Wednesday, January 04, 2012

Massachusetts Private Fund Adviser Exemption Up for Public Hearing January 5, 2012

A public hearing on a new private fund adviser exemption, as well as an amended institutional investor definition and revised custody requirements for investment advisers will be held at the Massachusetts Securities Division on Thursday, January 5 at One Ashburton Place, Room 1701 in Boston Massachusetts 02108. Public comments will be received through Friday, January 6. Please email your comments to

The proposed amendments for the public hearing are as follows:

Registration exemption for private fund advisers. As proposed, private fund advisers would be exempt from investment adviser registration in Massachusetts, provided the advisers are not subject to "bad boy" disqualifications under Rule 262 of federal Regulation A, and electronically file through the IARD the SEC-filed reports and amendments required by SEC Rule §204-4, together with a $300 fee, at which time the electronic submission would be considered "filed."

Private fund advisers to certain 3(c)(1) funds. Private fund advisers advising at least one 3(c)(1) fund that is not a venture capital fund would, in addition to meeting the above requirements: (1) advise only those 3(c)(1) funds (other than venture capital funds) whose outstanding securities (other than short-term paper) are beneficially owned solely by persons who, after deducting the value of the primary residence from the person’s net worth, would each meet the “qualified client” definition in SEC rule 205-3 at the time the securities are purchased from the issuer; (2) disclose in writing to each “non-venture capital 3(c)(1) fund beneficial owner,” at the time of purchase, either the services the advisers will provide, and duties the advisers will owe, the beneficial owners, or disclose to the beneficial owners that services will not be provided, or duties owed, to them, and disclose all other material information affecting the beneficial owners’ rights or responsibilities; and (3) obtain audited financial statements annually of each non-venture capital 3(c)(1) fund and deliver a copy of the financial statements to each beneficial owner.

Grandfathering for private fund advisers with non-qualified client. Private fund advisers to one or more non-venture capital 3(c)(1) funds beneficially owned by persons who are not “qualified clients” as defined above could still qualify for the private fund adviser exemption if: (1) the subject fund(s) existed before March 30, 2012 and cease(s) to accept beneficial owners who are not qualified clients as of that date; and (2) the private fund advisers to the subject fund(s) were in compliance, as of March 30, 2012, with the “no transacting business in Massachusetts unless registered” requirement of §201(c) under the Massachusetts Securities Act, disclose in writing to the fund(s)’ beneficial owners the “services/duties provided (or not provided) to them as mentioned above, and deliver the audited financial statements mentioned above.

Notes pertinent to all private fund advisers. (1) Investment adviser representatives would be exempt from registration if registration would be required solely because of their being employed by or associated with an "exempt private fund adviser." (2) The exemption would not apply to federal covered investment advisers, i.e., private fund advisers registered with the SEC; they would need to comply with state notice filing requirements. (3) A "private fund,""private fund adviser, " "3(c)(1) fund," "value of primary residence," and "venture capital fund" would be defined.

Institutional buyer definition. Currently, institutional buyers may be: (1) an organization described in Section 501(c)(3) of the Internal Revenue Code having a securities portfolio of more than $25 million; (2) an investing entity whose only investors are financial institutions and institutional buyers as described in Massachusetts Securities Act §401(m) and Massachusetts Securities Rule 12.205(1)(a)6.a.; or (3) an investing entity 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 in (3) above would additionally require the subject fund to have existed before March 30, 2012 and to have ceased to accept new beneficial owners as of that date.

Custody of, and discretionary authority over, client funds or securities. As proposed, investment advisers registered or required to register in Massachusetts that have custody of their clients’ funds or securities would need to comply with the safekeeping requirements of SEC Rule 206(4)-2 under the Investment Advisers Act of 1940. Massachusetts would adopt the "custody" definition in SEC Rule 206(4)-2 of the 1940 Act. An investment advisers would not be exempt from the independent verification requirement in subsection (b)(3) of SEC Rule 206(4)-2 unless the adviser: (1) has written consent from the client to deduct advisory fees from the qualified custodian-held account; and (2) sends the qualified custodian and client an invoice or statement of the fee amount to be deducted from the client’s account each time a fee is directly deducted.

Investment advisers registered or required to register in Massachusetts that have discretionary authority over their clients’ funds or securities would maintain a minimum $10,000 bond from a Massachusetts-qualified bonding company.