Monday, March 19, 2012

Rhode Island Proposes Exemption for Private Fund Advisers

An exemption from investment adviser registration for private fund advisers was proposed by the Rhode Island Securities Division. A public hearing on the proposed rule will be held on April 19, 2012 at 10:00 a.m. at 1511 Pontiac Avenue, Cranston, Rhode Island 02920. Please submit written comments about the proposed rule to Dennis Murray at Comments must be received by April 19th, the date of the public hearing.

The text of the proposed rule is as follows:

Rule 204(3)-3 REGISTRATION EXEMPTION FOR INVESTMENT ADVISERS TO PRIVATE FUNDS. (A) DEFINITIONS. For purposes of this regulation, the following definitions shall apply:

(1) "Value of primary residence" means the fair market value of a person’s primary residence, subtracted by the amount of debt secured by the property up to its fair market value.
(2) Private fund adviser" means an investment adviser who provides advice solely to one or more private funds.
(3) "Private fund" means an issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940, 15 U.S.C. 80a-3, but for section 3(c)(1) or 3(c)(7) of that Act. Page 9 of 43
(4) "3(c)(1) fund" means a private fund that is excluded from the definition of an investment company under section 3(c)(1) of the Investment Company Act of 1940, 15 U.S.C. 80a-3(c)(1).
(5) "Venture capital fund" means a private fund that meets the definition of a venture capital fund in SEC Rule 203(l)-1, 17 C.F.R. § 275.203(l)-1.

Subject to the additional requirements of paragraph (c) below, a private fund adviser shall be exempt from the registration requirements of Section 203 of the Rhode Island Uniform Securities Act of 1990 ("RIUSA"), § 7-11-101 et seq. of the Rhode Island General Laws, 1989, as amended (the "RIUSA"), if the private fund adviser satisfies each of the following conditions:

(1) neither the private fund adviser nor any of its advisory affiliates are subject to a disqualification as described in Rule 262 of SEC Regulation A, 17 C.F.R. § 230.262;
(2) the private fund adviser files with the state each report and amendment thereto that an exempt reporting adviser is required to file with the Securities and Exchange Commission pursuant to SEC Rule 204-4, 17 C.F.R. § 275.204-4; and
(3) the private fund adviser pays the same fee as that specified for a federal covered adviser in Section 7-11-206(a)(5) of the RIUSA;

(C) ADDITIONAL REQUIREMENTS FOR PRIVATE FUND ADVISERS TO CERTAIN 3(C)(1) FUNDS. In order to qualify for the exemption described in paragraph (b) of this regulation, a private fund adviser who advises at least one (3)(c)(1) fund that is not a venture capital fund shall, in addition to satisfying each of the conditions specified in paragraphs (b)(1) through (b)(3), comply with the following requirements:

(1) The private fund adviser shall advise only those 3(c)(1) funds (other than venture capital funds) whose outstanding securities (other than short-term paper) are beneficially owned entirely by persons who, after deducting the value of the primary residence from the person’s net worth, would each meet the definition of a qualified client in SEC Rule 205-3, 17 C.F.R. § 275.205-3, at the time the securities are purchased from the issuer;

(2) At the time of purchase, the private fund adviser shall disclose the following in writing to each beneficial owner of a 3(c)(1) fund that is not a venture capital fund:

(A) the fund, rather than the individual beneficial owners, is the investment adviser’s client;
(B) all services, if any, to be provided to individual beneficial owners;
(C) all duties, if any, the investment adviser owes to the beneficial owners;
(D) any other material information affecting the rights or responsibilities of the beneficial owners.

(3) The private fund adviser shall obtain on an annual basis audited financial statements of each 3(c)(1) fund that is not a venture capital fund, and shall deliver a copy of such audited financial statements to each beneficial owner of the fund.

(D) FEDERAL COVERED INVESTMENT ADVISERS. If a private fund adviser is registered with the Securities and Exchange Commission, the adviser shall not be eligible for this exemption and shall comply with the state notice filing requirements applicable to federal covered investment advisers in Section 203 of the RIUSA.

(E) INVESTMENT ADVISER REPRESENTATIVES. A person is exempt from the registration requirements of Section 203 of the RIUSA if he or she is employed by or associated with an investment adviser that is exempt from registration in this state pursuant to this regulation and does not otherwise act as an investment adviser representative.

(F) ELECTRONIC FILING. The report filings described in paragraph (b)(2) above shall be made electronically through the IARD. A report shall be deemed filed when the report and the fee required by Section 7-11-206(a)(5) of the RIUSA are filed and accepted by the IARD on the state's behalf.

(G) TRANSITION. An investment adviser who becomes ineligible for the exemption provided by this rule must comply with all applicable laws and rules requiring registration or notice filing within ninety (90) days from the date the investment adviser’s eligibility for this exemption ceases.

(H) GRANDFATHERING FOR INVESTMENT ADVISERS TO 3(C)(1) FUNDS WITH NON-QUALIFIED CLIENTS. An investment adviser to a 3(c)(1) fund (other than a venture capital fund) that is beneficially owned by one or more persons who are not qualified clients as described in subparagraph (c)(1) may qualify for the exemption contained in paragraph (b) of this regulation if the following conditions are satisfied:

(1) the subject fund existed prior to the effective date of this regulation; and,
(2) as of the effective date of this regulation, the subject fund ceases to accept beneficial owners who are not qualified clients, as described in subparagraph (c)(1) of this regulation.