Legislation proposed by the Obama administration could have the knock-on effect of non-US general partners limiting the number of US investors in their funds.
A bill proposed by the US Treasury department, as well as separate legislation making its way through the Senate, would force certain non-US firms to register with the Securities and Exchange Commission as a “foreign private advisor”.
Those with fewer than 15 clients (defined currently as funds) and assets under management less than $25 million may be exempt. Firms that do not market their services to the US public, nor act as an advisor to a US-registered company may also be exempt.
However, these exemptions may be limited by certain aspects of both bills.
The SEC, for example, would have the authority to redefine the term “client” – if this is interpreted as individual investors within a fund, rather than the fund itself, many more firms will have to register with the SEC and subsquently comply with the substantive provisions of the Investment Advisers Act of 1940. This could result in foreign firms looking to cap the number of US investors in its funds, so as to avoid regulatory burdens and costs, Dechert partner Jennifer Wood told sister news site PrivateEquityManager.com.
In addition, the $25 million asset threshold being proposed could result in registration for foreign firms with just one significant US investor. However, any non-US firm seeking US investors would likely raise enough capital to offest the costs associated wtih regulatory and compliance issues, Wood said.
She noted that these sorts of regulations are on the horizon in Europe, as well. “I don’t think anyone who has looked at the [proposed EU directive on alternative investment funds] will be terribly surprised if you need to be authorised in multiple countries to run a fund that will be sold to investors in multiple countries.”