Over the past few months, several states have commenced the process of adopting revised investment adviser registration requirements and new exemptions. These changes are based on the increase in the assets under management threshold for SEC registration and the elimination of the "private adviser exemption" by the Dodd-Frank Act. Because most states currently provide exemptions from registration for investment advisers with more than $25 million in assets under management, several states are proposing revisions to correspond to changes made at the federal level and avoid a regulatory gap that would allow certain hedge fund managers to remain unregistered.
Specifically, the California Department of Corporations released an Invitation for Comments in March regarding potentially increasing the AUM threshold for the exemption to $100 million and to require all non-SEC registered hedge fund managers to register with the state as investment advisers. Additionally, the Massachusetts Securities Division recently released proposed regulations that would require all Massachusetts based hedge fund managers with less than $100 million in assets under management to register with the Massachusetts Securities Division, unless they only manage Section 3(c)(7) funds or qualify for another exemption. For the most part, the changes taking place at the state level are based on a recent NASAA model rule that suggests states adopt regulations that require registration of all non-SEC registered fund managers unless the managers advises only funds which rely on the exclusion from the definition of "investment company" under Section 3(c)(7) of the Investment Company Act of 1940, as amended. According the model rule, the rationale for this exemption is that all investors in 3(c)(7) funds must be "qualified purchasers" and therefore do not require the protection afforded by requiring registration of the fund manager.
The NASAA model rule and the recent proposals by California and Massachusetts reflect the first steps at the state level to respond to the new investment adviser regulatory regime brought on by the Dodd-Frank Act. More developments are sure to come in this area, and we will continue to monitor and provide updates on these developments and how they will impact the industry. For additional information, please contact Zac Rosenberg, Compliance Consultant by email at firstname.lastname@example.org or by phone at (619) 278-0020.