On June 15, 2012, the Maryland Securities Commissioner issued an order adopting the NASAA model rule exemption for investment advisers to private funds.
Like the model rule, the new order issued by the Maryland Securities Commissioner, provides for an exemption from registration for “private fund advisers”, which is any investment adviser who provides advice solely to one or more private funds (i.e. a 3(c)(1) fund or a 3(c)(7) fund). A private fund adviser must not be subject to disqualification from prior bad acts such as fraud or other securities law violations. The private fund adviser must also make the same Form ADV filings as an exempt reporting adviser would.
Any private fund adviser that advises one or more 3(c)(1) funds (other than venture capital funds, as defined under federal regulations) must also comply with additional restrictions. All investors in these funds must be “qualified clients.” [1] The fund manager must also disclose in writing all services that are provided to individual owners (if any), all duties owed to individual owners (if any), and any other material information affecting the rights or responsibilities of owners. Finally, the fund manager must provide audited financial statements to each investor.
Fund managers registered with the SEC will be required to make applicable notice filings to the Maryland Securities Commissioner even if they would otherwise qualify for the private fund adviser exemption.
The new rule also provides grandfathering provisions for fund managers of 3(c)(1) funds that existed before June 15, 2012 but cease accepting non-qualified clients after the date, as long as the fund manager does comply with the disclosure and audit requirements of the new exemption.
This order continues the trend of an increasing number of states adopting the NASAA model rule, or something substantially similar. So far California, Indiana, Maine, Virginia, Massachusetts, Michigan, Wisconsin, Missouri, Rhode Island (proposed but not yet adopted), and Maryland have adopted some form of the NASAA model rule.
Footnotes
[1] A “qualified client” is defined as an individual or company that has at least $1 Million under the management with the investment adviser or has a net worth (together with assets held jointly with a spouse) of more than $2 Million, not counting an individual’s primary residence.
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© 2012 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
One of the questions I’ve been grappling with is when is an exempt reporting adviser required to file a truncated ADV? Dodd-Frank and much of the writing on the subject provides that any manager relying on the private fund adviser exemption is an ERA and therefore required to file the truncated ADV. However, I’ve spoken to the SEC and they’ve told me only private fund advisers over $100m in all states other than NY and WY need to file are ERA. In NY a private fund adviser is an ERA over $25m and an adviser in WY is an ERA no matter what. I’m taking the SEC at its word but could you look at this issue for me and confirm that what they have told me at the SEC is accurate or whether I should be speaking to someone else there to see whether the advise I got was inaccurate – that would be helpful.
Liz,
I don’t believe the info you got from the SEC was accurate. My guess is they are assuming that NY and WY are the only states which provide exemptions from registration.
For instance, Tennessee has retained the traditional 15 client exemption. Let’s say you have a private fund adviser with $55 million under management. Because it has AUM over $25 million it is not prohibited from registering with the SEC under 203A(a)(1). It may seem that since it is under $100 MM AUM, it is a midsize adviser and must register with the state. (Under 203A(a)(2)) But that treatment is conditioned on the adviser to be “required to be registered as an investment adviser with the [state] securities commissioner” (203A(a)(2)(B)(i)). Since it would not be so required, because of TN’s 15 client exemption, I don’t believe it would qualify as a mid-sized adviser and would thus need to rely on the private fund adviser exemption (causing the requirement to file a truncated ADV).
Does this analysis sound right to you?
My only thought here is they are confusing the $100 MM threshold with the $25 MM threshold. If an adviser has AUM of under $25 MM, then it is prohibited from registering with the SEC unless the adviser’s state provides for no regulation of investment advisers. WY has always been such a state. My theory about the SEC confusing the 2 thresholds fall apart when they lumped NY into the mix, which does regulate investment advisers. So I don’t really understand how they are analyzing this problem.
I’d ask a 2nd person. If you agree with the above analysis, then perhaps run that by them to see where they disagree. Let me know how it goes, if you can.
Best,
Alex