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Why are Investment Advisers Reluctant to Enter the US?

It is not that the applicable laws in the US are so much more onerous than those found in other jurisdictions. In fact, in many instances they are less burdensome.

Then what is the issue? It is the complexity and perceived contradictions of the US legal system. Unlike Canada, for example, where registration is required if a firm wants to sponsor, manage or advise on financial instruments, in the US registration is required with the SEC only if certain conditions are met. A firm advising on securities must register with the SEC if it advises a certain number of clients/investors and meets certain thresholds concerning assets under management. Even then, precisely what counts towards assets under management is not entirely obvious. For example, under the “private fund adviser exemption” from SEC registration, which is available to a non-US adviser whose only US clients are private funds, the adviser only counts toward the $150 million AUM threshold the assets it manages from a US place of business. In essence, an adviser without a US office/employees can continue to rely on this exemption regardless of amount of assets attributable to its US private fund clients. Under this exemption, many firms can participate in the US market without registering with the SEC.

But let’s say a firm does not trigger the registration thresholds; is it free from all registration requirements? Not necessarily. First, any advice on commodities can trigger a separate registration regime managed by separate regulators, the CFTC. The US may be the only country in the world that has this dichotomy. Second, providing advice to certain types of clients may trigger registration requirements. So, for example, advisers to mutual funds must be registered with the SEC and advisers to municipal entities may need to be registered under a municipal regulatory regime with the SEC and be subject rules of the Municipal Securities Rulemaking Board. Against this complexity, state requirements must be overlaid. These can require registrations with state securities regulators and, to market to certain types of state entities, satisfaction of other requirements such as registration as a lobbyist.

However, the specifics required of a registered firm under each of these regulatory regimes are in many instances less onerous than those required in other jurisdictions. Compare China, the UK, and Canada; each has certification and other requirements that do not exist in the US.

Although the US legal landscape may appear daunting from an outside perspective, navigating the requirements is actually easier than one may think. Upon further reflection, the benefits may well exceed the burdens for many advisers, such as being able to attract investment from US institutional investors like pension funds.

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