with the Advisers Act, the adviser's Commission registration must be
approved before the adviser accepts a client that is not a private
fund. Moreover, even an adviser to whom the transition period is
available could not, consistent with the Advisers Act, accept a
client that is not a private fund until the Commission approves its
registration. These same limitations apply to non-U.S. advisers with
respect to their clients that are United States persons.
---------------------------------------------------------------------------

    Commenters who addressed the issue generally supported the proposed
transition period, but requested that we extend the transition period
beyond one calendar quarter as proposed or otherwise make it more
broadly available.\379\ Requiring annual calculations extends the
transition period, as commenters recommended, and is consistent with
the amount of time provided to state-registered advisers switching to
Commission registration. Advisers to whom the transition period is
available will have up to 180 days after the end of their fiscal years
to register.\380\
---------------------------------------------------------------------------

    \379\ ABA Letter; AIMA Letter; CompliGlobe Letter; Gunderson
Dettmer Letter; Katten Foreign Advisers Letter; Sadis & Goldberg
Implementing Release Letter; Seward Letter; Shearman Letter.
    \380\ An adviser must file its annual Form ADV updating
amendment within 90 days after the end of its fiscal year and, if
the transition period is available, may apply for registration up to
90 days after filing the amendment. See also supra note 378.
---------------------------------------------------------------------------

    One commenter argued that the transition period should be available
to all advisers relying on rule 203(m)-1, including those that had not
complied with their reporting requirements.\381\ The transition period
is a safe harbor that provides advisers flexibility in

complying with rule 203(m)-1, and we continue to believe that it would
be inappropriate to extend this benefit to advisers that have not met
their reporting requirements.\382\
---------------------------------------------------------------------------

    \381\ Shearman Letter.
    \382\ See Proposing Release, supra note 26, discussion at n.223
and accompanying text.
---------------------------------------------------------------------------

3. Assets Managed in the United States
    Under rule 203(m)-1, all of the private fund assets of an adviser
with a principal office and place of business in the United States are
considered to be ``assets under management in the United States,'' even
if the adviser has offices outside of the United States.\383\ A non-
U.S. adviser, however, need only count private fund assets it manages
at a place of business in the United States toward the $150 million
asset limit under the exemption.\384\
---------------------------------------------------------------------------

    \383\ Rule 203(m)-1(a). The rule defines the ``United States''
to have the same meaning as in rule 902(l) of Regulation S under the
Securities Act, which is ``the United States of America, its
territories and possessions, any State of the United States, and the
District of Columbia.'' Rule 203(m)-1(d)(7); 17 CFR 230.902(l).
    \384\ Rule 203(m)-1(b). Any assets managed at a U.S. place of
business for clients other than private funds would make the
exemption unavailable. See also supra note 378. We revised this
provision to refer to assets managed ``at'' a place of business in
the United States, rather than ``from'' a place of business in the
United States as proposed. The revised language is intended to
reflect more clearly the rule's territorial focus on the location at
which the asset management takes place.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, the rule deems all of the
assets managed by an adviser to be managed ``in the United States'' if
the adviser's ``principal office and place of business'' is in the
United States. This is the location where the adviser controls, or has
ultimate responsibility for, the management of private fund assets, and
therefore is the place where all the adviser's assets are managed,
although day-to-day management of certain assets may also take place at
another location.\385\ For most advisers, this approach will avoid
difficult attribution determinations that would be required if assets
are managed by teams located in multiple jurisdictions, or if portfolio
managers located in one jurisdiction rely heavily on research or other
advisory services performed by employees located in another
jurisdiction.
---------------------------------------------------------------------------

    \385\ This approach is similar to the way we have identified the
location of the adviser for regulatory purposes under our current
rules, which define an adviser's principal office and place of
business as the location where it ``directs, controls and
coordinates'' its advisory activities, regardless of the location
where some of the advisory activities might occur. See rule 203A-
3(c); rule 222-1.
---------------------------------------------------------------------------

    Most commenters who addressed the issue supported our proposal to
treat ``assets under management in the United States'' for non-U.S.
advisers as those assets managed at a U.S. place of business.\386\ One
commenter did, however, urge us to presume that a non-U.S. adviser's
assets are managed from its principal office and place of business to
avoid the inherent difficulties in determining the location from which
any particular assets of a private fund are managed if an adviser
operates in multiple jurisdictions.\387\ As we stated in the Proposing
Release, this commenter's approach ignores situations in which day-to-
day management of some assets of the private fund does in fact take
place ``in the United States.'' \388\ It also would permit an adviser
engaging in substantial advisory activities in the United States to
escape our regulatory oversight merely because the adviser's principal
office and place of business is outside of the United States. This
consequence is at odds not only with section 203(m), but also with the
foreign private adviser exemption discussed below in which Congress
specifically set forth circumstances under which a non-U.S. adviser may
be exempt provided it does not have any place of business in the United
States, among other conditions.\389\
---------------------------------------------------------------------------

    \386\ ABA Letter; Comment Letter of Association Fran[ccedil]aise
de la Gestion financi[egrave]re (Jan. 24, 2011) (``AFG Letter'')
(sought clarification that assets managed from non-U.S. offices are
exempted); AIMA Letter; Comment Letter of Avoca Capital Holdings
(Dec. 21, 2010) (``Avoca Letter''); Debevoise Letter; Dechert
Foreign Adviser Letter; EFAMA Letter; Gunderson Dettmer Letter;
Katten Foreign Advisers Letter; MAp Airports Letter; Merkl Letter;
Comment Letter of Non-U.S. Adviser (Jan. 24, 2011) (``Non-U.S.
Adviser Letter''). Cf. Sen. Levin Letter (advisers managing assets
in the United States of funds incorporated outside of the United
States ``are exactly the type of investment advisers to which the
Dodd-Frank Act's registration requirements are intended to apply'').
    \387\ Katten Foreign Advisers Letter.
    \388\ See Proposing Release, supra note 26, at nn.204-205 and
accompanying text.
    \389\ See infra Section II.C.
---------------------------------------------------------------------------

    In addition, some commenters supported an alternative approach
under which we would interpret ``assets under management in the United
States'' by reference to the source of the assets (i.e., U.S. private
fund investors).\390\ One of the commenters argued that our
interpretation would disadvantage U.S.-based advisers by permitting
non-U.S. advisers to accept substantial amounts of money from U.S.
investors without having to comply with certain U.S. regulatory
requirements, and cause U.S. advisers to move offshore or close U.S.
offices to avoid regulation.\391\
---------------------------------------------------------------------------

    \390\ Comment Letter of Portfolio Manager (Jan. 24, 2011)
(``Portfolio Manager Letter''); Merkl Letter (suggested that it
``may be useful'' to look both to assets managed from a U.S. place
of business and assets contributed by U.S. private fund investors to
address both investor protection and systemic risk concerns).
    \391\ Portfolio Manager Letter. See also Comment Letter of
Tuttle (Nov. 30, 2010) (submitted in connection with the
Implementing Adopting Release, avail. at http://www.sec.gov/comments/s7-35-10/s73510.shtml) (``Tuttle Implementing Release
Letter'') (argued that businesses may move offshore if they become
too highly regulated in the United States).
---------------------------------------------------------------------------

    As we explained in the Proposing Release, we believe that our
interpretation recognizes that non-U.S. activities of non-U.S. advisers
are less likely to implicate U.S. regulatory interests and is in
keeping with general principles of international comity.\392\ The rule
also is designed to encourage the participation of non-U.S. advisers in
the U.S. market by applying the U.S. securities laws in a manner that
does not impose U.S. regulatory and operational requirements on a non-
U.S. adviser's non-U.S. advisory business.\393\ Non-U.S. advisers
relying on rule 203(m)-1 will remain subject to the Advisers Act's
antifraud provisions and will become subject to the requirements
applicable to exempt reporting advisers.
---------------------------------------------------------------------------

    \392\ See Proposing Release, supra note 26, at n.207
(identifying Regulation S and Exchange Act rule 15a-6 as examples of
Commission rules that adopt a territorial approach).
    \393\ See generally Division of Investment Management, SEC,
Protecting Investors: A Half Century of Investment Company
Regulation, May 1992 (``1992 Staff Report''), at 223-227
(recognizing that non-U.S. advisers that registered with the
Commission were arguably subject to all of the substantive
provisions of the Advisers Act with respect to their U.S. and non-
U.S. clients, which could result in inconsistent regulatory
requirements or practices imposed by the regulations of their local
jurisdiction and the U.S. securities laws; in response, advisers
could form separate and independent subsidiaries but this could
result in U.S. clients having access to a limited number of advisory
personnel and reduced access by the U.S. subsidiary to information
or research by non-U.S. affiliates).
---------------------------------------------------------------------------

    One commenter proposed an additional interpretation under which we
would determine the ``assets under management in the United States''
for U.S. advisers only by reference to the amount of assets invested,
or ``in play,'' in the United States.\394\ We decline to adopt this
approach because it would be difficult for advisers to ascertain and
monitor which assets are invested in the United States, and this
approach thus could be confusing and difficult to apply on a consistent
basis. For example, an adviser might invest in the American Depositary
Receipts of a company incorporated in Bermuda that: (i) Engages in
mining operations in Canada, the principal trading market for its
common stock; and (ii) derives the majority of its revenues from
exports to the United States. It is not clear whether

these investments should be considered ``in play'' in the United
States.
---------------------------------------------------------------------------

    \394\ Comment Letter of Richard Dougherty (Dec. 14, 2010)
(``Dougherty Letter'').
---------------------------------------------------------------------------

    Another commenter urged us to exclude assets managed by a U.S.
adviser at its non-U.S. offices.\395\ This, the commenter argued, would
allow more U.S. advisers to rely on the exemption and allow us to focus
our resources on larger advisers more likely to pose systemic risk. But
the management of assets at these non-U.S. offices could have investor
protection implications in the United States, such as by creating
conflicts of interest for an adviser between assets managed abroad and
those managed in the United States.
---------------------------------------------------------------------------

    \395\ Comment Letter of T.A. McKay & Co., Inc. (Nov. 23, 2010).
---------------------------------------------------------------------------

    In addition, we sought comment as to whether, under the approach we
are adopting today, some or most U.S. advisers with non-U.S. branch
offices would re-organize those offices as subsidiaries in order to
avoid attributing assets managed to the non-U.S. office.\396\ No
commenter suggested this would occur. We continue to believe that rule
203(m)-1 will have only a limited effect on multi-national advisory
firms, which for tax or business reasons keep their non-U.S. advisory
activities organizationally separate from their U.S. advisory
activities. For these reasons, and our substantial interest in
regulating all of the activities of U.S. advisers, we decline to revise
rule 203(m)-1 as this commenter suggested.
---------------------------------------------------------------------------

    \396\ See Proposing Release, supra note 26, at discussion
following n.208.
---------------------------------------------------------------------------

    Several commenters asked that we clarify whether certain U.S.
activities or arrangements would result in an adviser having a ``place
of business'' in the United States.\397\ Commenters also sought
guidance as to whether limited-purpose U.S. offices of non-U.S.
advisers would be considered U.S. places of business (e.g., offices
conducting research or due diligence).\398\
---------------------------------------------------------------------------

    \397\ See, e.g., EFAMA Letter.
    \398\ AIMA Letter; Dechert General Letter; EFAMA Letter. See
also ABA Letter; Vedanta Letter.
---------------------------------------------------------------------------

    Under rule 203(m)-1, if a non-U.S. adviser relying on the exemption
has a place of business in the United States, all of the clients whose
assets the adviser manages at that place of business must be private
funds and the assets managed at that place of business must have a
total value of less than $150 million. Rule 203(m)-1 defines a ``place
of business'' by reference to rule 222-1(a) as any office where the
adviser ``regularly provides advisory services, solicits, meets with,
or otherwise communicates with clients,'' and ``any other location that
is held out to the general public as a location at which the investment
adviser provides investment advisory services, solicits, meets with, or
otherwise communicates with clients.''
    Whether a non-U.S. adviser has a place of business in the United
States depends on the facts and circumstances, as discussed below in
connection with the foreign private adviser exemption.\399\ For
purposes of rule 203(m)-1, however, the analysis frequently will turn
not on whether a non-U.S. adviser has a U.S. place of business, but on
whether the adviser manages assets, or has ``assets under management,''
at such a U.S. place of business. Under the Advisers Act, ``assets
under management'' are the securities portfolios for which an adviser
provides ``continuous and regular supervisory or management services.''
\400\ This is an inherently factual determination. We would not,
however, view providing research or conducting due diligence to be
``continuous and regular supervisory or management services'' at a U.S.
place of business if a person outside of the United States makes
independent investment decisions and implements those decisions.\401\
---------------------------------------------------------------------------

    \399\ See infra Section II.C.4.
    \400\ Section 203A(a)(2) of the Advisers Act. The instructions
to Item 5 of Form ADV provide guidance on the circumstances under
which an adviser would be providing ``continuous and regular
supervisory or management services with respect to an account.''
Form ADV: Instructions for Part 1A, instr. 5.b. The calculation of
an adviser's assets under management at a U.S. place of business
turns on whether the adviser is providing those services with
respect to a particular account or accounts at a U.S. place of
business.
    \401\ See Form ADV: Instructions for Part 1A, instr. 5.b(3)(b)
(an adviser provides continuous and regular supervisory or
management services with respect to an account if it has ``ongoing
responsibility to select or make recommendations, based upon the
needs of the client, as to specific securities or other investments
the account may purchase or sell and, if such recommendations are
accepted by the client, [it is] responsible for arranging or
effecting the purchase or sale''). These research or due diligence
services, while not ``continuous and regular supervisory or
management services,'' may be investment advisory services that, if
performed at a U.S. location, would cause the adviser to have a
place of business in the United States. See infra note 493 and
accompanying text.
---------------------------------------------------------------------------

4. United States Person
    Under rule 203(m)-1(b), a non-U.S. adviser may not rely on the
exemption if it has any client that is a United States person other
than a private fund.\402\ Rule 203(m)-1 defines a ``United States
person'' generally by incorporating the definition of a ``U.S. person''
in Regulation S under the Securities Act.\403\ Regulation S looks
generally to the residence of an individual to determine whether the
individual is a United States person,\404\ and also addresses the
circumstances under which a legal person, such as a trust, partnership
or a corporation, is a United States person.\405\ Regulation S
generally treats legal partnerships and corporations as United States
persons if they are organized or incorporated in the United States, and
analyzes trusts by reference to the residence of the trustee.\406\ It
treats discretionary accounts generally as United States persons if the
fiduciary is a resident of the United States.\407\ Commenters generally
supported defining ``United States person'' by reference to Regulation
S because, among other reasons, the definition is well developed and
understood by advisers.\408\
---------------------------------------------------------------------------

    \402\ In response to commenters seeking clarity on this point,
we note that a non-U.S. adviser need not have one or more private
fund clients that are United States persons in order to rely on the
exemption.
    \403\ Rule 203(m)-1(d)(8). We are adding a note to rule 203(m)-1
that clarifies that a client will not be considered a United States
person if the client was not a United States person at the time of
becoming a client of the adviser. This will permit a non-U.S.
adviser to continue to rely on rule 203(m)-1 if a non-U.S. client
that is not a private fund, such as a natural person client residing
abroad, relocates to the United States or otherwise becomes a United
States person. As one commenter recognized, this also will establish
similar treatment in these circumstances for non-U.S. advisers
relying on rule 203(m)-1 or the foreign private adviser exemption,
which contains an analogous note. See EFAMA Letter. See also Comment
Letter of Investment Funds Institute of Canada (Jan. 24, 2011)
(``IFIC Letter''). The note applicable to the foreign private
adviser exemption generally describes the time when an adviser must
determine if a person is ``in the United States'' for purposes of
that exemption. See infra Section II.C.3.
    \404\ 17 CFR 230.902(k)(1)(i).
    \405\ See, e.g., 17 CFR 230.902(k)(1) and (2).
    \406\ 17 CFR 230.902(k)(1)(ii) and (iv).
    \407\ 17 CFR 230.902(k)(1)(vii).
    \408\ AIMA Letter; CompliGlobe Letter; Debevoise Letter; Dechert
General Letter; Gunderson Dettmer Letter; Katten Foreign Advisers
Letter; O'Melveny Letter. As we explained in the Proposing Release,
advisers to private funds and their counsel must today be familiar
with the definition of ``U.S. person'' under Regulation S in order
to comply with other provisions of the Federal securities laws. See
Proposing Release, supra note 26, at n.217 and accompanying text.
---------------------------------------------------------------------------

    Rule 203(m)-1 also contains a special rule that requires an adviser
relying on the exemption to treat a discretionary or other fiduciary
account as a United States person if the account is held for the
benefit of a United States person by a non-U.S. fiduciary who is a
related person of the adviser.\409\ One

commenter expressed concern that the special rule is unnecessary while
another who supported the special rule as proposed noted that the
special rule should be ``narrowly drawn'' to avoid frustrating
legitimate subadvisory relationships between non-U.S. advisers and
their U.S. adviser affiliates.\410\ We believe that the special rule is
narrowly drawn and necessary to prevent advisers from purporting to
rely on the exemption and establishing discretionary accounts for the
benefit of U.S. clients with an offshore affiliate that would then
delegate the actual management of the account back to the adviser.\411\
---------------------------------------------------------------------------

    \409\ Rule 203(m)-1(d)(8) provides that a ``United States person
means any person that is a `U.S. person' as defined in [Regulation
S], except that any discretionary account or similar account that is
held for the benefit of a United States person by a dealer or other
professional fiduciary is a United States person if the dealer or
professional fiduciary is a related person of the investment adviser
relying on [rule 203(m)-1] and is not organized, incorporated, or
(if an individual) resident in the United States.'' In contrast,
under Regulation S, a discretionary account maintained by a non-U.S.
fiduciary (such as an investment adviser) is not a ``U.S. person''
even if the account is owned by a U.S. person. See 17 CFR
230.902(k)(1)(vii); 17 CFR 230.902(k)(2)(i).
    \410\ Katten Foreign Advisers Letter; AIMA Letter (noting that
the special rule should be narrowly drawn but also stating that
``[w]e understand the rationale for the special rule proposed by the
Commission for discretionary accounts maintained outside the US for
the benefit of US persons and we believe that that is an appropriate
safeguard against avoidance of the registration requirement'').
    \411\ See Proposing Release, supra note 26, discussion at
section II.B.4.
---------------------------------------------------------------------------

    Another commenter suggested the rule apply a different approach
with respect to business entities than that under Regulation S, which
as noted above generally treats legal partnerships and corporations as
U.S. persons if they are organized or incorporated in the United
States.\412\ The commenter suggested that advisers should instead look
to a business entity's principal office and place of business in
certain instances because an entity organized under U.S. law should not
necessarily be treated as a United States person if it was formed by a
non-United States person to pursue the entity's investment
objectives.\413\
---------------------------------------------------------------------------

    \412\ Debevoise Letter (noted that, for example, ``a private
fund, or an entity that is organized as part of a private fund, may
be organized under Delaware law to meet certain regulatory and tax
objectives, but the fund's principal office and place of business in
fact may be outside the U.S.'').
    \413\ The commenter asserted that this approach ``would not be
inconsistent with Regulation S itself, which treats a partnership or
corporation organized under the laws of a foreign jurisdiction as a
U.S. person if it was `[f]ormed by a U.S. person principally for the
purpose of investing in securities not registered under the
[Securities] Act, unless it is organized or incorporated, and owned,
by accredited investors * * * who are not natural persons, estates
or trusts.''' See also Comment Letter of Fulbright & Jaworski L.L.P.
(on behalf of a German asset manager) (Jun. 15, 2011) (``Fulbright
Letter'').
---------------------------------------------------------------------------

    We decline to adopt this suggestion because we believe it is most
appropriate to incorporate the definition of ``U.S. person'' in
Regulation S with as few modifications as possible. As noted above,
Regulation S provides a well-developed body of law with which advisers
to private funds and their counsel must today be familiar in order to
comply with other provisions of the Federal securities laws.
Incorporating this definition in rule 203(m)-1, therefore, makes rule
203(m)-1 easier to apply and fosters consistency across the Federal
securities laws. Deviations from the definition used in Regulation S,
including an entirely different approach to defining a ``United States
person,'' would detract from these benefits. Moreover, a test that
looks to a business entity's principal office and place of business, as
suggested by the commenter, would be difficult for advisers to apply.
It frequently is unclear where an investment fund maintains its
``principal office and place of business'' because investment funds
typically have no physical presence or employees other than those of
their advisers.

C. Foreign Private Advisers

    Section 403 of the Dodd-Frank Act replaces the current private
adviser exemption from registration under the Advisers Act with a new
exemption for a ``foreign private adviser,'' as defined in new section
202(a)(30).\414\ The new exemption is codified as amended section
203(b)(3).
---------------------------------------------------------------------------

    \414\ Section 402 of the Dodd-Frank Act (providing a definition
of ``foreign private adviser,'' to be codified at section 202(a)(30)
of the Advisers Act). See supra notes 22 and 23 and accompanying
text.
---------------------------------------------------------------------------

    Under section 202(a)(30), a foreign private adviser is any
investment adviser that: (i) Has no place of business in the United
States; (ii) has, in total, fewer than 15 clients in the United States
and investors in the United States in private funds advised by the
investment adviser; \415\ (iii) has aggregate assets under management
attributable to clients in the United States and investors in the
United States in private funds advised by the investment adviser of
less than $25 million; \416\ and (iv) does not hold itself out
generally to the public in the United States as an investment
adviser.\417\ Section 202(a)(30) authorizes the Commission to increase
the $25 million threshold ``in accordance with the purposes of this
title.'' \418\
---------------------------------------------------------------------------

    \415\ One commenter suggested that a non-U.S. adviser with no
place of business in the United States would not be subject to the
Advisers Act unless the adviser has at least one direct U.S. client.
See Katten Foreign Advisers Letter. See also ABA Letter. We note
that section 203(a) of the Advisers Act provides that an adviser may
not, unless registered, make use of any means or instrumentality of
interstate commerce in connection with its business as an investment
adviser. Hence, whether a non-U.S. adviser with no place of business
in the United States and no U.S. clients would be subject to
registration depends on whether there is sufficient use of U.S.
jurisdictional means. See also supra note 334.
    \416\ Subparagraph (B) of section 202(a)(30) refers to the
number of ``clients and investors in the United States in private
funds,'' while subparagraph (C) refers to assets of ``clients in the
United States and investors in the United States in private funds''
(emphasis added). As noted in the Proposing Release, we interpret
these provisions consistently so that only clients in the United
States and investors in the United States would be counted for
purposes of subparagraph (B). See Proposing Release, supra note 26,
at n.225.
    \417\ In addition, the exemption is not available to an adviser
that ``acts as (I) an investment adviser to any investment company
registered under the [Investment Company Act]; or (II) a company
that has elected to be a business development company pursuant to
section 54 of [that Act], and has not withdrawn its election.''
Section 202(a)(30)(D)(ii). As noted in the Proposing Release, we
interpret subparagraph (II) to prohibit an adviser that advises a
business development company from relying on the exemption. See
Proposing Release, supra note 26, at n.226.
    \418\ Section 202(a)(30)(C).
---------------------------------------------------------------------------

    Today we are adopting, substantially as proposed, new rule
202(a)(30)-1, which defines certain terms in section 202(a)(30) for use
by advisers seeking to avail themselves of the foreign private adviser
exemption, including: (i) ``investor;'' (ii) ``in the United States;''
(iii) ``place of business;'' and (iv) ``assets under management.''
\419\ We are also including in rule 202(a)(30)-1 the safe harbor and
many of the client counting rules that appeared in rule 203(b)(3)-1.
---------------------------------------------------------------------------

    \419\ Rule 202(a)(30)-1(c).
---------------------------------------------------------------------------

1. Clients
    Rule 202(a)(30)-1 includes a safe harbor for advisers to count
clients for purposes of the definition of ``foreign private adviser''
that is similar to the safe harbor that has been included in rule
203(b)(3)-1.\420\ The commenter that generally addressed this aspect of
our proposed rule agreed with our approach,\421\ which was designed to
apply a well-developed body of law to

give effect to a statutory provision with a similar purpose.
---------------------------------------------------------------------------

    \420\ Rule 203(b)(3)-1, which we are rescinding with the
Implementing Adopting Release, provided a safe harbor for
determining who may be deemed a single client for purposes of the
private adviser exemption. We are not, however, carrying over from
rule 203(b)(3)-1 a provision that distinguishes between advisers
whose principal places of business are inside or outside of the
United States. See rule 203(b)(3)-1(b)(5). Under the definition of
``foreign private adviser,'' an adviser relying on the exemption may
not have any place of business in the United States. See section 402
of the Dodd-Frank Act (defining ``foreign private adviser''). We are
also not including rule 203(b)(3)-1(b)(7), which specifies that a
client who is an owner of a private fund is a resident where the
client resides at the time of the client's investment in the fund.
The provision was vacated by a Federal court in Goldstein, supra
note 14. As discussed below, we are including a provision in rule
202(a)(30)-1 that addresses when an adviser must determine if a
client or investor is ``in the United States'' for purposes of the
exemption. See infra note 476 and accompanying text.
    \421\ See Katten Foreign Advisers Letter.
---------------------------------------------------------------------------

    New rule 202(a)(30)-1 allows an adviser to treat as a single client
a natural person and: (i) That person's minor children (whether or not
they share the natural person's principal residence); (ii) any
relative, spouse, spousal equivalent, or relative of the spouse or of
the spousal equivalent of the natural person who has the same principal
residence; \422\ (iii) all accounts of which the natural person and/or
the person's minor child or relative, spouse, spousal equivalent, or
relative of the spouse or of the spousal equivalent who has the same
principal residence are the only primary beneficiaries; and (iv) all
trusts of which the natural person and/or the person's minor child or
relative, spouse, spousal equivalent, or relative of the spouse or of
the spousal equivalent who has the same principal residence are the
only primary beneficiaries.\423\ Rule 202(a)(30)-1 also permits an
adviser to treat as a single ``client'' (i) a corporation, general
partnership, limited partnership, limited liability company, trust, or
other legal organization to which the adviser provides investment
advice based on the legal organization's investment objectives, and
(ii) two or more legal organizations that have identical shareholders,
partners, limited partners, members, or beneficiaries.\424\
---------------------------------------------------------------------------

    \422\ As suggested by a commenter, we incorporated in rule
202(a)(30)-1(a)(1) the concept of a ``spousal equivalent,'' which we
define by reference to rule 202(a)(11)(G)-1(d)(9) as ``a cohabitant
occupying a relationship generally equivalent to that of a spouse.''
See ABA Letter.
    \423\ Rule 202(a)(30)-1(a)(1). If a client relationship
involving multiple persons does not fall within the rule, whether
the relationship may appropriately be treated as a single ``client''
depends on the facts and circumstances.
    \424\ Rule 202(a)(30)-1(a)(2). In addition, rule 202(a)(30)-
1(b)(1) through (3) contain the following related ``special rules:''
(1) An adviser must count a shareholder, partner, limited partner,
member, or beneficiary (each, an ``owner'') of a corporation,
general partnership, limited partnership, limited liability company,
trust, or other legal organization, as a client if the adviser
provides investment advisory services to the owner separate and
apart from the investment advisory services provided to the legal
organization; (2) an adviser is not required to count an owner as a
client solely because the adviser, on behalf of the legal
organization, offers, promotes, or sells interests in the legal
organization to the owner, or reports periodically to the owners as
a group solely with respect to the performance of or plans for the
legal organization's assets or similar matters; and (3) any general
partner, managing member or other person acting as an investment
adviser to a limited partnership or limited liability company must
count the partnership or limited liability company as a client.
---------------------------------------------------------------------------

    As proposed, we are omitting the ``special rule'' providing
advisers with the option of not counting as a client any person for
whom the adviser provides investment advisory services without
compensation.\425\ Some commenters argued that an adviser should not
have to count such persons, who may be employees and principals of the
firm and their family members.\426\ But as we explained in the
Proposing Release, allowing an adviser not to count as clients persons
in the United States who do not compensate the adviser would allow
certain advisers to avoid registration through reliance on the foreign
private adviser exemption despite the fact that, as those commenters
acknowledge, the adviser provides advisory services to those
persons.\427\
---------------------------------------------------------------------------

    \425\ See rule 203(b)(3)-1(b)(4).
    \426\ See Dechert General Letter (``In many instances, advisers
manage the assets of employees and principals of the firm and their
family members, and use such services as a legitimate compensation
arrangement to retain talented employees.''); Katten Foreign
Advisers Letter (``Such persons are likely to be in a special
relationship with the adviser that allows them to benefit from the
advisers' investment advice without having to pay.''). See also ABA
Letter.
    \427\ Cf. Form ADV: Glossary (stating that for purposes of Form
ADV, the term ``client'' ``includes clients from which [an adviser]
receives no compensation * * *.''). We also are adopting in the
Implementing Adopting Release a uniform method for calculating
assets under management for regulatory purposes, including
availability of the foreign private adviser exemption, that requires
advisers to include in that calculation assets they manage without
compensation. See Implementing Adopting Release, supra note 32,
discussion at section II.A.3. Requiring foreign private advisers to
treat as clients persons from whom they receive no compensation is
consistent with the use of this new uniform method of calculating
assets under management for regulatory purposes.
---------------------------------------------------------------------------

    The new rule includes two provisions that clarify that advisers
need not double-count private funds and their investors under certain
circumstances.\428\ One provision, as proposed, specifies that an
adviser need not count a private fund as a client if the adviser
counted any investor, as defined in the rule, in that private fund as
an investor in that private fund for purposes of determining the
availability of the exemption.\429\ The other provision, recommended by
commenters,\430\ clarifies that an adviser is not required to count a
person as an investor if the adviser counts such person as a client of
the adviser.\431\ Thus, a client who is also an investor in a private
fund advised by the adviser would only be counted once.
---------------------------------------------------------------------------

    \428\ See rule 202(a)(30)-1(b)(4)-(5).
    \429\ See rule 202(a)(30)-1(b)(4); 202(a)(30)-1(c)(2). See also
infra Section II.C.2 (discussing the definition of investor). This
provision is applicable only for purposes of determining whether an
adviser has fewer than 15 clients in the United States and investors
in the United States in private funds it advises under section
202(a)(30)(B) of the foreign private adviser exemption. It does not
apply to the determination of the assets under management relevant
for purposes of that exemption under section 202(a)(30)(C). As a
result, an adviser must include the assets of a private fund that is
a client in the United States even if the adviser may exclude the
private fund when determining whether the adviser has fewer than 15
clients or investors in the United States. See also infra note 499.
    \430\ See ABA Letter; Katten Foreign Advisers Letter.
    \431\ See rule 202(a)(30)-1(b)(5).
---------------------------------------------------------------------------

2. Private Fund Investor
    Section 202(a)(30) provides that a ``foreign private adviser''
eligible for the new registration exemption cannot have more than 14
clients ``or investors in the United States in private funds'' advised
by the adviser. Rule 202(a)(30)-1 defines an ``investor'' in a private
fund as any person who would be included in determining the number of
beneficial owners of the outstanding securities of a private fund under
section 3(c)(1) of the Investment Company Act, or whether the
outstanding securities of a private fund are owned exclusively by
qualified purchasers under section 3(c)(7) of that Act.\432\ In
addition, a beneficial owner of short-term paper issued by the private
fund also is an ``investor,'' notwithstanding that holders of short-
term paper need not be counted for purposes of section 3(c)(1).\433\
Finally, in order to avoid double-counting, the rule clarifies that an
adviser may treat as a single investor any person who is an investor in
two or more private funds advised by the investment adviser.\434\ We
are adopting rule 202(a)(30)-1 substantially as proposed. In a
modification to the proposal, however, we are not including
knowledgeable employees in the definition of ``investor.'' \435\
---------------------------------------------------------------------------

    \432\ See rule 202(a)(30)-1(c)(2)(i); supra notes 10 and 12 and
accompanying text. We note that the definition of ``investor'' in
rule 202(a)(30)-1 is for purposes of the foreign private adviser
exemption and does not limit the scope of that term for purposes of
rule 206(4)-8.
    \433\ See rule 202(a)(30)-1(c)(2)(ii).
    \434\ See rule 202(a)(30)-1(c)(2), at note to paragraph (c)(2).
    \435\ See rule 202(a)(30)-1(c)(2). See also infra notes 448-452
and accompanying text.
---------------------------------------------------------------------------

    The term ``investor'' is not currently defined under the Advisers
Act or the rules under the Advisers Act. We are adopting the new
definition to provide for consistent application of the statutory
provision and to prevent non-U.S. advisers from circumventing the
limitations in section 203(b)(3). As discussed in the Proposing
Release, we believe that defining the term ``investor'' by reference to
sections 3(c)(1) and 3(c)(7) of the Investment Company Act will best
achieve these purposes.
    Commenters who addressed the issue agreed with our decision to
define investor for purposes of this rule by reference to the well-
developed understanding of ownership under

sections 3(c)(1) and 3(c)(7).\436\ Funds and their advisers must
determine who is a beneficial owner for purposes of section 3(c)(1) or
whether an owner is a qualified purchaser for purposes of section
3(c)(7).\437\ More importantly, defining the term ``investor'' by
reference to sections 3(c)(1) and 3(c)(7) places appropriate limits on
the ability of a non-U.S. adviser to avoid application of the
registration provisions of the Advisers Act by setting up intermediate
accounts through which investors may access a private fund and not be
counted for purposes of the exemption. Advisers must ``look through''
nominee and similar arrangements to the underlying holders of private
fund-issued securities to determine whether they have fewer than 15
clients and private fund investors in the United States.\438\ Holders
of both equity and debt securities must be counted as investors.\439\
---------------------------------------------------------------------------

    \436\ See ABA Letter; Dechert General Letter; Katten Foreign
Advisers Letter.
    \437\ See supra notes 10 and 12 and accompanying text. In the
Proposing Release, we noted that typically a prospective investor in
a private fund must complete a subscription agreement that includes
representations or confirmations that it is qualified to invest in
the fund and whether it is a U.S. person. This information is
designed to allow the adviser (on behalf of the fund) to make the
above determination. Therefore, an adviser seeking to rely on the
foreign private adviser exemption will have ready access to this
information.
    \438\ Rule 202(a)(30)-1(c)(2). See generally sections 3(c)(1)
and 3(c)(7) of the Investment Company Act.
    \439\ Sections 3(c)(1) and 3(c)(7) of the Investment Company Act
refer to beneficial owners and owners, respectively, of
``securities'' (which is broadly defined in section 2(a)(36) of that
Act to include debt and equity).
---------------------------------------------------------------------------

    Under the new rule, an adviser will determine the number of
investors in a private fund based on the facts and circumstances and in
light of the applicable prohibition not to do indirectly, or through or
by any other person, what is unlawful to do directly.\440\ Depending
upon the facts and circumstances, persons other than the nominal holder
of a security issued by a private fund may be counted as the beneficial
owner under section 3(c)(1), or be required to be a qualified purchaser
under section 3(c)(7).\441\ An adviser relying on the exemption would
have to count such a person as an investor.
---------------------------------------------------------------------------

    \440\ See section 208(d) of the Advisers Act; section 48(a) of
the Investment Company Act.
    \441\ As noted above, we have recognized that in certain
circumstances it is appropriate to ``look through'' an investor
(i.e., attribute ownership of a private fund to another person who
is the ultimate owner). See, e.g., Privately Offered Investment
Companies, Investment Company Act Release No. 22597 (Apr. 3, 1997)
[62 FR 17512 (Apr. 9, 1997)] (``NSMIA Release'') (``The Commission
understands that there are other forms of holding investments that
may raise interpretative issues concerning whether a Prospective
Qualified Purchaser `owns' an investment. For instance, when an
entity that holds investments is the `alter ego' of a Prospective
Qualified Purchaser (as in the case of an entity that is wholly
owned by a Prospective Qualified Purchaser who makes all the
decisions with respect to such investments), it would be appropriate
to attribute the investments held by such entity to the Prospective
Qualified Purchaser.'').
---------------------------------------------------------------------------

    For example, the adviser to a master fund in a master-feeder
arrangement would have to treat as investors the holders of the
securities of any feeder fund formed or operated for the purpose of
investing in the master fund rather than the feeder funds, which act as
conduits.\442\ In addition, an adviser would need to count as an
investor an owner of a total return swap on the private fund because
that arrangement effectively provides the risks and rewards of
investing in the private fund to the swap owner.\443\ Whether an owner
of another type of instrument referencing a private fund would be
counted as the beneficial owner under section 3(c)(1), or be required
to be a qualified purchaser under section 3(c)(7), would depend on the
facts and circumstances.
---------------------------------------------------------------------------

    \442\ A ``master-feeder fund'' is an arrangement in which one or
more funds with the same or consistent investment objectives
(``feeder funds'') invest all or substantially all of their assets
in a single fund (``master fund'') with the same or consistent
investment objective and strategies. We have taken the same approach
within our rules that require a private fund to ``look through'' any
investor that is formed or operated for the specific purpose of
investing in a private fund. See rule 2a51-3(a) under the Investment
Company Act (17 CFR 270.2a51-3(a)) (a company is not a qualified
purchaser if it is ``formed for the specific purpose of acquiring
the securities'' of an investment company that is relying on section
3(c)(7) of the Investment Company Act, unless each of the company's
beneficial owners is also a qualified purchaser). See also NSMIA
Release, supra note 441 (explaining that rule 2a51-3(a) would limit
the possibility that ``a company will be able to do indirectly what
it is prohibited from doing directly [by organizing] * * * a
`qualified purchaser' entity for the purpose of making an investment
in a particular Section 3(c)(7) Fund available to investors that
themselves did not meet the definition of `qualified purchaser' '').
    \443\ One commenter argued that the swap counterparty is not
required to hedge its exposure by investing the full notional amount
in the private fund. See Dechert General Letter. We do not find this
distinction persuasive in situations in which the adviser knows or
should know of the existence of the swap. See infra discussion
accompanying and following note 447.
---------------------------------------------------------------------------

    Several commenters generally disagreed that advisers should be
required to ``look through'' total return swaps or similar instruments
or master-feeder arrangements in at least certain circumstances,
arguing among other things that these instruments or arrangements serve
legitimate business purposes.\444\ As we explain above, however, the
requirement to count as investors persons other than the nominal holder
of a security issued by a private fund is derived from provisions in
both the Advisers Act and the Investment Company Act prohibiting a
person from doing indirectly, or through or by any other person, what
is unlawful to do directly, and from sections 3(c)(1) and 3(c)(7).\445\
---------------------------------------------------------------------------

    \444\ See, e.g., ABA Letter; Dechert General Letter; EFAMA
Letter.
    \445\ See supra notes 440-443 and accompanying text.
---------------------------------------------------------------------------

    Some commenters also argued that ``looking through'' a total return
swap or similar instrument would be impractical or unduly burdensome in
certain circumstances, including situations in which the adviser did
not participate in the swap's creation or know of its existence.\446\
An issuer relying on section 3(c)(7) may treat as a qualified purchaser
any person whom the issuer reasonably believes is a qualified
purchaser, and the definition of investor that we are adopting today
provides that an adviser counts as investors those persons who must be
qualified purchasers under section 3(c)(7). Therefore, an adviser may
treat as an investor a person the adviser reasonably believes is the
actual investor.\447\ Similarly, if an adviser reasonably believes that
an investor is not ``in the United States,'' the adviser may treat the
investor as not being ``in the United States.''
---------------------------------------------------------------------------

    \446\ See, e.g., Dechert General Letter; EFAMA Letter.
    \447\ Rule 202(a)(30)-1(c)(2) defines the term ``investor''
generally to include persons that must be counted for purposes of
section 3(c)(1) of the Investment Company Act or qualified
purchasers for purposes of section 3(c)(7) of that Act. See supra
notes 432-443 and accompanying text. Advisers to private funds
relying on section 3(c)(7) may under Investment Company Act rule
2a51-1(h) treat as qualified purchasers those persons they
reasonably believe are qualified purchasers. Persons who must be
qualified purchasers for purposes of section 3(c)(7) generally would
be the same as those who must be counted for purposes of section
3(c)(1). Accordingly, advisers may, for purposes of determining
their investors in the United States under rule 202(a)(30)-1, treat
as an investor a person the adviser reasonably believes is the
actual investor.
---------------------------------------------------------------------------

    The final rule, unlike the proposal, does not treat as investors
beneficial owners who are ``knowledgeable employees'' with respect to
the private fund, and certain other persons related to such employees
(we refer to them, collectively, as ``knowledgeable employees'').\448\
In formulating our

proposal to include knowledgeable employees in the definition of
investor, we were concerned that excluding knowledgeable employees from
the definition of investor would allow certain advisers to avoid
registration by relying on the foreign private adviser exemption.\449\
A number of commenters opposed our proposal.\450\ In particular, they
argued that the proposed approach was inconsistent with Congressional
and prior Commission determinations that such employees do not need the
protections of the Investment Company Act.\451\
---------------------------------------------------------------------------

    \448\ See proposed rule 202(a)(30)-1(c)(1)(i) (referencing rule
3c-5 under the Investment Company Act (17 CFR 270.3c-5(b)), which
excludes from the determinations under sections 3(c)(1) and 3(c)(7)
of that Act any securities beneficially owned by knowledgeable
employees of a private fund; a company owned exclusively by
knowledgeable employees; and any person who acquires securities
originally acquired by a knowledgeable employee through certain
transfers of interests, such as a gift or a bequest).
    \449\ See Proposing Release, supra note 26, at n.250 and
accompanying text.
    \450\ See Dechert General Letter; Katten Foreign Advisers
Letter; Seward Letter; Shearman Letter.
    \451\ See, e.g., Dechert General Letter (``[The] Commission
promulgated the knowledgeable employee safe-harbors for sections
3(c)(1) and 3(c)(7) in response to the Congressional mandate in the
National Securities Markets Improvement Act of 1996 to allow certain
informed insiders to invest in a private fund without causing the
fund to lose its exception under the 1940 Act.''); Shearman Letter
(the proposed approach is ``contrary to a long history of
recognizing that knowledgeable employees should be treated
differently than other investors and that their privileged status
with their organizations in terms of influence and access to
information reasonably limits the public's interest in their
protection'').
---------------------------------------------------------------------------

    Upon further consideration, we have determined that the same policy
considerations that justify disregarding knowledgeable employees for
purposes of other provisions provide a valid basis for excluding them
from the definition of ``investor'' under the foreign private adviser
exemption.\452\ Treating knowledgeable employees in the same manner for
purposes of the definition of investor and sections 3(c)(1) and 3(c)(7)
will also simplify compliance with regulatory requirements imposed by
both the Advisers Act and the Investment Company Act.
---------------------------------------------------------------------------

    \452\ See Advisers Act rule 205-3(d)(1)(iii) (specifying that
knowledgeable employees are included among the types of clients to
whom the adviser may charge performance fees); Advisers Act rule
202(a)(11)(G)-1 (permitting a family office excluded from the
definition of investment adviser under the Advisers Act to provide
investment advice to its knowledgeable employees). These provisions
reflect a policy determination that knowledgeable employees are
likely to be in a position or have a level of knowledge and
experience in financial matters sufficient to be able to evaluate
the risks and take steps to protect themselves.
---------------------------------------------------------------------------

    The new rule requires advisers to treat as investors beneficial
owners of ``short-term paper'' \453\ issued by the private fund.\454\
These persons are not counted as beneficial owners for purposes of
section 3(c)(1) but must be qualified purchasers under section
3(c)(7).\455\ Some commenters opposed this approach, arguing that
holders of short-term paper do not make an investment decision but
rather are creditors making a credit risk evaluation.\456\ We disagree.
The acquisition of those instruments involves an investment decision,
although the considerations involved in that decision might differ from
the considerations involved in a decision to make an equity investment.
---------------------------------------------------------------------------

    \453\ See rule 202(a)(30)-1(c)(2)(ii) (referencing the
definition of ``short-term paper'' contained in section 2(a)(38) of
the Investment Company Act, which defines ``short-term paper'' to
mean ``any note, draft, bill of exchange, or banker's acceptance
payable on demand or having a maturity at the time of issuance of
not exceeding nine months, exclusive of days of grace, or any
renewal thereof payable on demand or having a maturity likewise
limited; and such other classes of securities, of a commercial
rather than an investment character, as the Commission may designate
by rules and regulations'').
    \454\ See rule 202(a)(30)-1(c)(2)(ii).
    \455\ See sections 3(c)(1) and 3(c)(7) of the Investment Company
Act.
    \456\ See ABA Letter (``[H]olders of short-term securities do
not view themselves as making an investment decision in connection
with their extension of credit, but rather assess the risk of
holding a private fund's short-term paper based on credit risk.'');
Shearman Letter (``[A] lender to a fund, while it makes a `credit
analysis,' does not deploy capital based on the perceived skill of
the fund manager and so is not an investor by any traditional
measure.'').
---------------------------------------------------------------------------

    One commenter asserted that treating holders of short-term paper as
investors could result in a U.S. commercial lender to a fund being
treated as an investor, leading non-U.S. advisers to avoid U.S.
lenders.\457\ Unless the extension of credit by a fund's broker-dealer
or custodian bank results in the issuance of a security by the fund to
its creditor, the creditor would not be considered an investor for
purposes of the foreign private adviser exemption.\458\
---------------------------------------------------------------------------

    \457\ See Shearman Letter.
    \458\ See Reves v. Ernst & Young, 494 U.S. 56 (1990).
---------------------------------------------------------------------------

    As we stated in the Proposing Release, there appears to be no valid
reason to treat as investors all debt holders except holders of short-
term paper.\459\ Certain issuers continually roll over short-term paper
and effectively use it as a permanent source of capital, further
supporting our view that there appears to be no reason to treat holders
of short-term paper differently than other longer-term debt holders for
purposes of the exemption.\460\ Moreover, a private fund's losses
directly affect the interests of holders of short-term paper in the
fund just as they affect the interests of other debt holders in the
fund.\461\ In contrast to the treatment of knowledgeable employees,
holders of short-term paper must be qualified purchasers under section
3(c)(7), the more recent of the two exclusions under the Investment
Company Act on which private funds rely.\462\ Thus, we are requiring
advisers to count as investors all debt holders, including holders of
short-term paper.
---------------------------------------------------------------------------

    \459\ See Proposing Release, supra note 26, at n. 251 and
accompanying text. One commenter agreed that we should not treat
short- and longer-term debt holders differently for purposes of the
exemption. See ABA Letter (asking that we exclude all holders of
conventional debt from the definition of investor).
    \460\ As we noted in the Proposing Release, because commercial
paper issuers often refinance the repayment of maturing commercial
paper with newly issued commercial paper, they may face roll-over
risk, i.e., the risk that investors may not be willing to refinance
maturing commercial paper. See Proposing Release, supra note 26, at
n. 134. These risks became particularly apparent for issuers of
asset-backed commercial paper beginning in August 2007. At that
time, structured investment vehicles (``SIVs''), which are off-
balance sheet funding vehicles sponsored by financial institutions,
issued commercial paper to finance the acquisition of long-term
assets, including residential mortgages. As a result of problems in
the residential home mortgage market, short-term investors began to
avoid asset-backed commercial paper tied to residential mortgages,
regardless of whether the securities had substantial exposure to
sub-prime mortgages. Unable to roll over their commercial paper,
SIVs suffered severe liquidity problems and significant losses. See
Money Market Fund Reform, Investment Company Act Release No. 28807
(June 30, 2009) [74 FR 32688 (July 8, 2009)] (``Money Market Fund
Reform Release'') at nn. 37-39 and preceding and accompanying text;
Marcin Kacperczyk And Philipp Schnabl, When Safe Proved Risky:
Commercial Paper During the Financial Crisis Of 2007-2009 (Nov.
2009).
    \461\ As discussed in the Proposing Release, various types of
investment vehicles make significant use of short-term paper for
financing purposes so holders of this type of security are, in
practice, exposed to the investment results of the security's
issuer. See Proposing Release, supra note 26, at n. 251. See also
Money Market Fund Reform Release, supra note 460, at nn. 37-39 and
preceding and accompanying text (discussing how money market funds
were exposed to substantial losses during 2007 as a result of
exposure to debt securities issued by structured investment
vehicles).
    \462\ Congress added section 3(c)(7) to the Investment Company
in 1996 as part of the National Securities Markets Improvement Act
of 1996. Section 3(c)(1) was included in the Investment Company Act
when it was enacted in 1940.
---------------------------------------------------------------------------

    Some commenters expressed concern that the look-through requirement
contained in the statutory definition of a ``foreign private adviser''
could impose significant burdens on advisers to non-U.S. funds,
including non-U.S. retail funds publicly offered outside of the United
States.\463\ Two of these commenters stated, for example, that in their
view a non-U.S. fund could be considered a private fund as a result of
independent actions of U.S. investors, such as if a non-U.S.
shareholder of a non-U.S. fund moves to the United States and purchases
additional shares.\464\ If these funds were ``private

funds,'' their advisers would, if seeking to rely on the foreign
private adviser exemption, be required to determine the number of
private fund investors in the United States and the assets under
management attributable to them.
---------------------------------------------------------------------------

    \463\ See AFG Letter; Dechert Foreign Adviser Letter; EFAMA
Letter; Shearman Letter.
    \464\ Dechert Foreign Adviser Letter; EFAMA Letter. See also
Comment Letter of Association Fran[ccedil]aise de la Gestion
financi[egrave]re (Jun. 14, 2011) (recommended that ``investment
funds that already are strictly regulated and supervised by European
Union regulators should be excluded from the scope of Title IV of
the Dodd Frank Act and should not be considered as `private funds'''
because, among other reasons, the commenter's management company
members ``very often'' do not know the identities of their funds'
investors, and ``therefore should not [] be held responsible if,
unbeknownst to them, US persons decide to invest in their funds'').
---------------------------------------------------------------------------

    As we explain above, if an adviser reasonably believes that an
investor is not ``in the United States,'' the adviser may treat the
investor as not being ``in the United States.'' Moreover, we understand
that non-U.S. private funds currently count or qualify their U.S.
investors in order to avoid regulation under the Investment Company
Act.\465\ A non-U.S. adviser would need to count the same U.S.
investors (except for holders of short-term paper with respect to a
fund relying on section 3(c)(1)) in order to rely on the foreign
private adviser exemption. In this respect, therefore, the look-through
requirement of the foreign private adviser exemption will generally not
impose any new burden on advisers to non-U.S. funds.
---------------------------------------------------------------------------

    \465\ This practice is consistent with positions our staff has
taken in which the staff has stated it would not recommend
enforcement action in certain circumstances. See, e.g., Goodwin
Procter No-Action Letter, supra note 294; Touche Remnant No-Action
Letter, supra note 294. See also sections 7(d), 3(c)(1), and 3(c)(7)
of the Investment Company Act. See also, e.g., Canadian Tax-Deferred
Retirement Savings Accounts Release, supra note 294, at n. 23 (``The
Commission and its staff have interpreted section 7(d) to generally
prohibit a foreign fund from making a U.S. private offering if that
offering would cause the securities of the fund to be beneficially
owned by more than 100 U.S. residents.'').
---------------------------------------------------------------------------

3. In the United States
    Section 202(a)(30)'s definition of ``foreign private adviser''
employs the term ``in the United States'' in several contexts,
including: (i) Limiting the number of--and assets under management
attributable to--an adviser's ``clients'' ``in the United States'' and
``investors in the United States'' in private funds advised by the
adviser; (ii) exempting only those advisers without a place of business
``in the United States;'' and (iii) exempting only those advisers that
do not hold themselves out to the public ``in the United States'' as an
investment adviser.\466\ Today, we are defining the term ``in the
United States'' to clarify the term for all of the above purposes as
well as to provide specific instructions as to the relevant time for
making the related determination.
---------------------------------------------------------------------------

    \466\ See section 402 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    New rule 202(a)(30)-1 defines ``in the United States,'' as
proposed, generally by incorporating the definition of a ``U.S.
person'' and ``United States'' under Regulation S.\467\ In particular,
we are defining ``in the United States'' to mean: (i) With respect to
any place of business, any such place that is located in the ``United
States,'' as defined in Regulation S;)\468\ (ii) with respect to any
client or private fund investor in the United States, any person who is
a ``U.S. person'' as defined in Regulation S,\469\ except that any
discretionary account or similar account that is held for the benefit
of a person ``in the United States'' by a non-U.S. dealer or other
professional fiduciary is deemed ``in the United States'' if the dealer
or professional fiduciary is a related person of the investment adviser
relying on the exemption; and (iii) with respect to the public, in the
``United States,'' as defined in Regulation S.\470\
---------------------------------------------------------------------------

    \467\ Rule 202(a)(30)-1(c)(3). As discussed above, we are also
referencing Regulation S's definition of a ``U.S. person'' for
purposes of the definition of ``United States person'' in rule
203(m)-1. See supra Section II.B.4.
    \468\ See 17 CFR 230.902(l).
    \469\ See 17 CFR 230.902(k).
    \470\ See 17 CFR 230.902(l).
---------------------------------------------------------------------------

    We believe that the use of Regulation S is appropriate for purposes
of the foreign private adviser exemption because Regulation S provides
more specific rules when applied to various types of legal
structures.\471\ Advisers, moreover, already apply the Regulation S
definition of U.S. person with respect to both clients and investors
for other purposes and therefore are familiar with the definition.\472\
The references to Regulation S with respect to a place of business ``in
the United States'' and the public in the ``United States'' also allows
us to maintain consistency across our rules. Two commenters
specifically supported our approach.\473\
---------------------------------------------------------------------------

    \471\ See supra notes 404-407 and accompanying text.
    \472\ As we noted in the Proposing Release, many non-U.S.
advisers identify whether a client is a ``U.S. person'' under
Regulation S in order to determine whether the client may invest in
certain private funds and certain private placement offerings exempt
from registration under the Securities Act. See Proposing Release,
supra note 26, at n. 259. With respect to ``investors,'' our staff
has generally taken the interpretive position that an investor that
does not meet that definition is not a U.S. person when determining
whether a non-U.S. private fund meets the section 3(c)(1) and
3(c)(7) counting or qualification requirements. See id., at n. 217.
Many non-U.S. advisers, moreover, currently determine whether a
private fund investor is a ``U.S. person'' under Regulation S for
purposes of the safe harbor for offshore offers and sales.
    \473\ Dechert Foreign Adviser Letter; Dechert General Letter.
Commenters generally addressed our proposal to rely on Regulation S
to identify U.S. persons within the context of the private fund
adviser exemption. See supra Section II.B.4.
---------------------------------------------------------------------------

    Similar to our approach in new rule 203(m)-1(d)(8) and as we
proposed,\474\ we are treating as persons ``in the United States'' for
purposes of the foreign private adviser exemption certain persons that
would not be considered ``U.S. persons'' under Regulation S. For
example, we are treating as ``in the United States'' any discretionary
account owned by a U.S. person and managed by a non-U.S. affiliate of
the adviser in order to discourage non-U.S. advisers from creating such
discretionary accounts with the goal of circumventing the exemption's
limitation with respect to advising assets of persons in the United
States.\475\
---------------------------------------------------------------------------

    \474\ See supra Section II.B.4 (discussing the definition of
United States persons and the treatment of discretionary accounts).
    \475\ Rule 202(a)(30)-1(c)(3)(i). See supra note 409.
---------------------------------------------------------------------------

    We also are including the note to paragraph (c)(3)(i) specifying
that for purposes of that definition, a person who is ``in the United
States'' may be treated as not being ``in the United States'' if the
person was not ``in the United States'' at the time of becoming a
client or, in the case of an investor in a private fund, each time the
investor acquires securities issued by the fund.\476\ As we explained
in the Proposing Release, the note is designed to reduce the burden of
having to monitor the location of clients and investors on an ongoing
basis, and to avoid placing an adviser in a position whereby it might
have to choose between registering with the Commission or terminating
the relationship with any client that moved to the United States, or
redeeming the interest in the private fund of any investor that moved
to the United States.\477\
---------------------------------------------------------------------------

    \476\ Rule 202(a)(30)-1, at note to paragraph (c)(3)(i) (``A
person who is in the United States may be treated as not being in
the United States if such person was not in the United States at the
time of becoming a client or, in the case of an investor in a
private fund, each time the investor acquires securities issued by
the fund.''). We revised the note to provide that it applies ``each
time'' the investor acquires securities issued by the fund. Cf.
proposed rule 202(a)(30)-1, at note to paragraph (c)(2)(i). This
change to the note as proposed more clearly reflects the note's
intended operation.
    \477\ See Proposing Release, supra note 26, at n.257 and
accompanying and following text.
---------------------------------------------------------------------------

    Several commenters supported the inclusion of the note.\478\ Some
commenters, however, advocated expanding the note to treat a private

fund investor in the same way as a client so that additional
investments in a fund made after moving to the United States would not
cause the investor to become a U.S. person.\479\ They argued that, as
discussed above, advisers to non-U.S. funds should not be required to
``look through'' these funds to ensure that their investors who
purchased shares while outside of the United States did not
subsequently relocate to the United States and purchase additional
shares.
---------------------------------------------------------------------------

    \478\ See, e.g., Dechert General Letter (``The note provides
helpful relief at a time when advisory clients often move across
international borders while keeping an existing relationship with a
financial institution.''). See also ABA Letter; Dechert Foreign
Adviser Letter.
    \479\ See Dechert Foreign Adviser Letter; Dechert General
Letter; EFAMA Letter.
---------------------------------------------------------------------------

    As we explain above, if an adviser reasonably believes that an
investor is not ``in the United States,'' the adviser may treat the
investor as not being ``in the United States.'' In addition, we
understand that, based on no-action positions taken by our staff, non-
U.S. funds do not consider for purposes of section 3(c)(1) beneficial
owners who were not U.S. persons at the time they invested in the fund,
but do consider those beneficial owners if they make additional
purchases in the same fund after relocating to the United States.\480\
The note is consistent with the funds' current practices, and thus
generally should not impose any new burdens on non-U.S. funds. The note
also is consistent with section 3(c)(7), which requires an investor to
be a qualified purchaser at the time the investor acquires the
securities.
---------------------------------------------------------------------------

    \480\ See Investment Funds Institute of Canada, SEC Staff No-
Action Letter (Mar. 4, 1996) (staff also stated its belief that, to
the extent that a dividend reinvestment plan of a non-U.S. fund is
consistent with the requirements of Securities Act Release No. 929
(July 29, 1936), such a plan would not involve an offer for purposes
of Section 7(d) of the Investment Company Act). See also Goodwin
Procter No-Action Letter, supra note 294; Touche Remnant No-Action
Letter, supra note 294.
---------------------------------------------------------------------------

    The Investment Funds Institute of Canada (IFIC) and the Investment
Industry Association of Canada (IIAC) urged that, for purposes of the
look-through provision, the Commission allow non-U.S. advisers not to
count persons (and their assets) who invest in a foreign private fund
through certain Canadian retirement accounts (``Participants'') after
having moved to the United States.\481\ The commenters noted that this
treatment would be consistent with rule 7d-2 under the Investment
Company Act and certain related rules.\482\ We agree. A non-U.S. fund
sold to Participants would be deemed a private fund if it conducted a
private offering in the United States,\483\ but we have previously
stated that Participants need not be counted toward the 100-investor
limit for purposes of section 3(c)(1).\484\ As a result, and based on
the same policy considerations embodied in rule 7d-2, we believe that a
non-U.S. adviser should not be required to treat Participants as
investors in the United States under rule 202(a)(30)-1 with respect to
investments they make after moving to the United States if the fund is
in compliance with rule 7d-2.\485\
---------------------------------------------------------------------------

    \481\ See IFIC Letter; Comment Letter of Investment Industry
Association of Canada (Jan. 18, 2011) (``IIAC Letter'').
    \482\ We adopted rule 7d-2, along with rule 237 under the
Securities Act, in order to allow Participants who move to the
United States to continue to manage their Canadian retirement
accounts. See Offer and Sale of Securities to Canadian Tax-Deferred
Retirement Savings Accounts, Securities Act Release No. 7860 (June
7, 2000) [65 FR 37672 (June 15, 2000)]. U.S. registration
requirements were affecting those Participants' ability to purchase
or exchange securities for such accounts. Rule 7d-2 generally allows
non-U.S. funds to treat as a private offering certain offerings to
Participants who are in the United States.
    \483\ See supra notes 294 and 313.
    \484\ See Canadian Tax-Deferred Retirement Savings Accounts
Release, supra note 294, at n.23.
    \485\ This interpretation only applies with respect to
Participants' investments in Eligible Securities issued by a
Qualified Company, as these terms are defined in rule 7d-2.
---------------------------------------------------------------------------

4. Place of Business
    New rule 202(a)(30)-1, by reference to rule 222-1,\486\ defines
``place of business'' to mean any office where the investment adviser
regularly provides advisory services, solicits, meets with, or
otherwise communicates with clients, and any location held out to the
public as a place where the adviser conducts any such activities.\487\
We are adopting this provision as proposed because we believe the
definition appropriately identifies a location where an adviser is
doing business for purposes of section 202(a)(30) of the Advisers Act
and thus provides a basis for an adviser to determine whether it can
rely on the exemption in section 203(b)(3) of the Advisers Act for
foreign private advisers. As discussed in the Proposing Release,
because both the Commission and the state securities authorities use
this definition to identify an unregistered foreign adviser's place of
business for purposes of determining regulatory jurisdiction,\488\ we
believe it is logical as well as efficient to use the rule 222-1(a)
definition of ``place of business'' for purposes of the foreign private
adviser exemption. The two commenters that considered the proposed
definition of ``place of business'' by reference to rule 222-1 agreed
with this analysis.\489\
---------------------------------------------------------------------------

    \486\ Rule 222-1(a) (defining ``place of business'' of an
investment adviser as: ``(1) An office at which the investment
adviser regularly provides investment advisory services, solicits,
meets with, or otherwise communicates with clients; and (2) Any
other location that is held out to the general public as a location
at which the investment adviser provides investment advisory
services, solicits, meets with, or otherwise communicates with
clients.'').
    \487\ Rule 202(a)(30)-1(c)(4).
    \488\ See Proposing Release, supra note 26, at n.265 (explaining
that, under section 222(d) of the Advisers Act, a state may not
require an adviser to register if the adviser does not have a
``place of business'' within, and has fewer than six clients
resident in, the state).
    \489\ See ABA Letter (``[W]e believe that the definition of
place of business set forth in Rule 222-1 is appropriate * * *'');
AIMA Letter (``We consider the definition of `place of business' by
reference to Rule 222-1 of the Advisers Act both logical and
appropriate.'').
---------------------------------------------------------------------------

    Some commenters asked us to clarify that a ``place of business''
would not include an office in the United States where a non-U.S.
adviser solely conducts research, communicates with non-U.S. clients,
or performs administrative services and back-office books and
recordkeeping activities.\490\ Under rule 202(a)(30)-1, as under rule
203(m)-1, an adviser must determine whether it has a place of business,
as defined in rule 222-1, in the United States in light of the relevant
facts and circumstances.\491\ For example, any office from which an
adviser regularly communicates with its clients, whether U.S. or non-
U.S., would be a place of business.\492\ In addition, an office or
other location where an adviser regularly conducts research would be a
place of business because research is intrinsic to the provision of
investment advisory services.\493\ A place of business would not,
however, include an office where an adviser solely performs
administrative services and back-office activities if they are not
activities intrinsic to providing investment advisory services and do
not involve communicating with clients.
---------------------------------------------------------------------------

    \490\ See, e.g., ABA Letter; AIMA Letter.
    \491\ As discussed above, investment advisers will also apply
this provision for purposes of the private fund adviser exemption.
See supra Section II.B.3.
    \492\ Rule 222-1 does not distinguish between U.S. and non-U.S.
clients.
    \493\ That would include, for example, research conducted in
order to produce non-public information relevant to the investments
of, or the investment recommendations for, any of the adviser's
clients.
---------------------------------------------------------------------------

    A number of commenters sought guidance as to whether the activities
of U.S. affiliates of non-U.S. advisers would be deemed to constitute
places of business in the United States of the non-U.S. advisers.\494\
There is no presumption that a non-U.S. adviser has a place of business
in the United States solely because it is affiliated with a U.S.
adviser.\495\ A non-U.S. adviser might be deemed to have a place of
business in

the United States, however, if the non-U.S. adviser's personnel
regularly conduct activities at an affiliate's place of business in the
United States.\496\
---------------------------------------------------------------------------

    \494\ See, e.g., Debevoise Letter; Dechert Foreign Adviser
Letter; EFAMA Letter.
    \495\ See infra note 506.
    \496\ We have provided guidance as to whether certain activities
would result in an investment adviser representative having a place
of business as defined in rule 203A-3(b), which we believe also is
applicable to an adviser's determination as to whether it has a U.S.
place of business under rule 222-1 (and therefore under rule 203(m)-
1 or rule 203(a)(30)-1). We have explained that the definition in
rule 203A-3(b) ``encompasses permanent and temporary offices as well
as other locations at which an adviser representative may provide
advisory services, such as a hotel or auditorium.'' Rules
Implementing Amendments to the Investment Advisers Act of 1940,
Investment Advisers Act Release No. 1633 (May 15, 1997) [62 FR 28112
(May 22, 1997)]. We further explained that whether a temporary
office or location is a place of business ``will turn on whether the
adviser representative has let it generally be known that he or she
will conduct advisory business at the location, rather than on the
frequency with which the adviser representative conducts advisory
business there.'' Id. See also infra Section II.D.
---------------------------------------------------------------------------

5. Assets Under Management
    For purposes of rule 202(a)(30)-1 we are defining ``assets under
management,'' as proposed, by reference to the calculation of
``regulatory assets under management'' for Item 5 of Form ADV.\497\ As
discussed above, in Item 5 of Form ADV we are implementing a uniform
method of calculating assets under management that can be used for
several purposes under the Advisers Act, including the foreign private
adviser exemption and the private fund adviser exemption.\498\ Because
the foreign private adviser exemption is also based on assets under
management, we believe that all advisers should use the same method for
calculating assets under management to determine if they are required
to register or may be eligible for the exemption.\499\
---------------------------------------------------------------------------

    \497\ See rule 202(a)(30)-1(c)(1); instructions to Item 5.F of
Form ADV, Part 1A. As discussed above, we are taking the same
approach under rule 203(m)-1. See supra Section II.B.2.a.
    \498\ See supra Section II.B.2.a; Implementing Adopting Release,
supra note 32, discussion at section II.A.3.
    \499\ According to the statutory definition of ``foreign private
adviser,'' a non-U.S. adviser calculating the assets relevant for
purposes of the foreign private adviser exemption would only include
those assets under management (i.e., regulatory assets under
management) that are ``attributable to clients in the United States
and investors in the United States in private funds advised by the
investment adviser.'' See supra notes 416 and 429 and accompanying
text and note 417.
---------------------------------------------------------------------------

    We believe that uniformity in the method for calculating assets
under management will result in more consistent asset calculations and
reporting across the industry and, therefore, in a more coherent
application of the Advisers Act's regulatory requirements and
assessment of risk.\500\ One commenter specifically agreed that the
uniform method should be applied for purposes of the foreign private
adviser exemption.\501\ Most commenters addressed the components of the
new method of calculation in reference to the calculation of
``regulatory assets under management'' under Form ADV, or with respect
to the calculation of private fund assets for purposes of the private
fund adviser exemption.\502\ We address these comments in the
Implementing Adopting Release and in Section II.B.2.\503\
---------------------------------------------------------------------------

    \500\ See supra Section II.B.2.a; Implementing Adopting Release,
supra note 32, discussion at section II.A.3.
    \501\ See Seward Letter.
    \502\ See supra Section II.B.2.a; Implementing Adopting Release,
supra note 32, discussion at section II.A.3. A few commenters raised
the same arguments in favor of revising the method of calculation
also with respect to the calculation under the foreign private
adviser exemption. See, e.g., ABA Letter; EFAMA Letter; Katten
Foreign Advisers Letter (arguing that the method should exclude
proprietary and knowledgeable employee assets, and assets for which
the adviser receives no compensation).
    \503\ See Implementing Adopting Release, supra note 32,
discussion at section II.A.3. In addition, several commenters
requested that we exercise our authority to increase the $25 million
asset threshold applicable to the foreign private adviser exemption.
See, e.g., ABA Letter ($100 million); AFG Letter ($150 million);
AIMA Letter (at least $100 million); Comment Letter of
Autorit[eacute] des March[eacute]s Financiers (Jan. 18, 2011) ($150
million); EVCA Letter ($100 or $150 million); DLA Piper VC Letter
($250 million); Fulbright Letter ($500 million). We acknowledged in
the Proposing Release that Section 204 of the Advisers Act provides
us with the authority to raise the threshold, but we did not propose
to do so. Therefore, we have not considered raising the threshold in
connection with this rulemaking, but we will evaluate whether doing
so may be appropriate in the future, consistent with a comment we
received. See ABA Letter (asked that we ``monitor this issue * * *
undertake dialogue with foreign regulators with respect to their
supervisory regimes over investment advisers, and * * * consider
proposing an increase in the exemption amount in the near future'').
---------------------------------------------------------------------------

D. Subadvisory Relationships and Advisory Affiliates

    We generally interpret advisers as including subadvisers,\504\ and
therefore believe it is appropriate to permit subadvisers to rely on
each of the new exemptions, provided that subadvisers satisfy all terms
and conditions of the applicable rule.
---------------------------------------------------------------------------

    \504\ See, e.g., Pay to Play Release, supra note 9, at nn.391-94
and accompanying and following text; Hedge Fund Adviser Registration
Release, supra note 14, at n.243.
---------------------------------------------------------------------------

    We are aware that in many subadvisory relationships a subadviser
has contractual privity with a private fund's primary adviser rather
than the private fund itself. Although both the private fund and the
fund's primary adviser may be viewed as clients of the subadviser, we
would consider a subadviser eligible to rely on rule 203(m)-1 if the
subadviser's services to the primary adviser relate solely to private
funds and the other conditions of the rule are met. Similarly, a
subadviser may be eligible to rely on section 203(l) if the
subadviser's services to the primary adviser relate solely to venture
capital funds and the other conditions of the rule are met.
    We anticipated that an adviser with advisory affiliates could
encounter interpretative issues as to whether it may rely on any of the
exemptions discussed in this Release without taking into account the
activities of its affiliates. The adviser, for example, might have
advisory affiliates that are registered or that provide advisory
services that the adviser itself could not provide while relying on an
exemption. In the Proposing Release, we requested comment on whether
any proposed rule should provide that an adviser must take into account
the activities of its advisory affiliates when determining eligibility
for an exemption, by having the rule, for example, specify that the
exemption is not available to an affiliate of a registered investment
adviser.
    Commenters that responded to our request for comment generally
supported treating each advisory entity separately without regard to
the activities of, or relationships with, its affiliates.\505\ This
approach, however, would for example permit an adviser managing $200
million in private fund assets simply to reorganize as two separate
advisers, each of which could purport to rely on the private fund
adviser exemption. Such a result would in our view be inconsistent with
the intent of Congress in establishing the exemption's $150 million
threshold and would violate section 208(d) of the Advisers Act, which
prohibits any person from doing indirectly or through or by any other
person any act or thing which would be unlawful for such person to do
directly. Accordingly, we would treat as a single adviser two or more
affiliated advisers that are separately organized but operationally
integrated, which could result in a requirement for one or both
advisers to register.\506\ Some commenters

acknowledged this, but urged that, in the case of a non-U.S. advisory
affiliate, the Commission affirm the staff's positions developed in the
Unibanco line of no-action letters (``Unibanco letters'').\507\ In the
Unibanco letters,\508\ the staff provided assurances that it would not
recommend enforcement action, subject to certain conditions, against a
non-U.S. unregistered adviser that is affiliated with a Commission-
registered adviser, despite sharing personnel and resources.\509\
---------------------------------------------------------------------------

    \505\ See, e.g., AFG Letter (in determining exemption
thresholds, each entity's assets should be determined separately;
does not support combining different entities with different
business activities); Debevoise Letter (in the context of rule
203(m)-1).
    \506\ Generally, a separately formed advisory entity that
operates independently of an affiliate may be eligible for an
exemption if it meets all of the criteria set forth in the relevant
rule. However, the existence of separate legal entities may not by
itself be sufficient to avoid integration of the affiliated
entities. The determination of whether the advisory businesses of
two separately formed affiliates may be required to be integrated is
based on the facts and circumstances. Our staff has taken this
position in Richard Ellis, Inc., SEC Staff No-Action Letter (Sept.
17, 1981) (discussing the staff's views of factors relevant to the
determination of whether a separately formed advisory entity
operates independently of an affiliate). See also discussion infra
following note 515.
    \507\ See, e.g., AIMA Letter, Commenter Letter of Bank of
Montreal, Royal Bank of Canada and The Toronto-Dominion Bank (Jan.
24, 2011) (``Canadian Banks Letter''); CompliGlobe Letter; Debevoise
Letter; Dechert General Letter (also supported extending the
Unibanco letters to U.S. advisers); Dechert Foreign Adviser Letter;
EFAMA Letter; Katten Foreign Advisers Letter; McGuireWoods Letter;
MFA Letter; Comment Letter of MFS Investment Management (Jan. 24,
2011) (``MFS Letter''); Comment Letter of Ropes & Gray LLP (Jan. 24,
2011).
    \508\ See, e.g., ABA Subcommittee on Private Investment
Entities, SEC Staff No-Action Letter (Dec. 8, 2005) (``ABA No-Action
Letter''); Royal Bank of Canada, SEC Staff No-Action Letter (Jun. 3,
1998); ABN AMRO Bank, N.V., SEC Staff No-Action Letter (Jul. 7,
1997); Murray Johnstone Holdings Limited, SEC Staff No-Action Letter
(Oct. 7, 1994); Kleinwort Benson Investment Management Limited, SEC
Staff No-Action Letter (Dec. 15, 1993); Mercury Asset Management
plc, SEC Staff No-Action Letter (Apr. 16, 1993); and Uniao de Bancos
de Brasileiros S.A., SEC Staff No-Action Letter (Jul. 28, 1992)
(``Unibanco No-Action Letter''). See also 1992 Staff Report, supra
note 393, at Section III.D.
    \509\ Generally, the staff has provided assurances that it will
not recommend enforcement action in situations in which the
unregistered non-U.S. adviser, often termed a ``participating
affiliate'' in these letters, and its registered affiliate are
separately organized; the registered affiliate is staffed with
personnel (located in the U.S. or abroad) who are capable of
providing investment advice; all personnel of the participating
affiliate involved in U.S. advisory activities are deemed
``associated persons'' of the registered affiliate; and the
Commission has adequate access to trading and other records of the
participating affiliate and to its personnel to the extent necessary
to enable it to identify conduct that may harm U.S. clients or
markets. See supra note 508; Hedge Fund Adviser Registration
Release, supra note 14, at n.211 and accompanying text.
---------------------------------------------------------------------------

    The Unibanco letters grew out of recommendations in a 1992 staff
study, and sought to limit the extraterritorial application of the
Advisers Act while also protecting U.S. investors and markets.\510\ In
these letters, the staff provided assurances that it would not
recommend enforcement action of the substantive provisions of the
Advisers Act with respect to a non-U.S. adviser's relationships with
its non-U.S. clients.\511\ In addition, and as relevant here, the staff
agreed not to recommend enforcement action if a non-U.S. advisory
affiliate of a registered adviser, often termed a ``participating
affiliate,'' shares personnel with, and provides certain services
through, the registered adviser affiliate, without such affiliate
registering under the Advisers Act.\512\ Many commenters asserted that
affirming these positions would accommodate established business
practices of global advisory firms without reducing the Commission's
ability to protect U.S. markets and investors, because the Commission
would continue to have access to records and personnel of unregistered
non-U.S. advisory entities that are involved in the U.S. advisory
business of an affiliated and registered adviser.\513\
---------------------------------------------------------------------------

    \510\ See 1992 Staff Report, supra note 393, at section III.D.
In enacting the private fund adviser exemption and the foreign
private adviser exemption, both of which focus on an adviser's
activities in, or contacts with, the United States, Congress has
addressed issues similar to those described in the 1992 Staff
Report. See section 408 of the Dodd-Frank Act (directing the
Commission to exempt private fund advisers with less than ``$150
million in assets under management in the United States'') (emphasis
added); sections 402 and 403 of the Dodd-Frank Act (exempting from
registration foreign private advisers with no place of business in
the United States that have a limited number of clients in the
United States and investors in the United States in private funds
and a limited amount of assets attributable to these clients and
investors, among other conditions).
    \511\ See supra note 508. See also infra note 515.
    \512\ See supra note 508.
    \513\ See, e.g., Canadian Banks Letter; CompliGlobe Letter; MFA
Letter; MFS Letter.
---------------------------------------------------------------------------

    A number of commenters asserted that the staff positions in the
Unibanco letters are consistent with our approach to the territorial
application of the Advisers Act with respect to non-U.S. advisers.\514\
As we stated in 2004, we do not apply most of the substantive
provisions of the Advisers Act to the non-U.S. clients of a non-U.S.
adviser registered with the Commission.\515\ However, the Unibanco
letters were developed by the staff in the context of the private
adviser exemption,\516\ which Congress repealed. Nothing in the rules
we are today adopting in this Release is intended to withdraw any prior
statement of the Commission or the views of the staff as expressed in
the Unibanco letters. We expect that the staff will provide guidance,
as appropriate, based on facts that may be presented to the staff
regarding the application of the Unibanco letters in the context of the
new foreign private adviser exemption and the private fund adviser
exemption.
---------------------------------------------------------------------------

    \514\ See, e.g., Canadian Banks Letter; MFA Letter. See also
supra notes 510 and 316 and accompanying text.
    \515\ See Hedge Fund Adviser Registration Release, supra note
14, at nn.211 and 216-222 and accompanying text (noting that this
policy was first set forth in the Unibanco No-Action Letter).
Although the rules contained in the Hedge Fund Adviser Registration
Release were vacated by a Federal court in Goldstein, supra note 14,
the court's decision did not address our statement in that release
that we do not apply most of the substantive provisions of the
Advisers Act to the non-U.S. clients of a non-U.S. adviser
registered with the Commission. In addition, our staff expressed
this view in a 2006 no-action letter issued in response to a request
for the staff's views on matters affecting investment advisers to
certain private funds that arose as a result of the Goldstein
decision. See ABA Subcommittee on Private Investment Companies, SEC
Staff No-Action Letter (Aug. 10, 2006) (Commission staff expressed
the view that the substantive provisions of the Advisers Act do not
apply to offshore advisers with respect to such advisers' dealings
with offshore funds and other offshore clients to the extent
described in prior staff no-action letters and the Hedge Fund
Adviser Registration Release, supra note 14. The staff noted,
however, that an offshore adviser registered with the Commission
under the Advisers Act must comply with the Advisers Act and the
Commission's rules thereunder with respect to any U.S. clients (and
any prospective U.S. clients) it may have.).
    \516\ Our staff has provided assurances that it would not
recommend enforcement action when no participating affiliate has any
U.S. clients other than clients of the registered affiliate,
consistent with the private adviser exemption, which was conditioned
on the number of a non-U.S. adviser's U.S. clients. See supra notes
508-509; Hedge Fund Adviser Registration Release, supra note 14, at
n.211 and accompanying text. Under the Unibanco letters,
participating affiliates only share personnel with, and provide
certain services through, their registered adviser affiliates. See
supra notes 508-509.
---------------------------------------------------------------------------

III. Certain Administrative Law Matters

    The effective date for rules 203(l)-1, 203(m)-1 and 202(a)(30)-1 is
July 21, 2011. The Administrative Procedure Act generally requires that
an agency publish a final rule in the Federal Register not less than 30
days before its effective date.\517\ This requirement does not apply,
however, if the rule is a substantive rule which grants or recognizes
an exemption or relieves a restriction or is an interpretative
rule.\518\
---------------------------------------------------------------------------

    \517\ See 5 U.S.C. 553(d).
    \518\ The statute also provides an exception if the agency finds
good cause to make the rule effective less than 30 days after its
date of publication in the Federal Register. Id.
---------------------------------------------------------------------------

    As discussed above, effective July 21, 2011, the Dodd-Frank Act
amends the Advisers Act to eliminate the private adviser exemption in
pre-existing section 203(b)(3), which will require advisers relying on
that exemption to register with the Commission as of July 21, 2011
unless another exemption is available.\519\ Also effective July 21,
2011, are the Dodd-Frank Act amendments to the Advisers Act that are
described immediately below.
---------------------------------------------------------------------------

    \519\ See sections 403 of the Dodd-Frank Act; sections 203(b)(3)
of the Advisers Act; Section I supra.
---------------------------------------------------------------------------

    Sections 203(l) and 203(b)(3) of the Advisers Act provide
exemptions from

registration for advisers to venture capital funds and foreign private
advisers, respectively. Rule 203(l)-1 defines venture capital fund, and
rule 202(a)(30)-1 defines several terms in the definition of ``foreign
private adviser'' in section 202(a)(30).\520\ Thus, these interpretive
rules implement the new venture capital and foreign private adviser
exemptions added to the Advisers Act by the Dodd-Frank Act.
---------------------------------------------------------------------------

    \520\ As discussed above, the Dodd-Frank Act amended the
Advisers Act to define ``foreign private adviser'' in section
202(a)(30).
---------------------------------------------------------------------------

    Section 203(m) of the Advisers Act, as amended by the Dodd-Frank
Act, directs the Commission to provide an exemption for advisers solely
to private funds with assets under management in the United States of
less than $150 million. Rule 203(m)-1, which implements section 203(m),
grants an exemption and relieves a restriction and in part has
interpretive aspects. Accordingly, we are making the rules effective on
July 21, 2011.

IV. Paperwork Reduction Analysis

    The rules do not contain a ``collection of information''
requirement within the meaning of the Paperwork Reduction Act of
1995.\521\ Accordingly, the Paperwork Reduction Act is not applicable.
---------------------------------------------------------------------------

    \521\ 44 U.S.C. 3501.
---------------------------------------------------------------------------

V. Cost-Benefit Analysis

    As discussed above, we are adopting rules 203(l)-1, 203(m)-1 and
202(a)(30)-1 to implement certain provisions of the Dodd-Frank Act. As
a result of the Dodd-Frank Act's repeal of the private adviser
exemption, some advisers that previously were eligible to rely on that
exemption will be required to register under the Advisers Act unless
they are eligible for a new exemption. Thus, the benefits and costs
associated with registration for advisers that are not eligible for an
exemption are attributable to the Dodd-Frank Act.\522\ Moreover, the
Dodd-Frank Act provides that, unlike an adviser that is specifically
exempt pursuant to section 203(b), an adviser relying on an exemption
provided by section 203(l) of the Advisers Act or rule 203(m)-1
thereunder may be subject to reporting and recordkeeping
requirements.\523\ Hence, the benefits and costs associated with being
an exempt reporting adviser, relative to being an adviser that is
registered or specifically exempted by reason of section 203(b), are
attributable to the Dodd-Frank Act. The Commission has discretion,
however, to adopt rules to define the terms used in the Advisers Act,
and we undertake below to discuss the benefits and costs of the rules
that we are adopting to implement the exemptions discussed in this
Release.\524\
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    \522\ As we discuss above, although most venture capital
advisers agreed with our proposed approach to the definition of
venture capital fund, a number of commenters disagreed with our
approach to the proposed definition, and argued that it should be
expanded to include investments in small companies (regardless of
whether they satisfy our definition of qualifying portfolio company)
and investments in other private funds. See, e.g., NASBIC/SBIA
Letter; PEI Funds/Willowbridge Letter; VIA Letter. We do not believe
that these more expansive positions are consistent with the intended
scope of the venture capital exemption as expressed by Congress. See
supra note 204 and accompanying text. Thus, we believe that the
costs of registration for advisers to funds that would not satisfy
the definition because they hold such investments are attributable
to the Dodd-Frank Act.
    \523\ See supra note 5.
    \524\ The benefits and costs of the reporting requirements
applicable to advisers relying on the venture capital exemption and
the private fund adviser exemption are discussed in greater detail
in the Implementing Adopting Release, supra note 32, discussion at
sections V.A.2 and V.B.2.
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    We are sensitive to the costs and benefits imposed by our rules,
and understand that there will be costs and benefits associated with
complying with the rules we are adopting today. We recognize that
certain aspects of these rules may place burdens on advisers that seek
to qualify for the various exemptions discussed in this Release. We
believe that these rules, as modified from the proposals, offer
flexibility and clarity for advisers seeking to qualify for the
exemptions. We have designed the rules to balance these concerns with
respect to potential costs and burdens with what we understand was
intended by Congress.
    In the Proposing Release, we identified possible costs and benefits
of the proposed rules and requested comment on the analysis, including
identification and assessment of any costs and benefits not discussed
in the analysis. We requested that commenters provide analysis and
empirical data to support their views on the costs and benefits
associated with the proposals. In addition, we requested confirmation
of our understanding of how advisers that may seek to rely on the
exemptions operate and manage private funds and how the proposals may
affect them and their businesses.

A. Definition of Venture Capital Fund

    We define a venture capital fund as a private fund that: (i) Holds
no more than 20 percent of the fund's capital commitments in non-
qualifying investments (other than short-term holdings) (``qualifying
investments'' generally consist of equity securities of ``qualifying
portfolio companies'' and are discussed below); (ii) does not borrow or
otherwise incur leverage, other than limited short-term borrowing
(excluding certain guarantees of qualifying portfolio company
obligations by the fund); (iii) does not offer its investors redemption
or other similar liquidity rights except in extraordinary
circumstances; (iv) represents itself as pursuing a venture capital
strategy to investors; and (v) is not registered under the Investment
Company Act and has not elected to be treated as a BDC.\525\
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    \525\ Rule 203(l)-1(a).
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    We define ``qualifying investments'' as: (i) Directly acquired
equities; (ii) equity securities issued by a qualifying portfolio
company in exchange for directly acquired equities issued by the same
qualifying portfolio company; and (iii) equity securities issued by a
company of which a qualifying portfolio company is a majority-owned
subsidiary, or a predecessor, and is received in exchange for directly
acquired equities of the qualifying portfolio company (or securities
exchanged for such directly acquired equities).\526\ We define a
``qualifying portfolio company'' as any company that: (i) Is not a
reporting company and does not have a control relationship with a
reporting company; (ii) does not borrow or issue debt obligations in
connection with the investment by the private fund and distribute
proceeds of the borrowing or issuance to the private fund in exchange
for the private fund investment; and (iii) is not itself a fund (i.e.,
is an operating company).\527\
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    \526\ Rule 203(l)-1(c)(3).
    \527\ Rule 203(l)-1(c)(4). See also text accompanying note 148.
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    The final rule also grandfathers existing funds by including in the
definition of ``venture capital fund'' any private fund that: (i)
Represented to investors and potential investors at the time the fund
offered its securities that it pursues a venture capital strategy; (ii)
prior to December 31, 2010, has sold securities to one or more
investors that are not related persons of any investment adviser of the
venture capital fund; and (iii) does not sell any securities to,
including accepting any additional capital commitments from, any person
after July 21, 2011 (the ``grandfathering provision'').\528\ An adviser
seeking to rely on the exemption under section 203(l) of the Advisers
Act would be eligible for the venture capital exemption only if it
exclusively advised venture capital funds that satisfy all of the
elements of the definition of venture capital fund or the
grandfathering provision.
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    \528\ Rule 203(l)-1(b).

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    We have identified certain costs and benefits, discussed below,
that may result from our definition of venture capital fund, including
modifications to the proposal. As we discussed in the Proposing
Release, the proposed rule was designed to: (i) Implement the directive
from Congress to define the term venture capital fund in a manner that
reflects Congress' understanding of what venture capital funds are, and
as distinguished from other private funds such as private equity funds
and hedge funds; and (ii) facilitate the transition to the new
exemption.\529\ As discussed above, we have modified the proposed rule
to give qualifying funds greater flexibility with respect to their
investments, partly in response to comments we received.\530\ The final
rule defines the term venture capital fund consistently with what we
believe Congress understood venture capital funds to be,\531\ and in
light of other concerns expressed by Congress with respect to the
intended scope of the venture capital exemption.\532\
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    \529\ See Proposing Release, supra note 26, discussion at text
immediately preceding text accompanying n.273.
    \530\ See generally Section II.A.1.
    \531\ See supra notes 36-37 and accompanying and following text.
See also infra note 535.
    \532\ See supra discussion at Section II.A.
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    Approximately 26 comment letters addressed the costs and benefits
of the proposed rule defining venture capital fund.\533\ As discussed
below, most of these commenters did not provide empirical data to
support their views. However, a number of venture capital advisers
commenting on the proposed rule offered observations based upon their
experiences managing venture capital funds and presented views on the
potential impact of the proposed rule on their businesses and business
practices.
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    \533\ See, e.g., NVCA Letter; NYSBA Letter; Oak Investments
Letter; Sevin Rosen Letter; SVB Letter; Trident Letter.
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1. Benefits
    In the Proposing Release, we stated that based on the testimony
presented to Congress and our research, we believed that venture
capital funds currently in existence would meet most, if not all, of
the elements of our proposed definition of venture capital fund.\534\
Several commenters agreed that the proposed rule is consistent with
Congressional intent.\535\ Many venture capital advisers and related
industry groups acknowledged that the proposed definition would
generally encompass most venture capital investing activity that
typically occurs,\536\ but expressed the concern that a venture capital
fund may, on occasion, deviate from its typical investing pattern with
the result that the fund could not satisfy all of the definitional
criteria under the proposed rule with respect to each investment all of
the time.\537\ Several commenters also expressed the concern that the
final rule should provide sufficient flexibility to accommodate future
business practices that are not known or contemplated today.\538\
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    \534\ Proposing Release, supra note 26, at section IV.A.1.
    \535\ AFL-CIO Letter (``[T]he SEC has * * * generally provided
appropriate definitions for each of the factors.''); AFR Letter
(``[W]e believe that the exemption ultimately created in the [Dodd-
Frank Act] for venture capital funds must be narrowly defined so as
to prevent it from undermining the requirement all other fund
managers register. We believe that the language in the proposed rule
meets this goal * * *''); Sen. Levin Letter (``[T]he proposed
definition captures the essence of venture capital firms whose
mission is to encourage the development and expansion of new
business.''). See also DuFauchard Letter (``Congressional directives
require the SEC to exclude private equity funds, or any fund that
pivots its investment strategy on the use of debt or leverage, from
the definition of VC Fund.'').
    \536\ See, e.g., Cook Children's Letter (``The Commission's
definition of a venture capital fund does a thorough job capturing
many of the aspects that differentiate venture capital funds from
other types of private investment funds.''); Leland Fikes Letter;
NVCA Letter (``[T]he Proposed Rules are generally consistent with
existing venture capital industry practice * * *''). See also
CompliGlobe Letter; DLA Piper VC Letter.
    \537\ See, e.g., ATV Letter; BIO Letter; NVCA Letter; Sevin
Rosen Letter.
    \538\ See, e.g., NVCA Letter; Oak Investments Letter.
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    For the reasons discussed above, we have modified the definition of
venture capital fund. Our modifications include specifying a non-
qualifying basket \539\ and excluding from the 120-day limit with
respect to leverage certain guarantees of portfolio company obligations
by a qualifying fund.\540\ For the reasons discussed in greater detail
above, we are adopting a limit of 20 percent for non-qualifying
investments.\541\ In summary, the non-qualifying basket is designed to
address commenters' concerns regarding occasional deviations from
typical venture capital investing activity,\542\ inadvertent violations
of the definitional criteria \543\ and flexibility to address evolving
or future business practices.\544\ We considered these comments in
light of our concerns that the exemption not be expanded beyond what we
believe was the intent of Congress \545\ and that the definition not
operate to foreclose investment funds from investment opportunities
that would benefit investors but would not change the character of the
fund.\546\ We concluded that a non-qualifying basket limit of 20
percent would provide the flexibility sought by many venture capital
fund commenters while appropriately limiting the scope of the
exemption.\547\
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    \539\ Rule 203(l)-1(a)(2).
    \540\ Rule 203(l)-1(a)(3).
    \541\ See generally Section II.A.
    \542\ See supra note 56.
    \543\ See supra note 58.
    \544\ See supra note 56.
    \545\ See supra notes 45 and 61 and accompanying text.
    \546\ See supra note 60.
    \547\ See supra note 72 and following text.
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    We believe that the final rule (including the modifications from
the proposal) better describes the existing venture capital industry
and provides venture capital advisers with greater flexibility to
accommodate existing (and potentially evolving or future) business
practices and take advantage of investment opportunities that may
arise. We also believe that the criteria under the final rule will
facilitate transition to the new exemption, because it minimizes the
extent to which an adviser seeking to rely on the venture capital
exemption would need to alter its existing business practices, thus,
among other things, reducing the likelihood of inadvertent non-
compliance.\548\
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    \548\ For example, the final rule does not specify that a
qualifying fund must provide managerial assistance or control each
qualifying portfolio company in which the fund invests. A number of
commenters indicated that venture capital funds may not provide
sufficient assistance or exercise sufficient control in order to
satisfy this element of the proposed definition. See, e.g., ESP
Letter; Merkl Letter. The final rule also allows a qualifying fund
to exclude investments in money market funds from the non-qualifying
basket. A number of commenters indicated that money market funds are
typically used by venture capital funds for cash management
purposes. See, e.g., NVCA Letter. We expect that these modifications
to the rule would avoid the cost of altering an adviser's existing
business practices.
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    As we discuss in greater detail above, many commenters arguing in
favor of the modifications that we are adopting generally cited these
benefits to support their views.\549\ Specifically, several commenters
asserted that providing a limited basket for non-qualifying investments
would benefit venture capital advisers relying on the venture capital
exemption, and the U.S. economy, by facilitating job creation and
capital formation \550\ and minimizing the extent to which a venture
capital fund would need to alter

its typical business practices.\551\ Other commenters maintained that
an approach providing advisers some flexibility on occasion to take
advantage of promising investment opportunities that might not be
typical of most venture capital activity would benefit those funds and
their investors.\552\
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    \549\ See, e.g., NVCA Letter; Oak Investments Letter; Quaker
BioVentures Letter. See also supra discussion at Section II.A.1.
    \550\ See, e.g., NVCA Letter (stating that a low level of 15%
would ``allow innovation and job creation to flourish within the
venture capital industry''); Sevin Rosen Letter (a 20% limit would
be ``flexible enough not to severely impair the operations of bona
fide [venture capital funds], a critically important resource for
American innovation and job creation'').
    \551\ See, e.g., McDonald Letter; Pine Brook Letter.
    \552\ See, e.g., DuFauchard Letter; Merkl Letter.
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    We anticipate that a number of benefits, described by commenters,
may result from allowing qualifying funds limited investments in non-
qualifying investments, including publicly traded securities,
securities that are not equity securities (e.g., non-convertible debt
instruments) and interests in other private funds.\553\ For example,
increasing the potential pool of investors that could provide financing
to publicly traded companies to include venture capital funds could
facilitate access to capital for a portfolio company's expansion and
growth.\554\ Including investments that are not equity securities could
offer funds seeking to qualify as venture capital funds the flexibility
to structure an investment in a manner that is most appropriate for the
fund (and its investors), including for example to obtain favorable tax
treatment, manage risks (such as bankruptcy protection), maintain the
value of the fund's equity investment or satisfy the specific financing
needs of a portfolio company.\555\ Including non-convertible bridge
financing also would enable a portfolio company to seek such financing
from venture capital funds if it is unable to obtain financing from
traditional lending sources.\556\ In addition, permitting qualifying
funds to invest in other underlying private funds could facilitate
capital formation and enhance liquidity for the underlying private
funds.\557\ Under the final rule, qualifying funds also would have
increased flexibility to invest in portfolio companies through
secondary market transactions. Commenters asserted that this would help
align the interests of portfolio company founders with the interests of
venture capital funds \558\ and prevent dilution of the venture capital
fund's investment in the portfolio company.\559\
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    \553\ Rule 203(l)-1(a)(2) (specifying that a qualifying fund
must hold, immediately after the acquisition of any asset (excluding
short-term holdings) no more than 20% of its committed capital in
assets that are not qualifying investments); rule 203(l)-1(c)(3)
(defining ``qualifying investment'').
    \554\ See, e.g., Lowenstein Letter; McDonald Letter; Mesirow
Letter; Quaker BIO Letter; Trident Letter.
    \555\ See, e.g., Merkl Letter; Oak Investments Letter; Sevin
Rosen Letter; Vedanta Capital Letter.
    \556\ NVCA Letter; Trident Letter.
    \557\ See, e.g., Cook Children's Letter; Leland Fikes Letter;
Merkl Letter; SVB Letter.
    \558\ Sevin Rosen Letter.
    \559\ SVB Letter.
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    Under the final rule, the non-qualifying basket is determined as a
percentage of a qualifying fund's capital commitments, and compliance
with the 20 percent limit is determined each time a qualifying fund
makes any non-qualifying investment (excluding short-term holdings). We
expect that calculating the size of the non-qualifying basket as a
percentage of a qualifying fund's capital commitments, which will
remain relatively constant during the fund's term, will provide
advisers with a degree of predictability when managing the fund's
portfolio and determining how much of the basket remains available for
new investments. Moreover, we believe that by applying the 20 percent
limit as of the time of acquisition of each non-qualifying investment,
a fund is able to determine prospectively how much it can invest in the
non-qualifying basket. We believe that this approach to determining the
non-qualifying basket will appropriately limit a qualifying fund's non-
qualifying investments and ease the burden of determining compliance
with the criterion under the rule.
    As discussed above, a qualifying fund can only invest up to 20
percent of its capital commitments in non-qualifying investments, as
measured immediately after it acquires any non-qualifying
investment.\560\ The final rule treats as a qualifying investment any
equity security of a qualifying portfolio company, or a company
acquiring the qualifying portfolio company, that is exchanged for
directly acquired equities issued by the qualifying portfolio company.
This definition should benefit venture capital funds because it allows
funds to participate in the reorganization of the capital structure of
a portfolio company.\561\ It also provides qualifying funds with
liquidity and an opportunity to take profits from their investments
because they can acquire securities in connection with the acquisition
(or merger) of a qualifying portfolio company by another company--
typical means by which venture capital funds exit an investment.\562\
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    \560\ The rule requires a qualifying fund at the time it
acquires an asset, to have no more than 20% of its capital
commitments invested in assets that are not qualifying investments.
Rule 203(l)-1(a)(2).
    \561\ See supra note 109 and following text.
    \562\ See, e.g., NVCA Letter; PTV Sciences Letter. The final
rule defines equity securities broadly to cover many types of equity
securities in which venture capital funds typically invest, rather
than limit the definition solely to common stock. See supra notes
95-96 and accompanying text. Our definition of qualifying portfolio
company is similarly broad because it does not restrict qualifying
companies to ``small or start-up'' companies. As we have noted in
the Proposing Release and above, we believe that such definitions
would be too restrictive and provide venture capital fund advisers
with too little flexibility and limited options with respect to
potential portfolio company investments. See supra discussion in
Section II.A.1.a.
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    The final rule excludes from the 120-day limit with respect to
leverage any venture capital fund guarantees of portfolio company
indebtedness, up to the value of the fund's investment in the
company.\563\ We agree with several commenters who stated that
guarantees of portfolio company indebtedness under these circumstances
will facilitate a portfolio company's ability to obtain credit for
working capital or business operations.\564\ Thus, we believe this