USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
3.2.2 Legal Structures Used by Fund Managers Retail funds are most often structured as limited partnerships, LLCs, or statutory trusts. 3.2.3 Restrictions on Investors Although retail funds with a public offering are allowed to sell to any investor, these funds may restrict their offerings to certain investors, such as those that meet eligibility thresholds based on net worth or income. Closed-end funds may only charge a performance-based fee on a fund’s capital gains if each of the fund’s US investors meets the definition of a “qualified client” under the Advisers Act. 3.3 Regulatory Environment 3.3.1 Regulatory Regime There are four main legal regimes that concern retail funds: the Securities Act, the Exchange Act, the Investment Company Act, and the Advisers Act. The Securities Act governs whether an issuer can offer or sell securities in the United States and broadly prohibits the use of deception, manipulation, or fraud in securi - ties transactions. The Exchange Act established the SEC and granted it the power to regulate and discipline brokerage firms and securities exchanges. The Investment Company Act regu - lates both open-end and closed-end funds and ensures that investors have sufficient informa - tion to make an informed investment decision while aiming to prevent or mitigate conflicts of interest and self-dealing by the fund and/or its affiliates. The Advisers Act governs the conduct of managers providing investment advice to US clients and has plenary anti-fraud provisions that apply to investment advisers regardless of whether or not they are registered with the SEC. Under Section 12(d) of the Investment Company Act, open- and closed-end funds cannot gener -
ally: (i) own more than 3% of the voting stock of another registered investment company (RIC); (ii) have more than 5% of their total assets in a single RIC’s securities; or (iii) have more than 10% of their total assets in any number of RIC securities. 3.3.2 Requirements for Non-Local Service Providers The Investment Company Act sets forth various requirements on specific service providers for retail funds, certain of which are specifically for - mulated with respect to operational differences between US and non-US providers. 3.3.3 Local Regulatory Requirements for Non- Local Managers Non-local managers (including sub-advisers) to retail funds are required to be registered as investment advisers under the Advisers Act and are subject to the full suite of Advisers Act regu - lation. 3.3.4 Regulatory Approval Process Obtaining regulatory approval from the SEC with respect to the formation of retail fund typically takes several months. The process may be long - er or shorter depending on the intricacy of the fund structure and strategy and the extent of any SEC comments. 3.3.5 Rules Concerning Pre-Marketing of Retail Funds Fund sponsors must adhere to specific rules and regulations when pre-marketing retail funds and are subject to SEC and FINRA oversight. Prior to marketing, retail funds must generally be registered with the SEC under the Securities Act. However, there may be available exemp - tions permitting retail funds to engage in com - munication with the public prior to being reg - istered, depending on (i) the type of securities
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