Investment Advisor Deregistration
Case Study
Issue
As a result of legacy practices, a global investment manager’s US client book was split between their US domiciled SEC registered advisor and their UK domiciled SEC registered advisor. The manager decided to simplify the corporate structure and consolidate all activity with the UK entity which held the majority of the book.
The US entity would continue to provide limited specialist investment services to the US book as well as a local point of contact for client service matters, but all other advisory services would be performed from the UK. The US entity would remain in place but would deregister as an advisor and no longer be subject to regulatory oversight.
Challenges
One of the first challenges was to determine how the de-registered US entity could continue providing limited specialist investment advisory services despite its non-registered status. The path forward for this issue was found in a series of administrative rulings (no-action letters) issued by the SEC where the non-registered entity commits to a series of undertakings, the most notable being that it would share its investment personnel and offer its service via the registered entity. This undertaking implied a level of control and direction over the non-registered US entity’s service being assumed by the registered UK entity to ensure compliance with the SEC’s guidelines.
The other significant issue that was identified related to the potential for the UK domiciled entity to be drawn into US taxation. A foreign domiciled entity will be subject to US tax if it engages in US business and has a fixed place of business/permanent establishment in the US. The requirement that a foreign entity have a permanent establishment provides broad protection from federal tax for a significant number of foreign companies without a US address and this was the case with the UK registered advisor.
The above referenced SEC guidelines presented a conflict that pitted regulatory against tax. If the level of control exerted by the registered UK entity was excessive over the US entity, the UK entity would be deemed to have a permanent US establishment which in turn would void its protection under this criterion and trigger its liability for federal tax. If control was too passive, there is a risk of non-compliance with SEC requirements.
Result
The solution to the non-registered advisor issue was found in a series of SEC no action letters which outlined how affiliates would share personal who would then have dual reporting lines into each entity. This personnel structure was able to satisfy requirements for regulatory as well as tax. Additionally, the organization achieved its objective in simplifying its corporate structure through the elimination of a registration. This also served to mitigate regulatory risk. This was a highly technical exercise that had limited possibilities for success.