Massachusetts Schedules Public Hearing on Proposed Regulations on Private Fund Managers

Previously, I posted a summary of the status of state investment advisor registration requirements for private fund managers in the Northeast in wake of adoption of the Dodd-Frank Act.  Massachusetts currently provides an exemption for investment advisers who only advise sophisticated clients such as “institutional buyers,” which include any “investing entity whose only investors are accredited investors… each of whom has invested a minimum of $50,000.”   In April, the Massachusetts Securities Division proposed changes to its investment adviser registration regulations, which would phase out the institutional buyer exemption and introduce a new “private fund adviser exemption”  A public hearing was held on June 23, 2011. After receiving comments, they revised the proposed regulations and released new revised proposed regulations on November 2, 2011.  Originally, the Massachusetts Securities Division had planned on having another hearing on December 6, 2011, but this has been postponed until January 5, 2012.  Interested parties will also have the right to introduce comments until January 6, 2012.The proposed regulation now make the following changes:

  • The existing institutional buyer exemption will only be available for funds which existed prior to March 30, 2012 and which ceases to accept new investors after March 30, 2012.  Essentially, advisers of funds who will no longer be raising capital after March 30 are grandfathered out of the new rules.
  • There will be a new exemption, which exempts a “private fund adviser” from registration 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).[1]  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 a 3(c)(1) fund (i.e. if they accept investors who are not qualified purchasers) must also comply with additional restrictions.  All investors in these funds must be “qualified clients,” which 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 $2,000,000, excluding the value of an individual’s primary residence.  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, a private fund adviser must provide audited financial statements to each investor.  These requirements are not imposed on advisers which solely advise venture capital funds, as defined in SEC regulations.
  • Fund managers registered with the SEC will be required to make applicable notice filings to the Massachusetts Securities Division, even if they would otherwise qualify for the private fund adviser exemption (federally covered advisers who qualified for the institutional buyer exemption did not have to make notice filings.)

It appears that these regulations are in near final form, but since the Massachusetts Securities Division is still soliciting comments and intends to hold a hearing, it is possible that further revisions may be made.  Stay tuned.


[1]  A 3(c)(1) fund is a fund which has under 100 investors.  A 3(c)(7) fund is a fund which is limited to qualified purchasers, which are defined roughly as a person with at least $5 Million in investment assets or a company with at least $25 Million in investment assets.

© 2011 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.

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Alexander J. Davie

Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

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