Form ADV Part 1 and Determining United States Person Status

Due to the constant shrinking of the globe, we have witnessed a rise in investment advisers who render investment advice to separate account clients across borders or to foreign citizens. For example, it is now not uncommon for (i) a wealth manager to have a client who resides in the United States decide to move to a foreign country and want to keep receiving investment advice from their investment adviser located in the United States, or (ii) a foreign citizen come to the United States temporarily or permanently and seek out investment advice. While these situations raise numerous questions, the issue this post focuses on are the ramifications these scenarios create under Form ADV Part 1A.

There are two items on Form ADV Part 1A that investment advisers and their legal and compliance officers frequently struggle addressing. These two questions are both located in Item 5 of Form ADV Part 1A. Each of these questions is set forth below:

  1. Item 5.C.(2) states: “Approximately what percentage of your clients are non-United States persons?
  2. Item 5.F.(3) states: “What is the approximate amount of your total regulatory assets under management (reported in Item 5.F.(2)(c) above) attributable to clients who are non-United States persons?

As an aside, the SEC included these items in Form ADV Part 1A so that its examination staff could better understand the extent of investment advice provided to non-U.S. clients, which apparently would assist in its risk assessment process. To date we haven’t noticed any trends in this area.

To respond accurately to each of these questions, the person compiling this information must first be able to understand the definition of “United States persons”. Luckily, “words that appear in italics on Form ADV are defined in the Glossary of Terms to Form ADV.” In fact, if you are competing the Form ADV electronically, you can actually access the definition by clicking on an italicized word.

The Glossary of Terms to Form ADV defines “United States Persons” has having “the same meaning as in rule 203(m)-1 under the Advisers Act, which includes any natural person that is resident in the United States.” You are probably thinking that that is the least helpful definition in the world, and I concur. Rule 203(m)-1 defines that term as “any person that is a U.S. person as defined in Rule 902(k) of Regulation S under the Securities Act of 1933, 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 this section and is not organized, incorporated, or (if an individual) resident in the United States.” Again, another definition using an incorporated definition.

Rule 902(k) of Regulation S defines the term “U.S. person” to mean: (i) any natural person resident in the U.S.; (ii) any partnership or corporation organized or incorporated under the laws of the U.S.; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the U.S.; (vi) any nondiscretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; and (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the U.S., and (viii) any partnership or corporation if (A) organized or incorporated under the laws of any foreign jurisdiction, and (B) formed by a U.S. person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts.

What each of these definitions establishes is that for natural persons (i.e., human beings), the definition of United States Person is a person who is resident in the United States. Unfortunately (or fortunately, depending on how you prefer ambiguity) the SEC did not define the phrase “resident in the U.S.”. Therefore, I would look to the plain meaning of that term for its meaning. Merriam-Webster defines it several ways, but the most helpful definition in my view is “the place where one actually lives as distinguished from one’s domicile or a place of temporary sojourn.” There you have it. A non-United States person for purposes of Form ADV means a person who is not living in the United States for more than a temporary period. There remains a ton of flexibility in this definition and investment advisers and compliance departments are free to set their own guidelines that work within this framework. I would be failing if I didn’t mention that firms should document this decision and seek to remain consistent from year to year.

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