State Private Fund Adviser Exemption Update

June 12, 2014

In the past six months two states, Iowa and Texas, have adopted private fund adviser exemptions to their investment adviser registration requirements under their respective state securities acts. Another state, Washington, has proposed a private fund adviser exemption. These state actions reflect a continuing trend to exempt private fund advisers from registration under certain carefully circumscribed conditions.

The Iowa exemption, which became effective at the end of 2013, exempted advisers providing advice to one or more qualifying private funds so long as neither the advisers nor their affiliates are subject to the "bad boy" disqualification provisions of Rule 262, Regulation A and the adviser files the required exempt reporting adviser's reports mandated by Rule 204-4 of the Investment Adviser's Act of 1940 via the IARD filing system. The exemption further provides that representatives of exemption-eligible investment advisers are also exempt from the investment adviser representative registration requirements if they do not otherwise act as representatives, that is, if they only act as representatives in connection with the activities of the exempt private adviser. The Iowa rule also provides that private fund advisers that are registered with the SEC are ineligible for the state exemption and therefore must comply instead with the notice filing requirements under the Iowa Securities Act for federal covered advisers.

The Iowa rule also contains additional requirements for any fund advisers to specific types of funds. More particularly, if any adviser seeking to take advantage of the exemption advises a fund that qualifies as exempt under the federal Investment Company Act of 1940 by virtue of Section 3(c)(1) and, so long as that fund is not a venture capital fund, the adviser must, in addition to the aforementioned basic requirements: (1) advise only non-venture capital 3(c)(1) funds whose owners are "qualified clients" under SEC Rule 205-3 at the time the securities are purchased; and (2) disclose the services, duties and other material information affecting the beneficial owner's rights or responsibilities. Private fund advisers must annually obtain audited financial statements and provide a copy of those to each beneficial owner of the fund.

The Texas rule, adopted in February 2014, is substantially similar to the Iowa rule. The Texas rule, however, specifically informs advisers seeking to take advantage of the exemption that they must comply with any requests by the Commissioner for records pertaining to their activities or about which the adviser gives advice and that, upon failure to comply with any written records request from the Commissioner, the adviser would be deemed ineligible for the exemption.

Washington's proposed rule was open for comment through June 4, 2014, and a hearing was held on June 5, 2014 to consider comments to the rule. As of the date of this writing, it has not become effective. The substance of the rule is similar to both the Iowa and Texas rule, but contains a specific reference to and disqualification for exemption based upon Washington's state "bad boy" disqualification provision, unless waived by the Washington Securities Administrator for good cause.

All three states require that investment advisers that become ineligible for the private fund exemption must register or notice file as applicable within 90 days of the loss of eligibility for the exemption.