RIA Compliance Blog
The California Department of Corporations has extended the comment period for a proposed rule to amend Rule 260.204.9 of Title 10 of the California Code of Regulations, which exempts private advisers from registration under certain circumstances. The public comment period for this exemption was extended from February 20, 2012 to March 25, 2012. To date, there are no public hearings scheduled; however comments may be mailed to the Department of Corporations.
The amended proposed rule significantly changes the current rule in place. Currently, the rule provides for an exemption for any adviser that:
- Has had fewer than 15 clients in the preceding 12 months;
- Does not hold itself out to the public as an investment adviser;
- Does not act as an investment adviser to a registered company or a company that has elected to be a business development company; and
- Either has assets under management of $25 million or more or provides investment advice solely to one or more venture capital companies.
If the proposed amendments pass, then the requirements would change for the adviser specifically no longer mandating the $25 million assets under management or the 15 client limit. The new requirements to qualify for this exemption would be:
- The advisers must only advise private funds;
- The advisers may not be subject to disqualification described in Rule 262 of Regulation A adopted by the Securities and Exchange Commission (SEC);
- The advisers must file all the reports and amendments required by the SEC required by an exempt reporting adviser; and
- The advisers must pay the fee required by Section 25608(g) of the Code and they must pay a renewal fee every year the exemption is sought.
If private fund advisers manage funds that are excluded from the definition of an investment company under section 3(c)(1) of the Investment Company Act of 1940 then there are additional requirements that they must meet. An adviser who advises at least on of these funds that are not a venture capital company must meet all the previously mentioned requirements as well as:
- Each investor in the 3(c)(1) fund must be an “accredited investor;”
- At the time of purchase the adviser must disclose in writing to the beneficial owner of the fund all services to be provided to the investor, all duties the adviser owes to the investor, and any other material information regarding the investor’s rights or responsibilities;
- The adviser should give the beneficial owner of the fund an audited financial statement annually; and
- The adviser must comply with Sections 25234(a)(1) of the California Securities Code and 260.234 of the California rules.
In situations where one or more of the investors of the 3(c)(1) fund are not accredited investors, the adviser can still be eligible for the exemption as long as certain other conditions are met: (1) The fund existed prior to this regulation effective date, (2) the fund no longer accepts unaccredited investors as of the effective date, (3) the adviser discloses in writing all the aforementioned conditions in the previous paragraph, and (4) the adviser delivers audited financial statements in the same manner as previously mentioned.
As a result of becoming ineligible for this exemption, the rule requires registration or notice filing within ninety days from the date the investment adviser’s eligibility ceases.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.