Thursday, April 28, 2011

Massachusetts Proposes Private Adviser Exemption to Coordinate with Dodd-Frank Act

An "exempt reporting adviser" registration exemption was proposed by the Massachusetts Securities Division to coordinate with the SEC's proposed adoption of an exemption for private fund advisers following the July 21, 2011 elimination of the federal de minimis exemption for investment advisers with fewer than 15 clients by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Other proposals would restrict investment advisers' use of the institutional buyer definition exclusion, amend the minimum financial requirements for investment advisers with custody of, or discretionary authority over, their clients' funds, and make retaining consulting services to obtain confidential information about public companies a dishonest practices for investment advisers unless certain conditions are met. Lastly, the registration fees for broker-dealers and agents would increase, nomenclature for stock exchanges would be updated to reflect their current names and, similarly, the name "FINRA" would replace "NASD" as the current name of the organization that regulates broker-dealers and agents.

Public Hearing and comments. A public hearing on the proposals will be held at 10:00 a.m. on June 23, 2011 at One Ashburton Place, 17th Floor, Boston, MA 02108. Comments on the proposals must be submitted by Friday, June 24, 2011. Interested parties will have an opportunity to orally present data, views and arguments relative to the proposed action. Written presentations may be made at the hearing or submitted at any time before the close of business Friday, June 24, 2011 to the Securities Division, One Ashburton Place, Room 1701, Boston, Massachusetts 02108. Copies of the proposed amendments are available on the Division's website at http://www.sec.state.ma.us/sct/sctidx.htm or by calling (617) 727-3548 or (800) 269-5428 (Massachusetts only).

Registration exemption for exempt reporting advisers. To coordinate with the Dodd-Frank Wall Street Reform and Consumer Protection Act that replaced the de minimis exemption for investment advisers with fewer than 15 clients with an SEC proposed exemption for private fund advisers with less than $150 million in assets under management, as well as venture capital funds in whatever amount of assets under management, the Massachusetts Securities Division proposed a new registration exemption for "exempt reporting advisers." Advisers to venture capital funds and funds under section 3(c)(7) of the Investment Company Act of 1940 would be exempt from Massachusetts registration requirements, subject to certain limitations, but be required to file the same reports and amendments with the Division that they are required to file with the SEC. As proposed by the Division, investment advisers that provide advice solely to 3(c)(7) or venture capital funds would be exempt from Massachusetts registration requirements, as long as the advisers are not subject to "bad boy" disqualifications under Rule 262 of federal Regulation A, and electronically file through the IARD the reports and amendments required to be filed with the SEC, together with a $300 fee, at which time the report would be considered "filed."

NOTES: (1) Investment adviser representatives would be exempt from registration if their registration would be required solely because of being employed or associated with an "exempt reporting adviser." (2) The exemption would not apply to federal covered investment advisers; they would be subject to notice filing requirements. (3) The exemption would not apply to any investment adviser whose private funds accept investments from non-natural persons to evade registration or the conditions or limitations of the exemption. (4) A "private fund," "3(c)(7)fund," and "venture capital fund" would be defined.

Institutional buyer definition. Investing entity. The "investing entity" type of institutional buyer is made up exclusively of accredited investors, as defined in Rule 501(a) of federal Regulation D under the Securities Act of 1933, who each invested a minimum of $50,000. As proposed, the definition would be further conditioned by requiring the investing entity to have existed before the date this condition takes effect by the Massachusetts Securities Division, and that, as of the condition's effective date, the investing entity ceased to accept beneficial owners or additional funds for existing investors. Essentially, the proposed condition would phase out this exemption for any new beneficial owners or additional funds for existing investors that investment advisers might accept after the date the condition takes effect, while leaving the exemption intact for beneficial owners or investor funds that existed before the date the condition takes effect.

Currently, the other two types of institutional buyers consist of: (1) an organization described in Section 501(c)(3) of the Internal Revenue Code having a securities portfolio of more than $25 million; and (2) an investing entity whose only investors are financial institutions and institutional buyers as described above and as set forth in the Massachusetts Securities
Act definition of an "investment adviser."

Minimum financial requirements. Massachusetts'current minimum financial requirements allowing investment advisers to maintain a segregated account instead of a bond, having a bonding requirement for custody, and requiring a bond amount of $10,000 would be replaced with the following:

Investment advisers registered or required to register under the Massachusetts Securities Act and having custody of their clients funds or securities would need to comply with the safekeeping requirements of SEC Rule 206(4)-2 of the Investment Advisers Act of 1940, and “custody” would have the meaning as defined in SEC Rule 206(4)-2 of the 1940 Act. Investment advisers registered or required to register under the Massachusetts Securities Act that have discretionary authority over, but not custody of, their clients' funds or securities would need to post a surety bond of not less than $50,000 by a bonding company qualified to do business in Massachusetts.

Dishonest, unethical and fraudulent practices. Retaining consulting services for compensation from a consultant or a matching or expert network service. Added to the list of dishonest, unethical and fraudulent practices for investment advisers or investment adviser representatives would be a prohibition against their retaining consulting services for compensation from a consultant or a matching or expert network service unless the advisers and representatives obtain a written certification signed by consultant describing all
confidentiality restrictions the consultant has (or reasonably expects to have) about the confidential information, and stating affirmatively that the consultant will not provide any confidential information to the adviser. Investment advisers (or investment adviser representatives) who, through a consultation, come into possession of material confidential
information are prohibited from trading any relevant security until the confidential information is made public. "Confidential Information" and "Matching or Expert Network Service" would be defined.

Fee increases. The initial registration fee for broker-dealers would increase to $450, from $300. The initial registration fee for agents would increase to $75, from $50.

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