SEC Staff Issues Guidance on Investment Adviser Registration
On August 7, 2006, the SEC staff told an adviser that it was prohibited from registering under the Investment Advisers Act, despite past staff positions suggesting the adviser was required to register. The letter, issued to Credit Agricole Asset Management Alternative Investments, Inc. (CAAMAI), illustrates how advisers can be caught between past staff guidance on the one hand, and the statutory and Form ADV changes brought about by the National Securities Markets Improvement Act of 1996 (NSMIA) on the other.
CAAM-AI, a Delaware corporation with its principal office in Chicago, Illinois, has only a handful of clients—all of which are offshore advisers that manage offshore private funds of funds. CAAM-AI provides only nondiscretionary advice by (i) identifying and recommending underlying funds, (ii) conducting due diligence on the managers of the underlying funds, (iii) providing reports on these managers, and (iv) providing research on industry trends. CAAM-AI does not have the authority to decide which securities (i.e., underlying funds) to purchase or sell for the private funds, and it is not responsible for arranging the purchase or sale of interests in the underlying funds. Prior no-action letters had stated that even if a U.S. resident adviser had only foreign clients, it still was required to register. Yet Section 203A(a)(1) of the Advisers Act, added by NSMIA, prohibits an adviser that is regulated (or required to be regulated) as an investment adviser in the state in which it maintains its principal office and place of business from registering with the SEC unless the adviser has assets under management of not less than $25 million or is an adviser to a registered investment company.
The SEC staff concluded that, based on the definitions of "assets under management" and "continuous and regular supervisory or management services" in the instructions to Part 1A of Form ADV, CAAM-AI has no assets under management because it does not provide continuous and regular supervisory or management services to the private funds. The staff’s conclusion was also based on CAAM-AI’s representations that it did not act as an investment adviser to a registered investment company and was required to be registered in Illinois, although the no-action letter noted that CAAM-AI was currently exempt from registration. The staff reminded CAAM-AI that the antifraud provisions of Section 206 of the Advisers Act apply to all investment advisers whether they are required to register with the SEC or not.
Investment Management FYI is a service of the Investment Management Practice Group of Morgan Lewis. If you have any questions concerning the important legal developments reflected herein, please contact any member of Morgan Lewis’ Investment Management Practice Group.
Washington, D.C.
Monica Parry
202.739.5692
mparry@morganlewis.com
Philadelphia
Sean Graber
215.963.5598
sgraber@morganlewis.com