEC-registered placement agent/broker-dealer/ securities firm to conduct
Self-distribute and (1) do not pay marketers transaction- based compensation and (2)
or (a) sell interests only to financial
institutions and intermediaries or
(b) ensure marketing personnel have other substantial roles at the manager and fund has not offered within 1 year,
Use a non-U.S. placement agent and solicit and place interests with a “U.S. Institutional
or Investor” or a “Major U.S.
Institutional Investor” while being accompanied or “chaperoned” by a U.S. registered broker- dealer or to certain other placement agents/brokers.
Trigger: Offering Interests of U.S. Funds or Offering Non-U.S. Funds to U.S. Investors
If a non-U.S. manager offers interests in its funds to
U.S. investors, the manager is required to analyze the offering under the securities registration requirements of
the U.S. Securities Act of 1933, as amended (Securities Act), and often under the class registration requirements under the Exchange Act.
Framework to Reduce Regulation:
Avoid using public marketing and advertising and limit offerings to known investors that are “accredited investors” or “QIBs” (confirmed via subscription agreement representations and warranties),
Use general solicitation and advertising to offer
or interests and ensure all purchasers are “accredited
investors” or “QIBs” via internal compliance
procedures in addition to subscription agreement representations and warranties.
Trigger: Fund Formation and Structuring Finally, a non-U.S. manager must consider the structure, investment objective and potential U.S. investor base
for any of its managed funds under the U.S. Investment
Company Act of 1940, as amended (the Investment Company Act) and the Employee Retirement Income Security Act (ERISA). One or more additional
approaches may be available under the Investment Company Act, depending on the nature of the fund’s business, and certain fund strategies and types of investors also will raise issues with the CFTC and under the Volcker Rule. Please see the white paper
for a discussion of these issues.
Framework to Reduce Regulation:
Conduct offering subject to offering framework above,
For non-U.S. funds, limit U.S. investors to fewer than 100, and for U.S. funds, limit all investors to fewer than 100,
For non-U.S. funds, ensure
or U.S. investors are “qualified
purchasers”, and for U.S. funds, ensure all investors are “qualified purchasers”.
Limit ERISA benefit plan investors’ ownership of
each class of equity to less than 25%,
Qualify the fund as a VCOC or REOC “operating company”.
© Allen & Overy LLP 2015
- Non-U.S. Investment Funds and Managers: Regulatory Framework for Raising Capital in the United States | June 2015
Schematic of Potential U.S. Issues
Manager domiciled in U.S.?
“Banking entity” investors?
Is Manager conducting any business
No 40 Act issue
Is Fund raising money from
Is Fund soliciting from or in the U.S.?
Does Fund trade
No Volcker Rule issue
Investors in the fund?
Is Fund using a registered broker or placement agent?
yES NO O
licensing issue al
Potential manager SEC licensing requirement
Potential CFTC Issues
Potential Broker Licensing Requirements for Manager
Potential 40 Act
Potential 33 Act Issues
Potential Political Law Issue
Potential Volcker Rule Issue
*All U.S. or non-U.S. funds will need to consider U.S. tax and ERISA issues when raising money from U.S. investors