Sunday, May 4, 2008

Access to US Market for Foreign Investment Advisors

U.S. Open Market for Foreign Advisers

It is relatively easy for a foreign adviser to register as an investment adviser in the United States and to set up its own U.S. mutual funds. An adviser, including any foreign adviser that wants to manage a registered mutual fund in the United States, may register as an investment adviser under the Investment Advisers Act of 1940. It is no more difficult for a foreign adviser to register than for a domestic adviser to register under the Advisers Act. There are very few barriers to entry for investment advisers wishing to register in the United States. There are no residency requirements. Thus, an adviser can be located outside the United States and is not required to establish a U.S. subsidiary in order to register as an investment adviser in the United States. There are no minimum educational requirements, and there are no capital requirements for investment advisers, although advisers that sponsor a registered mutual fund must make sure that fund has the requisite seed money of $100,000.

The main barrier to registration as an investment adviser in the United States would be if the adviser had been the subject of certain disciplinary actions. I understand that some other regulatory jurisdictions follow a different approach for investment advisers, conducting a pre-approval merit review of those that want to sponsor a fund or manage money in a jurisdiction to ensure that they are "fit and proper" or meet similar regulatory standards.
Many foreign advisers are exempt from registration as advisers in the United States if they have 14 or fewer U.S. clients, do not hold themselves out to the U.S. public as an investment adviser and do not serve as an adviser to an investment company registered under the Investment Company Act.

The Advisers Act and its rules make certain accommodations for foreign advisers. In determining whether an adviser qualifies for the 14 or fewer clients exception from the definition of investment adviser, foreign advisers are permitted to count only U.S. clients, while U.S. advisers must count all clients. However, if a foreign adviser chooses, or is required, to register in the United States, it may do so with the Commission, regardless of the amount of assets it has under management. NSMIA amended the Investment Advisers Act so that advisers with $25 million or more in assets under management generally register with Commission, and advisers with less than $25 million generally register with the states. However, all advisers with principal offices outside the United States register with the Commission rather than the states, and this single regulator approach eases some administrative difficulties for foreign advisers. Additionally, although the Advisers Act places certain restrictions on advisory contracts, including limitations on performance fees, the Advisers Act excepts contracts with persons who are not U.S. residents. Congress added this exception in NSMIA, recognizing that the common use of performance fee arrangements in other countries placed U.S.-registered advisers operating in foreign countries at a competitive disadvantage.


Michael said...

Thanks for posting this. I am doing research on this topic and wanted to go a little more in-depth on the subject. Can you tell me where you found this information, what sources I should look at?

KVSSNrao said...

Mr. Michael

The reference to the speech of SEC Governor was given in the post. If I see some more information now, I shall post it also. I included the information thinking it is a useful bit.

Thanks for the comment