Dodd-Frank fears "overblown"

As previously reported by unquote", the Dodd-Frank Wall Street Reform and Consumer Act has worried European GPs. Previously, fund managers with fewer than 15 US clients per preceding year were granted an exemption to avoid scrutiny under the Investment Advisers Act of 1940. Dodd-Frank removed this, leaving European fund managers with the risk of having to register with the American Securities and Exchange Commission (SEC).

There are however a number of exemptions available for non-US private fund managers, explained DLA Piper partners Lou Anne McInnis, David Goldstein, and David Williams.

The Foreign Private Adviser Exemption is a narrower version of the replaced exemption. It imposes further, strict requirements on the fund advisor, including aggregate American LP contribution of less than $25m, and for the adviser to have "no place of business in the US."

The definition of US operations is, as noted by many non-US GPs, markedly narrow. Goldstein clarified the legal position: "If an Australian fund manager, with headquarters and funds domiciled in Australia, sends one employee to manage the funds in the US, it would constitute US operations and that portion of the fund would be counted." It does not, however, cover investments made into the US by funds managed and domiciled outside the States.

The partners agreed that few European private equity houses would be able to rely on the first exemption. Instead, McInnis argued, the lion's share of these will fall under the Private Fund Adviser Exemption. It covers GPs who, firstly, "acts solely as an adviser to qualifying private funds," and secondly, "have assets under management in the US of less than $150m."

Most, if not all, private equity funds would qualify as "private funds" under the exemption. The stated exception is funds set up as investment companies, as defined by the Investment Company Act of 1940, section 3. The average European GP is also understood to fall below the limit of US assets under management, even if it chooses to invest in the US. "It has more to do with the fund managers' operational base and where funds are domiciled, rather than the geography of portfolio companies," explained Goldstein.

A third exemption is available for venture capital funds, but only according to the SEC's definition. "You would really have to be out in the market as a venture capital fund manager, pursuing a corresponding strategy with 80% of fund assets in qualifying investments," said McInnis. Moreover, leverage would be capped at 15% and only allowed as short-term financing.

There is no asset or geographical limit to the venture capital exemption. It was noted, however, that exemptions cannot be combined, and fund managers who also advise non-exempt funds for US clients will have to register with the SEC.

Under the available exemptions, Dodd-Frank does not seem as though it will have a major impact on European private equity houses. On the contrary, McInnis noted, it is actually quite straightforward once you work through the different points.

Conversely, McInnis rejected the idea of US GPs separating their American and European investment operations: "It will not be possible under Dodd-Frank; in fact, US-based fund managers have protested against the disadvantage imposed on them by having to count all of their assets, wherever funds are domiciled."

Despite favourable exemptions, the partners believed that many European GPs will have to examine their current situation. "The question for many will be whether to file as an exempt reporting adviser, which requires a limited filing on the Form ADV and a yearly update." Initial reports must be filed with the SEC by 31 March 2012.

Such a filing is, however, not thought to be overly interfering. UK-based partner David Williams says European GPs should let go of their worries about US investment: "Managers have been concerned that raising capital from the US is costly and fraught with risks - it isn't, and the scope of these exemptions is just one aspect of what is actually a fairly benevolent environment for those who take the time to explore it.

In further news, former US Federal Reserve chairman Paul Volcker today responded to related criticism of the Dodd-Frank Act.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• DACH
• France
• Nordics
• Southern Europe
• CEE
• UK / Ireland
• Benelux
• Buyout
• Venture
• DLA Piper
• Legal