The US Securities and Exchange Commission’s sweeping proposals for private funds could have significant implications for overseas and domestic managers alike.
Last month, the regulator unveiled plans to overhaul the private funds model through an outright ban on certain practices, including a raft of fees and business practices, and enhanced disclosures around others.
Foreign GPs will be impacted by at least some of these changes provided they have a touchpoint with the US, such as managing US investor capital or having a place of business in the US, said Liyong Xing, a Hong Kong-based partner at Kirkland & Ellis.
To what degree firms are affected would depend on whether they are registered with the SEC, which carries with it additional requirements under the latest proposals.
“While current interpretations of the SEC’s proposal indicate that the quarterly reporting, annual audit and secondary transactions rules will not apply to non-registered advisers, foreign private advisers and non-US GPs would be subject to the various proposed prohibited activities,” said Kobi Assaraf, a partner in EisnerAmper’s financial services group.
All private fund advisors, registered or not, would be prohibited from: providing preferential treatment to investors without proper disclosure; seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity; charging certain fees and expenses to a private fund or its portfolio investments; and reducing the amount of adviser clawback by the amount of certain taxes.
Who needs to register?
Foreign GPs managing capital on behalf of US investors must register with the SEC unless they qualify for an exemption, Xing said. The most common exemptions for private equity firms are:
- Foreign private adviser exemption: applies to sponsors managing less than $25 million of assets under management from less than 15 US clients and with no place of business in the US.
- Mid-sized private fund adviser exemption: exempts a non-US GP (ie. those whose principal office and place of business is outside the US) provided their advisory activities in the US are solely limited to managing private funds and, if they do have a place of business in the US, they manage less than $150 million in private fund assets from that office.
- Venture capital private fund exemption: applies to sponsors managing only VC funds.
For each of the above, AUM is calculated based on an aggregate of:
- the amount of remaining uncalled capital;
- current NAV of investments;
- amount of recallable capital, if any; and
- amount of cash balance, if any.
“[These exemptions are] why you do not often see Asia GPs registering with the SEC, even though they manage way more than $150 million AUM from US investors,” Xing said, noting that AUM is analysed firmwide, meaning GPs would not be able to circumvent these rules by holding US capital in a separate vehicle to their main fund.
“Unregistered investment advisers raising capital from US investors and/or operating in the US are also subject to the anti-fraud rules in the US,” added Brad Caswell, a New York-based investment funds partner at Linklaters.
“It is important that all international PE managers pay close attention to these proposals and developments and think about whether and to what extent they are subject to the specific rules and, if not, should comply with the spirit of the rules.”
This story was co-authored by Carmela Mendoza. It first appeared in Private Equity International.