Wednesday, March 16, 2011

California Seeks Comments on a Pre-Proposed Private Adviser Exemption Rule

The California Commissioner of Corporations, Preston DuFauchard, invites interested persons to submit written comments by March 28, 2011 on a pre-proposed revamping of an existing California rule exemption at Section 260.204.9 for private advisers. Please note, however, that this is not yet an official proposed amendment to Rule 260.204.9 for public comments--that will occur later. Instead, this is simply an invitation for comments on a draft of a potential proposed amendment to the California rule exemption. Comments may be submitted electronically to, identifying the comments as PRO 02/11, or faxed to (916) 322-5875 or mailed to California Department of Corporations, Office of Legislation and Policy, Attn: Karen Fong (PRO 02/11), 1515 K. St., Suite 200, Sacramento, CA 95814. Questions about the invitation may be phoned to Ivan V. Griswold, Corporations Counsel, at (415) 972-8937 or emailed to him at

California's Rule 260.204.9 [Par. 12,167 in the Blue Sky Law Reporter], an exemption that corolates with a federal exemption at Section 203(b)(9) of the Investment Advisers Act of 1940, currently exempts investment advisers from the state's licensing requirement if they do not hold themselves out generally to the public as investment advisers, have fewer than 15 clients, are exempt from registration under the 1940 Act, and either manage assets of not less than $25 million or give investment advice only to venture capital companies.

The California exemption must be amended, however, because the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama on July 10, 2010 will, on July 21, 2011, eliminate the 203(b) exemption under the 1940 Act, thereby eliminating the California exemption as well. But on July 21, 2011 the Dodd-Frank Act will have in place of the 203(b) exemption a new exemption for advisers to "private funds," defined as funds that would be required to register under the Investment Company Act of 1940 but for Section 3(c)(1) or 3(c)(7) of that Act; the new federal exemption will cover persons who exclusively advise private funds if they particularly advise venture capital funds or manage less than $150 million of assets.

California's draft of a proposed replacement exemption at Rule 260.204.9 [click on PRO 02/11 dated 3/15/11, the first item under "What's New" in the center of the following page:] attempts to mirror the new Dodd-Frank Act exemption that takes effect July 21, 2011. In anticipation of creating an official proposed exemption for public comments, Commissioner DuFauchard now invites interested persons to submit written comments on the draft that include answers to the following questions:

1. To avoid the "retailization" of private alternative investment funds, should the exemption apply exclusively to advisers to Section 3(c)(7) funds (i.e., not to Section 3(c)(1) funds)?

2. Should all persons investing in a Section 3(c)(1) fund be required to be qualified clients? If so, should the Department issue an order that "grandfathers" Section 3(c)(1) funds organized prior to July 21, 2010?

3. Should the proposed statutory disqualification provisions be expanded to include additional factors?

4. Should the proposed asset under management threshold (AUM) be a different amount than that set forth in the proposed rule (i.e., $100 million)? If so, what is the basis for a different threshold?

5. Are there criteria other than AUM that the Commissioner should consider to determine whether an adviser should be exempt (e.g., the fund is subject to an annual audit)?

6. Should the Department's definition of venture capital company/fund conform to the proposed SEC definition?

7. Should the Department adopt the North American Securities Administrators Association (NASAA) proposed model rule for an exemption for Private Fund Advisers?