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SEC Loosens Grip on Advisers of Funds-of-Funds

SEC Loosens Grip on Advisers of Funds-of-Funds

Monday’s no-action letter to an overseas management group’s Chicago based affiliate allows advisers with no discretionary authority over fund assets to avoid registration with the SEC. A recent SEC no-action letter indicated that the Commission may be leaning towards a more relaxed treatment of advisers of funds-of-funds. Since the July ruling in Goldstein v. SEC, the Commission’s policy of “looking through” funds in order to count clients has seemingly been on its way out, pending appeal. The Commission has indicated, however, that this ruling would not put a stop to its efforts to regulate the hedge fund industry, and many in the industry suspected that the commission would ramp up its efforts to regulate advisers in ways other than counting individual investors as. In an August 7th no-action letter to Credit Agricole Asset Management Alternative Investments, Inc. (“CAAM-AI”), the SEC staff agreed not to require CAAM-AI to register as an investment adviser under the Investment Advisers Act of 1940. CAAM-AI is an affiliate of the France based Credit Agricole Group, whose subsidiaries and affiliates manage large funds-of-funds throughout Europe, Asia, the Middle East, and the Caribbean. Chicago based CAAM-AI’s role in the group is to provide investment advice to three management companies within the CA group, which collectively manage 35 hedge funds, none of which are in the United States. In its letter to the SEC, CAAM-AI requested an assurance of no-action on several grounds, including the fact that none of the funds to which CAAM-AI provides advice market or sell fund interests to any US investors. The letter further points out that CAAM-AI is registered with the CFTC as a CPO and a CTA, and that registration with the SEC would be redundant and of no particular benefit to the capital markets. CAAM-AI’s letter to the SEC seemed to express concern that the Commission would count all 35 funds managed by the three affiliates to which CAAM-AI provides advice as clients for purposes of registration. CAAM-AI addressed this concern by asking that the Commission not “look through”, and count only the three affiliates, which are CAAM-AI’s only clients. In response, the SEC staff went beyond not requiring CAAM-AI to register, saying that section 203(a) of the Advisers Act prohibits CAAM-AI from registering. Specifically, the staff pointed to the Section 203(a)(1), which allows registration with the SEC only if an adviser, who is either registered or exempt under state law, has assets under management of $25 million or more. In determining that CAAM-AI did not in fact meet the minimum requirement of $25 million under management, the staff pointed out that although CAAM-AI does provide advice to funds whose assets far exceed $25 million, the fact that CAAM-AI has no discretionary authority over those funds eliminates the fund assets for purposes of determining the size of CAAM-AI’s assets under management. In short, for SEC registration purposes, CAAM-AI had no assets under management since its activities were limited to providing advice and research to affiliated fund managers, and it had no discretionary or supervisory authority over fund assets. In a footnote to the CAAM-AI no-action letter, the SEC staff did point out that, even absent registration, the antifraud provisions of the Advisers Act still apply to all investment advisers. This is another indication that the SEC will be relying increasingly more on the antifraud provisions in its efforts to regulate the hedge fund industry in the wake of Goldstein.

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