Tuesday, November 30, 2010

Kansas Seeks Public Comments on Exemption for Private Fund Advisers

Pubic comments on whether the State should promulgate an exemption for private fund advisers are being sought by the Kansas Office of the Securities Commissioner ("Office"). The Office believes that having a rule in place by July 21, 2011, the date the Dodd-Frank Act requires the states to begin regulating investment advisers to private funds with assets under management of less than $150 million, would address the legitimate, value-generating business models of private funds it's current rules do not adequately cover.

People submitting comments are asked to include a description of their knowledge, expertise and experience on the private fund adviser topic, and to supply their contact information. Comments should be sent as a PDF or a Microsoft Word document and may be emailed to ksc@ksc.ks.gov (emailed content should also include the text of the comment in the body of the email) or may be mailed to the Office of the Kansas Securities Commissioner, Attn: Private Fund Adviser Comments, 109 S.W. 9th, Suite 600, Topeka, Kansas 66612. Comments should be received by the close of business December 17.

Marc Wilson, the Kansas Securities Commissioner asks people to consider the following questions and include answers to these questions in their comment submission:

1. What is the extent of private fund activity in Kansas currently, with funds of any size and both within and outside of banks, and what types of investment strategies do they typically pursue?

2. Should KSC adopt the same or different rules with regard to advisers to funds formed pursuant to Section 3(c)(1) of the Investment Company Act of 1940 (ICA) and those formed pursuant to Section 3(c)(7) of the ICA? What are the consumer protection consequences of regulating advisers to these funds in the same manner?

3. The Act exempts from SEC registration advisers to a ‘‘venture capital fund,’’ though it does require these advisers to follow SEC recordkeeping and reporting requirements. Though the SEC is yet to define ‘‘venture capital fund,’’ what policy changes, if any, should KSC consider with regard to registration or regulation of advisers to venture capital funds?

4. Should KSC adopt rules or provide exemptions with regard to advisers to funds formed pursuant to Section 3(c)(5) of the ICA?

5. Requiring advisers to private funds to provide yearly audited financial statements of the fund to investors reduces the possibility of fraud. What are the advantages and disadvantages of requiring a private fund adviser, as a condition of their registration exemption, to provide to investors the private fund’s yearly audited financial statements?

6. Should KSC apply current adviser bonding requirements to advisers to private funds?

7. What are the typical qualifications of advisers to Kansas-based private funds? Should KSC require certain minimal examinations and expertise for private fund advisers?

8. Recent changes to financial institution affiliate transaction rules prohibit banks from certain private fund transactions and management arrangements. Will banks with these types of operations spin off their advisory personnel, and if so, to what extent are the needs of these fund advisers different than that of other private fund advisers?

9. Government funds available for borrowing by Small Business Investment Companies (SBICs) are subject to unpredictable congressional appropriation and increasing regulatory scrutiny. Might some SBICs choose to forgo SBIC regulation and convert to a state-sponsored regime if one were available? If so, what characteristics of a state-sponsored regime might be attractive to an SBIC?

People should note that this is not the first and last time they will be able comment on an exemption for private fund advisers; they will have another opportunity to submit written comments between the date the rule is proposed and the date of its public hearing.