SEPTEMBER 2005
Investment Management
SEC Registration of Non-U.S. Investment Advisers
SEC REGISTRATION RULES
TIMING
Rules adopted by the U.S. Securities and Exchange
Commission (the “SEC”) in December 2004 have
changed the manner in which an investment adviser,
whose clients include private funds, is required to
calculate the number of its U.S. clients for the
purposes of determining whether to register under the
Investment Advisers Act of 1940 (the “Act”). Under
the rules, an investment adviser whose principal office
is located outside the United States (an “Offshore
Adviser”), regardless of whether it has a U.S. affiliate
or if such an affiliate is registered with the SEC, must
now look through the funds that it is advising and
count the individual investors as clients.
Consequently, some currently unregistered Offshore
Advisers may now be considered to be providing
services to hundreds of investors, many of whom may
be U.S. clients. An Offshore Advisor is required to
register with the SEC if it has U.S. clients, unless the
Offshore Adviser is eligible for an exemption. The socalled “private adviser exemption” applies where the
Offshore Adviser has fewer than 15 U.S. clients during
the course of the preceding 12 months.
While the rules were adopted by the SEC in December
2004, Offshore Advisers have until February 1, 2006 to
register with the SEC. Since the SEC has up to 45 days
to process an application (although, if the SEC
considers an application defective it may take longer)
all applications should be filed before December 15,
2005 so as to allow time to be processed before
February 1, 2006.
If a registered Offshore Adviser has no U.S. clients who
directly use its management services (“Direct U.S.
Clients”) rather than invest with the Offshore Adviser
through its funds, significant requirements of the Act
will not be applicable. In particular, the compliance,
custody and proxy rules do not apply to registered
Offshore Advisers who have no Direct U.S. Clients. In
addition, an Offshore Adviser who is affiliated with an
adviser whose principal office is located in the United
States will not be subject to such rules if its U.S.
affiliate advises the Direct U.S. Clients.
REGISTERED OFFSHORE ADVISERS: RECORDKEEPING REQUIREMENTS
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All registered Offshore Advisers are required to
maintain certain records relating to both their U.S.
and non-U.S. clients including asset, liability,
reserve, capital, income and expense accounts;
financial statements and trial balances, all cheque
books, bank statements, cancelled cheques and cash
reconciliations; all invoices or statements (or copies
thereof), paid or unpaid, relating to the Offshore
Adviser’s business and all records of the names of
“access persons” (being those persons with access to
nonpublic information regarding a client’s sale or
purchase of securities) and reports required to be
made by “access persons.”
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There are additional record-keeping requirements
for registered Offshore Advisers who have Direct
U.S. Clients. These additional records include all
instructions received from, and copies of
correspondence with, Direct U.S. Clients; copies of
all powers of attorney and other evidence of the
granting of any discretionary authority by any
Direct U.S. Client to the Offshore Adviser; copies of
all written agreements entered into by the Offshore
Adviser with any Direct U.S. Client; and copies of
all notices, circulars, advertisements, newspaper
articles, investment letters, bulletins or other
communications that the Offshore Adviser
circulates or distributes, directly or indirectly, to
ten or more Direct U.S. Clients.
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All records should be maintained and preserved in
an easily accessible place for not less than five
years, and sometimes longer.
In the event of an SEC inspection, a registered
Offshore Adviser may be required to provide all of its
books and records, including those that the Offshore
Adviser is obliged to keep under non-U.S. law, to the
SEC. A registered Offshore Adviser may also be
required to advise the SEC of changes in its local law
that will affect the performance of its obligations
under the Act.
NEW YORK
DISCLOSURE OF RECORDS TO THE SEC
Beth Kramer
A registered Offshore Adviser is generally required to
keep all such records in the United States and furnish
to the SEC a written notice specifying the address
within the United States where the copies of the books
and records are kept. Each Offshore Adviser applying
for registration with the SEC is generally required to
file such notice with its application for registration.
Nonetheless, an Offshore Adviser would not be
required to keep its records in the United States if (i)
such Offshore Adviser files with the SEC a written
undertaking to furnish to the SEC, upon demand, true,
correct, complete and current copies of all such books,
and records; and (ii) such Offshore Adviser furnishes to
the SEC 14 days after Offshore Adviser’s receipt of a
written demand for its records, copies of all the records
specified in the demand.
bkramer@klng.com
2 SEPTEMBER 2005
212.536.4024
Kay Gordon
kgordon@klng.com
212.536.4038
LONDON
Philip Morgan
pmorgan@klng.com
+44.20.7360.8123
Neil Robson
nrobson@klng.com
+44.20.7360.8130
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
If you have questions or would like more information about K&LNG’s Investment Management Practice,
please contact one of our lawyers listed below:
BOSTON
Michael S. Caccese
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Lynn A. Schweinfurth
Donald W. Smith
Martin D. Teckler
Robert A. Wittie
Robert J. Zutz
617.261.3133
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Kirkpatrick & Lockhart Nicholson Graham LLP (K&LNG) has approximately 1,000 lawyers and represents entrepreneurs, growth and middle market
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