Richard A. Levan & Associates, PC - NSCP Currents

August 13, 1999

Investment Advisers Doing Business Abroad:
Part One -- Offshore Clients
By Richard A. Levan

Intrduction

This is the second article in a two-part series intended to provide U.S. investment advisors with general guidance concerning important regulatory issues they are likely to encounter as the scope of their business activity expands beyond the borders of the U.S. into the realm of international investments. Part One focused on the issues presented by U.S. advisors involved with offshore funds and foreign offerings.1 Part Two addresses common issues that U.S.-based investment advisors confront when dealing with offshore clients, and offers suggestions for navigating the shoals of foreign jurisdiction.

Trouble Abroad: Foreign Jurisdiction Over U.S. Advisors Doing Business Overseas

The explosion of international investing activity, coupled with the current strength of the U.S. capital markets and their relative freedom from fraud, make the U.S. an inviting target for investors around the globe. With opportunity, however, comes risk, and the risk to U.S. investment advisors conducting business abroad can be great. Penalties for conducting unregistered activity can be severe, and the cost of being hauled into court in a foreign jurisdiction can be disastrous. In short, the delivery of investment services to residents of foreign countries can be a minefield for the unwary.

Every country that regulates the rendering of investment advice -- and most developed nations do at least to some extent today -- has its own unique body of rules and regulations which vary widely in scope, substance and procedure. Moreover, the complexity of global investing makes it possible for multiple foreign jurisdictions to assert an interest in a single securities transaction. It is not uncommon today for an adviser in the U.S. to be contacted by a citizen of a second country who is interested in purchasing the securities of an issuer based in a third country. Each country in such a situation has at least a potential interest in the transaction and the failure of the advisor to investigate properly the regulatory scope of the transaction can have tremendous ramifications for both the adviser and the client.

The first and most important step in evaluating an opportunity to conduct business with an offshore client is to become thoroughly familiar with the regulatory schemes of each country with a possible interest in the transaction. Typically, this is done by consulting with counsel or other knowledgeable professionals regarding the pertinent regulatory schemes in the relevant countries, particularly if the new client opportunity represents the first time the adviser has conducted business in the particular jurisdiction. Many foreign jurisdictions have only recently implemented regulatory requirements, while others are in the process of changing or updating them. Unfamiliarity with a particular country 's current regulatory regime can lead to civil or even crimi nal penalties. Obtaining legal advice before providing investment services to offshore clients is a prudent, if not necessary, first step.?Despite the variety of regulatory schemes that exist among foreign nations, certain general observations and recommendations can be made. Typically, the decision by a foreign jurisdiction to regulate investment advice and transactions turns on the nature and extent of the contacts by the advisors with the foreign jurisdiction and its residents. Here are some steps to take when considering how or whether to provide investment advice to foreign investors and what steps to take:

Consider structuring the relationship with an offshore client so that the investment advice is provided through an entity that has been properly authorized or licensed to engage in investment activities in the relevant offshore jurisdiction. The licensed entity could be the adviser itself, or a U.S. affiliate firm authorized to provide investment advice in the relevant foreign jurisdiction.

If a U.S. advisor is not licensed to advise clients in a particular jurisdiction, and does not have an affiliate licensed to do so, consider the possibility of retaining an investment advisor or similar entity licensed in the jurisdiction to assist the client relationship. The involvement of an authorized or licensed entity can provide legal cover under offshore regulatory regimes for the advice rendered or transactions executed and can supply offshore regulators a licensed entity to monitor and hold accountable other than the U.S. advisor.

If an authorized affiliate or foreign firm is used to conduct the transaction, the U.S. advisor must be careful not to overstep the permissible bounds when "assisting " the affiliate or foreign firm, thereby undoing the benefits of affiliation. Using a duly authorized affiliate as merely a shill to cover a transaction orchestrated principally by the U.S. advisor may result in the exercise of jurisdiction over the advisor by the foreign jurisdiction, together with possible penalties for failing to register.

The fact that an advisor 's principal place of business is in the U.S.(or elsewhere)may be insufficient to avoid regulation by the offshore jurisdiction in certain situations. Even minor contacts between a U.S. advisor and an offshore client, if repeated with a sufficient number of other clients in the same foreign jurisdiction, may lead authorities there to conclude that the U.S. advisor is conducting business and therefore subject to regulation.

Many foreign jurisdict ions regulate an advisor 's activities even in the initial stages of the relationship between the advisor and the offshore client. Accordingly, the solicitation of offshore clients by a U.S. advisor may bring the advisor under the jurisdiction of the country in which the potential client resides.

In some jurisdictions, unsolicited inquiries made to U.S. advisors by residents of the foreign jurisdiction are exempt from regulation. In other foreign jurisdictions, the level of regulation imposed is based on the sophistication and financial wherewithal of the clients advised. Even in these jurisdictions where contacts with clients of sufficient net worth, or with qualified institutions, may be exempt, the advisor may be obligated to inform the qualified client that the advisory relationship is exempt from regulation.

Be aware that the U.S. has entered into cooperative international agreements with certain countries which have led to the adoption of certain U.S. regulatory standards by those countries. For example, Japan and Switzerland have adopted insider trading regimes similar to those adopted in the U.S., and Canada has adopted the Multi-jurisdictional Disclosure System, which governs the issuance of securities in the U.S. by Canadian issuers.?Conclusion Because of the variety in regulatory schemes and procedures, it is impossible to provide specific guidance on other than a country-specific basis. Information and planning, however, are the keys to any successful venture, and advising offshore clients is certainly no exception. Knowing when to register and when not, knowing how to register and through whom, and knowing when to stay away can make the difference between an expanding client base and a slew of troubles.

In summary, U.S. advisors considering relationships with foreign clients should review the following checklist before proceeding:

Who is the client or potential client?
Which countries potentially have an interest in the contemplated transaction?
Where does the client or potential client reside?
What country is the client or potential client a citizen of?
What interest,if any,does the issuer 's country have in a transaction involving the purchase of a particular security or fund?
What will the extent of my contacts with the client or potential client likely be?
Am I licensed to provide investment advice in the foreign jurisdiction, or do I qualify for an exemption from regulation?
Have I ever done business with clients in this jurisdiction before?
Is there an entity with whom I can easily affiliate which is licensed or authorized to conduct business in the foreign jurisdiction?
Have I consulted with counsel or other informed individuals before proceeding?