Thursday, February 16, 2012

Rhode Island Proposes Private Fund Adviser Exemption

An exemption from investment adviser registration for private fund advisers was proposed by the Rhode Island Securities Division, with an anticipated effective date of March 31, 2011. Please submit written comments about the proposed rule to Dennis Murray at, or by calling him at (401) 462-9584.

The text of the proposed rule is as follows:

Rule 204(3)-3. REGISTRATION EXEMPTION FOR INVESTMENT ADVISERS TO PRIVATE FUNDS. Pursuant to the provisions of R.I. Gen. Laws § 7-11-705 and 42-14-17, and in accordance with the Administrative Procedures Act Chapter 42-35 of the General Laws, the Department of Business Regulation hereby gives notice of its intent to propose Securities Rule 204(3)-3, REGISTRATION EXEMPTION INVESTMENT ADVISERS TO PRIVATE FUNDS, to the Rules promulgated under the Rhode Island Uniform Securities Act (“RIUSA”) R.I. Gen Laws §§ 7-11-101 et seq.

Under the regulatory framework established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Act”), advisers to certain private funds who previously relied on an exemption from SEC registration pursuant to Section 203(b)(3) of the Investment Advisers Act will now be subject to registration while others, including advisers to venture capital funds, will be exempt from registration but required to submit reports to the SEC.

As established by the Act, a private fund is defined as an issuer that would be an investment company under Section 3 of the Investment Company Act of 1940 but for an exception provided from that definition by either Section 3(c)(1) or 3(c)(7). Congress left to the SEC the task of promulgating a rule defining “venture capital fund.”

The proposed Rule is designed to address investor protection concerns and provide increased safeguards for investors who do not satisfy the “qualified client” standard contained in SEC Rule 205-3(d)1. The rule also requires that the value of the investor’s primary residence be excluded in calculating an investor’s net worth for purposes of determining whether the investor is a qualified client.

Further, to qualify for the exemption, advisers to Section 3(c)(1) funds must provide, on an annual basis, audited financial statements to investors. The advisers would also be required to provide investors with additional disclosures. The disclosures, which must be provided in writing to the investors in the fund, must include: the fact that the fund, rather than the individual beneficial owners, is the client of the adviser; a description of all services, if any, to be provided to individual beneficial owners and of all duties owed, if any, by the adviser to the beneficial owners; and any other material information affecting the rights or responsibilities of the beneficial owner.

In the event an adviser becomes ineligible for the exemption it will have 90 days to comply with applicable laws governing registration or notice filing.

The proposal also includes a provision that would grandfather into the exemption advisers to Section 3(c)(1) funds with existing investors who would not qualify for the heightened “qualified client” standard.

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