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.”  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.
 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.
© 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.