SEC proposes rules requiring offshore advisers of offshore hedge funds to register under the advisers act

On July 20, 2004, the Securities and Exchange Commission (SEC) published for comment proposed rules under the Investment Advisers Act of 1940 (the Act), which would require many non‐U.S. hedge fund advisers to be registered with the SEC. The proposed rules would require non‐U.S. investment advisers to look through their hedge funds (U.S. and non‐U.S. funds) to count all U.S. investors therein as clients for purposes of the Section 203(b)(3) “private adviser” exemption. The SEC stated in the proposing release that it did not intend the proposed rules to change current policy of substantially limiting the extraterritorial application of the Act to dealings between a registered non‐U.S. investment adviser and its non‐U.S. clients. However, there remains some ambiguity as to the application of this policy, which has been developed over the past 12 years through a series of no‐action letters. In addition, notwithstanding the SEC’s statement in the proposing release, the proposed rules could be read as changing current SEC policy in a couple of respects. This article explains those issues.