Multiple States Create Private Fund Adviser Exemption

March 28, 2012

Three more states have taken action either to adopt a private fund exemption or to create an interim exemption until final rules are proposed. As previously discussed in California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule and Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, California and Virginia have already started the process of creating a private fund adviser exemption. The states which have adopted exemption provisions most recently are Maine, Massachusetts and Wisconsin.

Maine issued an interim order exempting private fund advisers from registration, which became effective on February 16, 2012. It will remain effective until a private fund adviser rule is proposed. According to the exemption, in order to be exempt:


  • The investment adviser must advise one or more "qualified private funds" which are defined in SEC Rule 203(m)-1;

  • The adviser must maintain a place of business in Maine;

  • The adviser cannot hold himself/herself out to the public as an investment adviser;

  • Neither the adviser nor their advisory affiliates may be subject to "bad boy" disqualification provisions which are defined in Rule 262 of SEC Regulation A; and

  • Under Rule 204-4 of the Investment Advisers Act of 1940, the adviser must file with the Maine Office of Securities the SEC-filed reports and amendments required for exempt reporting advisers.

If a private fund adviser advises at least one 3(c)(1) fund, defined in the Investment Company Act of 1940, that is not a venture capital fund, the fund must satisfy the same additional requirements of the Virginia Proposed Rule that we have previously discussed. (A 3(c)(1) fund is a fund with less than 100 beneficial owners and which does not presently propose to make a public offering of its securities.)

Massachusetts adopted a new private fund exemption rule that took effect on February 3, 2012, but which will not be enforced until August 3, 2012 in order to allow investment advisers six months to comply. According to the exemption, a private fund adviser must satisfy a number of conditions to be exempt from regulation. The adviser:


  • Cannot be subject to disqualification under the "bad boy" provisions;

  • Must file with the state each report and amendment that an exempt reporting adviser is required to file with the SEC subject to Rule 204-4; and

  • Must pay a $300 fee.

In addition, if a private fund adviser advises at least one 3(c)(1) fund that is not a venture capital fund, or a 3(c)(7) fund, it must meet additional requirements to be exempt which are the same as both the Virginia and Maine rules. (A 3(c)(7) fund is a fund in which outstanding securities of the fund are held by qualified purchasers and which does not propose to make a public offering.) In those cases where the private fund adviser advises beneficial owners who are not "qualified clients," it may still use this exemption if: (1) the fund existed before February 3, 2012 and no longer accepts beneficial owners who are not "qualified clients" after that date, and (2) as of February 3, 2012, the advisers were in compliance with the "no transacting business in Massachusetts unless registered" requirement of ยง201(c) under the Massachusetts Securities Act.

An Administrative Order of the Wisconsin Securities Division adopted a private fund adviser exemption effective February 17, 2012. In order to qualify for the exemption, neither the private fund adviser nor any of its advisory affiliates can be subject to disqualification under the "bad boy" provisions of Rule 262. The private fund adviser must also file with the SEC each report and amendment thereto that an exempt reporting adviser is required to file. If an adviser is advising a 3(c)(1) fund that is not a venture capital fund, it must meet the same additional requirements that are imposed by the California Rule. However, instead of the beneficial owners meeting the "qualified client" definition as required in Maine, Massachusetts and Virginia, they must meet the definition of an accredited investor as defined in SEC Rule 501(a). Also, if a private fund adviser is registered with the SEC, the adviser will not be eligible for this exemption and needs to comply with state notice filing requirements applicable to federal covered investment advisers. Similar to the California Rule, there is a provision that allows certain advisers to be eligible for the exemption when they advise beneficial owners who do not meet the definition of a beneficial owner.

Parker MacIntyre, LLC provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.