Corporate & Securities Law

In its request for comments, NASAA noted that the Dodd-Frank Wall Street Reform and Consumer Protection Act has made substantial changes to the regulation of investment advisers to hedge funds and other private funds. Given the changes to the regulatory requirements of these advisers at the federal level, NASAA is considering whether to adopt a model rule that would, in many respects, mirror at the state level the treatment of private fund advisers at the federal level.

The model rule would provide the basis for an exemption from state registration for advisers only to funds formed under Section 3(c)(7) of the Investment Company Act, including venture capital funds formed under 3(c)(7). The model rule is limited to this category given the level of wealth required to invest in these funds. NASAA expressed interest, however, in divergent opinions as to the scope of the exemption.

Under the proposed model rule, an investment adviser solely to one or more private funds will be exempt from state registration requirements if the adviser satisfies certain specified conditions. The first condition is that the adviser cannot be subject to a disqualification. Second, the adviser?s clients must be limited to private funds that are subject to the exclusion under Section 3(c)(7). Advisers to 3(c)(1) funds will not qualify for the exemption. Third, the exempt reporting adviser must file with the state the report required by the SEC for exempt reporting advisers. Finally, the exempt reporting adviser must pay the fees specified by the state.

The model rule provides that the exemption does not apply to an investment adviser that is registered with the SEC. Such advisers must comply with state notice filing requirements that are applicable to all SEC-registered investment advisers.

NASAA said that the proposal is designed to follow certain provisions in the Dodd-Frank Act as implemented by the SEC. Accordingly, the proposal is contingent in many respects on how the SEC moves forward on implementation in this area. NASAA noted that it may be required to reevaluate the provisions in the proposed model rule, however, if the SEC makes significant alterations to its proposals. The SEC's recently issued its proposals for implementing the new registration and reporting requirements in Release No. IA-3110 and Release No. IA-3111.

Comments should be submitted electronically to advcomments@nasaa.org. Written comments may also be mailed to the attention of NASAA's Deputy General Counsel, Joseph Brady, at the organization's office in Washington, D.C. The deadline for submission of comments is January 24, 2011.

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Full post as published by Jim Hamilton's World of Securities Regulation on December 14, 2010 (boomark / email).