News on the Horizon: Massachusetts Adopts Stringent Regulations

Last week, the Massachusetts Securities Division (the “Division”) adopted new regulations for investment advisers doing business within the State.  This included legislation relating to the use of expert network firms and other paid consultants, limitations on investment advisers from receiving performance-based compensation except from qualified clients, and limitations on investment adviser registration exemptions and narrowing of registration exemptions.

First, effective December 1, 2011, investment advisers will have to obtain a certification from persons deemed to be providing Investment Consulting Services. An Investment Consulting Service is defined as a service which assists the investment adviser with deciding whether to buy or sell, or abstain from buying or selling, positions in client accounts. The certification to be sought from the consultant must describe all confidentiality restrictions relevant to the consultation and specify that the consultant will not provide certain types of confidential information to the investment adviser.

Next, The Division also adopted a new rule that prohibits investment advisers from receiving any compensation based upon the capital gains or capital appreciation of a client’s funds, unless such compensation is received in compliance with Rule 205-3 under the Advisers Act. Accordingly, as of August 19, 2011, advisers will only be able to receive performance-based compensation from qualified clients, which includes individuals that either: (i) have at least $1 million under the management of the adviser; or (ii) have a net worth of at least $2 million.

Finally, the Division proposed but has not yet adopted certain revisions to the exemptions from registration as an investment adviser. Importantly, the proposal would limit the existing exemption for advisers to “institutional buyer” entities (i.e., 501(c)(3) charitable entities and entities accepting only “accredited investors” investing at least $50,000) by making the exemption available only on a limited, grandfathered basis. Additionally, the proposal would create new exemptions for advisers whose only clients are venture capital funds, or funds relying on the exclusion from the definition of  “investment company” as provided by Section 3(c)(7) of the Investment Company Act. 

For additional information, please contact Zac Rosenberg, Compliance Consultant, by email at zachary.rosenberg@corecls.com or by phone at (619) 278-0020.