Tag: Rule 203A-3

Regulation of Private Fund Advisers at the State Level

The Dodd-Frank Wall Street Reform and Consumer Protection Act raised the level for registration with the SEC and removed the commonly used exemption from registration used by private fund advisers. That means smaller traditional investment advisers will be kicked out of the SEC registration and into the state registration systems. That also means that advisers to funds with less than $150 million are potentially subject to state-level registration and regulation.

In general, advisers to private funds with less than $150 million in assets under management will be exempt from SEC registration but still must submit reports to the SEC and maintain certain books and records. This, along with venture capital fund advisers are the new “exempt reporting advisers” category. They are not excluded from the definition of “investment adviser” under the Investment Advisers Act and are not required to register under the Investment Advisers Act.

That means states are not preempted by Section 203A of the Investment Advisers Act from requiring “exempt reporting advisers” to register.

Advisers to private funds with more than $150 million under management are federal covered advisers and merely have to notice file in the states in which they maintain a place of business. (Investment adviser representatives for private fund advisers are required to register with the states if they meet the definition of investment adviser representative under SEC Rule 203A-3.)

The North American Securities Administrators Association has begun looking at the issue of how states with regulate private fund advisers under the $150 million level. They have issued their Proposed NASAA Model Rule on Private Fund Adviser Registration and Exemption.

The model rule would provide the basis for an exemption from state registration only for advisers only to 3(c)(7) funds, including venture capital funds formed under 3(c)(7). Presumably funds falling under the 3(c)(1) exemption would be subject to state registration.

Under the proposed model rule, an investment adviser solely to one or more private funds will be exempt from state registration requirements if the adviser satisfies certain specified conditions:

  • The adviser cannot be subject to a disqualification under 230.262 of title 17, Code of Federal Regulations.
  • The adviser’s clients must be limited to private funds that that qualify for the exclusion from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act of 1940.
  • The adviser must file with the state the report required by the SEC for exempt reporting advisers.
  • The adviser must pay the fees specified by the state.

The proposed rule could change depending on how the SEC changes its proposals for implementing the new registration and reporting requirements in Release No. IA-3110 and Release No. IA-3111. Once the NASAA finalizes the proposed rule, it would be up to the states to adopt the rule. They may not adopt it all or may change it significantly.

NASAA is seeking comments on their proposed rule. Comments should be submitted electronically to [email protected], but written comments may be mailed to NASAA, Attn. Joseph Brady, 750 First Street, NE, Suite 1140, Washington, DC, 20002. The deadline for submission of comments is January 24, 2011.

Sources:

Do You need State Licensing if You’re an SEC Registered Investment Adviser?

With Dodd-Frank‘s elimination of the 15 client exemption, thousands (my guess) of private fund managers will need to register with the Securities and Exchange Commission as investment advisers to their funds. For alternative investment funds, like real estate, you’ll need to look at whether you are giving advice regarding securities.

If you have less than $100 million you will be in the state registration system and may need to have individuals licensed with the state. If you have over $100 million, you be registering with SEC. The deadline is July 21, 2011.

That leaves the question of whether you need a state license for the firm or individuals in the firm, like the Series 65.

One benefit of SEC registration is that the Investment Advisers Act preempts some state licensing for private fund management companies. Section 203(A)(b) prohibits the states from licensing an investment adviser registered with the SEC (or exempt from definition of Section 202(a)(11)).

The exception is that a state may require licensing for an “investment adviser representative” who has a place of business in that state. For a private fund manager, you need to determine if any of the management company employees fit into the definition in Rule 203A-3.

“(a)(1) “Investment adviser representative” of an investment adviser means a supervised person of the investment adviser:

i. Who has more than five clients who are natural persons (other than excepted persons described in paragraph (a)(3)(i) of this section); and

ii. More than ten percent of whose clients are natural persons (other than excepted persons described in paragraph (a)(3)(i) of this section).”

For a private fund manager, the key part of the definition is whether they have any clients who are natural persons. The manager’s funds are the clients and those funds are not natural persons. Employees of the fund manager should fall outside the definition of “investment adviser representative” and therefore not need a license.

Sources: