Do I Need To Register with the SEC?


A Compliance Officer's Best Tools and Tips for the SEC Exam Process

On September 13, MyComplianceOffice co-hosted a webinar with Milne Legal. Our presenters Dustin Milne, Charles Lerner and Laetitia Mantel discussed what an investment advisory firm outside of the US needs to consider when dealing with the US. This included discussions on what defines a US person, when to register with the SEC, how to handle a SEC exam and what sort of compliance program you should have in place.

 You can download a full copy of the slides from this webinar.


Full video transcript available below:

Our clients and prospects who approach us are concerned about whether they need to register as an investment adviser under the Investment Advisers Act of 1940. We begin to ask questions about their background, the kind of activities that they conduct, but it all starts with the definitely of an investment adviser under the act.

As a non-U.S. entity, are you in the business of advising others concerning securities for compensation? Those are the key elements. If you are in such a business and you meet that definition, then you need to look further in deciding whether or not you need to register with the SEC. Perhaps an applicable exemption is available to you.

It's worth noting that most of our clients that come to us ... This is really not one of the major drivers here. They are in the business; there is no doubt. They advise on securities, that's their profession, and they do indeed receive compensation.

It is, however, worth noting for those who are not sure, each of these definitions are broadly defined by the SEC. For example, securities. It's a laundry list of investment instruments that fit within this definition of securities. Same with compensation. Some of our clients who are advisers approach us and say, "What if I waive the compensation component?" That's certainly a good fact, but keep in mind that compensation by the SEC is interpreted as direct compensation or indirect compensation, so it can really be any economic benefit that you receive can meet this criteria. Just be mindful that these terms are incredibly broad, when trying to see if they apply to your non-U.S. firm.

I like to begin with this slide of my non-U.S. adviser. Shane, or Bethany, please flip the slide. Next slide. Bethany, will you please flip the slide? Thank you. To begin with this just as an optical. I'm there with the illustration of the map of the United States, for those who are participating. We have a non-U.S. adviser here. The purpose is to put him inside the territory of the United States. It's just an optical; I've been showing this for years. Whatever's in that briefcase, perhaps marketing materials or some form of advisory contracts. Once you place yourself inside of the United States, the 50 states, territories, or possessions, please first seek advice from Council. Understand what the regulatory laws are before you take these initial steps to go inside the United States. Next slide please.

 As lawyers, we quite often define these 50 states as ... We refer to it colloquially as the U.S. jurisdictional means. It's really under section 203(a) of the Investment Advisers Act. If you're a non-U.S. organized entity who meets the definition of an investment adviser, you need to be mindful of any means of marketing, mails, or anything that you may put in to process inside the 50 states if it is with regards to advising on securities.

For example, one of the things that we quite often look at it is an investment adviser's website. The website alone can be construed as marketing materials and you really need to look at it closely. If you're not registered as an investment adviser, look at that closely and make sure that the intent of that website is clear; i.e., meaning that you have a disclaimer on the website clearly defining that your intent is not to target residents or entities organized inside the United States for your investment advisory services. You really want to stay outside of the U.S. For your websites we recommend to begin with a disclaimer but also to consider other methods such as a blocker to make it clear that you are not targeting the U.S.

Our clients come to us; they meet the definition of an investment adviser, they are providing advice on securities, they are receiving compensation ... Now the question is, where it gets a little more difficult, is is my client or prospect a U.S. person?

The complexity of that definition really begins with, in the United States book of laws, if you will. For the regulatory and tax, they all use the same definition U.S. person, but define it differently. For example, here you see, on the far right, the tax definition, provided from section 7701 of the internal revenue code. On the left we see the definition used for the Investment Advisers Act, broadly speaking, under regulation S rule 902(k). They are different definitions.

Quite often here in the non-U.S. markets we get fixated on the tax definition, the big action item there you see on the first line. It includes citizenship. To the left, when it comes to investment advisers, you will not see the word citizenship. Meaning that individuals residing outside the United States, wherever it may be, are subject to taxation on their worldwide income because of the use of that word citizen. On the left, you can have citizens residing abroad who are not defined as Us persons for purposes of the Investment Advisers Act. We'll go into a little more detail as to why that distinction is important.

Some of the difficulty of this definition of U.S. person as well, especially in the investment advisory space is the Investment Advisers Act itself does not define U.S. person. Instead, historically we relied upon this regulation S, which is promulgated under the Securities Act of 1933 but was not initially intended to directly apply to the Advisers Act. Over time it has been referred to, the market is comfortable with its use, and it's regulation is focused on residency. We quite often talk about the Investment Advisers Act or the SEC itself as having territorial approach, and that's all because of this definition of U.S. person under reg S, not including citizenship but focusing on the U.S. markets and those residing inside the United States.

 That was reinforced in 2010 with the Dodd-Frank Act when new rules were adopted. The market was concerned about whether regulation S and its use of U.S. person would continue to be used. That was essentially confirmed with these new rules coming to play under the Dodd-Frank Act specifically rule 203 and 202 where again, these new rules referenced regulation S, making only minimal distinctions with regards to the discretionary counts.

For the participants on the phone, that's your definition right there. What I would say is if you meet the definition of an investment adviser ... So, you're a non-U.S. entity providing advice on securities for compensation, you find your advisory activities going inside of the United States, or i.e. using U.S. jurisdictional means, whether that's through word of mouth, on your physical trips to the United States like my chart illustrated, or you're using the emails, or your website ... Then the last question is are you providing advice to U.S. persons?

Assuming all of those are met, you need to think strongly about registering with the SEC or finding an applicable exemption or an exclusion under the act. 

Dustin, let me ask you a question. What, in your experience, is the most difficult question or issue that's faced in deciding whether a client of an adviser is a U.S. person?

That's a good question, Charles. I think, for me, I spend a lot of my time with my clients looking case by case. It's really a fact and circumstances analysis. Quite often what you'll find in the non-U.S. advisory space is the non-U.S. adviser has a client that's organized, lets say for example, in Mebus Ltd. Outside of the United States they provide services directly to the entity, but perhaps a director resides in New York. There starts to begin the complexity. Do I have a U.S. person now because an authorized officer is residing in New York? You really need to take that on a case by case

What would I say is as soon as your communications on adviser, your adviser activities start to flow into the United States, you need to be really cautious and slow down a little bit. Seek the advice of the council and make sure you get the answer right. It's all about this definition and accessing U.S. jurisdictional means with your advisory services.

The SEC in 1992, which I think is a very very helpful guideline for non-U.S. entities outside the United States do provide advisory services, whether they need to register or be concerned under the Advisers Act which is "Conducts & Effects" test. What the position there was, the SEC says if you carry out advisory conduct inside the United States, even if it has no effect on U.S. persons or the U.S. market ... So the activity itself takes place in the U.S., then you need to seriously consider whether or not you need to register under the Advisers Act.

For example, particularly a branch office; that would be enough for sure. Even to go further, meeting people in the office of the Waldorf Astoria. Even if those individuals are non-U.S. individuals, you're having continuous and regular meetings there, you need to really look at whether that would be enough to trigger registration.

Either the conduct occurs inside the United States or the conduct occurs outside the United States but it has an effect on U.S. markets or U.S. persons. We'll give one example of that later on. That also would catch the attention of the SEC and you would need to seriously consider whether those activities would trigger registration.

 In 1987 there was a No-Action Letter that's quite often referenced. It's Gim-Seong Seow No-Action Letter ... I never quite pronounce it correctly, I'm certain. Here a foreign adviser to foreign clients may without registering under the Advisers Act, use U.S. jurisdictional means - and this is quite interesting - to acquire information about securities of the United States issuers and to effect transactions and securities of United States issuers through the use of U.S. registered brokered dealers.

I just want to point out a few things here because this is also quite often discussed with our clients. We have a foreign adviser - that's our client. They themselves are providing advisory services to non-U.S. foreign clients and they're conducting research on U.S. issuers and then they're routing their orders based on that research to SEC registered brokered dealers.

Here in this No-Action Letter, the SEC confirmed they would not take action against such non-U.S. advisers or such activities. The key terms are foreign adviser, foreign client, and routing those orders to SEC registered brokered dealers. That's kind of a nice marker for some of our clients to keep in mind.

Lastly, in 2011, this rule of 203(m)-1 under the Dodd-Frank Act; I just want to emphasize one sentence that came out of the adoption of that rule, the final rule. The rule reflects - this is the SEC stating this - our long held view that the non-U.S. actives of non-U.S. advisers are less likely to implicate U.S. regulatory interests and that this territorial approach, meaning based on U.S. residence and U.S. markets - is in keeping with general principles of international comity.

The SEC is making it clear that they're not so interested in non-U.S. advisers, advisory business with their non-U.S. clients. They're trying to draw, in my view, quite a bright line in distinction ... Non-U.S. advisers advising their non-U.S. clients versus U.S. clients.

 Here on the next slide we see two relatively still recent enforcement actions against two banks. One, a bank in Portugal, the bank of Banco Espirito Santo FA and one agreeance Credits Suisse. The enforcement action against the Portuguese bank took place in 2011. The one against Credits Suisse a little bit more recent in 2014.

Both are relatively the same thing. We have foreign entities providing investment advisory services, so certainly they meet that definition of investment adviser. Those advisory services spilled over into the United States so it triggered U.S. jurisdictional means directly to U.S. residents. In the Portuguese case, they were providing advisory services to Portuguese citizens but residents of the United States. The same with Credit Suisse sending bankers into the U.S.

I just want to read one from the Portuguese bank that SEC said there in the [inaudible 00:18:06]: Foreign entity seeking to provide financial or securities related services in the U.S. must familiarize themselves with the statutory and regulatory framework in this area. Failure to do so, as was the case here, can be a costly misstep.

So just advise to be able to sit down with your council, look at the Investment Advisers Act, some of the things we're talking about today, and see if your activities inside the United States would trigger registration.

Same with Credit Suisse; the last paragraph: credits with relationship managers travel to the United States to solicit clients, provide investment advice, and induce security transactions. These relationship managers were not registered to provide brokerage or advisory services nor were they affiliated with the registered entity. The relationship managers also communicated with clients in the U.S. through overseas emails and phone calls.

Just an emphasis; it doesn't take physical presence. Marketing materials, whether through a website, emails, or even phone calls could be enough to trigger registration if your voice, if you will ... Your regulatory, your advisory activities spill over into U.S. residence inside the 50 states, you really need to take caution. This would be our message there.

Here it's an interesting case on the next slide. The SEC brought enforcement action against 32 defendants, two particular which had a prominent role in this enforcement action were Ukrainian citizens based in Ukraine, so there was no U.S. connection at all. The conduct did not take place in the United States, but this was an insider trading case where the two defendants had hacked into non-public material information from a server in New Jersey. There's you're U.S. connection. It had an effect. They traded off of information that they found there that was non-public, accruing, it says, over a hundred million in illegal profits. The SEC brought enforcement action against these folks in Ukraine. Had the help of the Ukrainian regulator, the government there to enforce this action.

It lets you know ... Here in this case, what I found interesting is although the individuals were outside the United States and the conduct, as far as the hacking, the cyber-security breach, took place in by activities in Ukraine, it had an effect on the U.S. markets. The SEC came outside the United States to bring enforcement action against them.

 Slide number 13. Non-U.S. investment advisers with U.S. and non-U.S. clients. Here we're talking about the "Unibanco Letters;" I just want to say a few things here. In a long line of no-action letters going back to 1992, the SEC staff confirmed that it would not apply the Advisers Act to SEC registered, non-U.S. advisers with respect to their non-U.S. adviser's non-U.S. clients.

For example, the delivery of the firm brochure ... We have some clients, of course, that are registered. They're very familiar with what they need to deliver a Form ADV, a firm brochure, up front prior to bringing them on as an advisory client to the firm. Those kind of substantive requirements are not required for non-U.S. advisers and their non-U.S. clients.

However, it is worth emphasizing ... I want to put this in context, we have a lot of clients that have majority non-U.S. clients. That's their primary business. Then they have a handful that are U.S. persons. There is the dilemma of whether they should register just to service these few clients and expose, if you will, the remainder of their business, the non-U.S. clients, to SEC supervision.

They wrestle with the dilemma of whether they should terminate the client relationship with the U.S. or go ahead and register, and if by registering, how interested the SEC also is in their non-U.S. business.

Here in the Unibanco Letters, the SEC has made it quite clear, again, that they are not as interested in the non-U.S. business, but when you have firms that have both U.S. and non-U.S., they certainly will require certain books and records to be kept even for the non-U.S. business that would certainly be subject to examination. Primarily, for example, to make sure that their U.S. clients are not being mistreated. There will not a thorough review or examination on the non-U.S. side, only to the extent that is necessary, again, to make sure that the adviser is respecting the U.S. advisory laws with regards to their U.S. clients.

The perfect example that is often cited is they would look at the trading activities for the non-U.S. clients to ensure, for example, no front-running activities are taking place to the disadvantage of the U.S. clients. They would look at some of your trading activities to ensure against front-running.


This webinar was co-hosted with Milne Legal. To learn more visit 

Find out how MCO can help

Request a demo today to learn how MyComplianceOffice puts you in command of your compliance program, synchronizing your business needs with regulation. 

Request a Demo



Download our four page Portfolio of Solutions to learn about;

  • Personal Trade Monitoring
  • Gifts & Entertainment
  • Political Contributions
  • Third Party vendor risk management
  • Trade surveillance
  • And more

Brochure Download