RIA Compliance Blog
On October 13, 2011 the Georgia Secretary of State published proposed rules under the Georgia Uniform Securities Act of 2008 (“the 2008 Act”). Among the proposed rules are twenty (20) rules governing investment advisers and investment adviser representatives.
Although many of the proposed rules are consistent with the applicable rules under the prior Georgia Securities Act of 1973, quite a few of the proposed rules are new, and are designed to respond to the changing business and regulatory environment, including passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Firms currently registered in Georgia should pay careful attention to the regulatory changes. In addition, formerly SEC-registered advisers that are switching to Georgia registration will find the Georgia regulatory landscape, under both the old rules and the new ones, if adopted, to be quite different than what they are accustomed to.
For example, while there is no longer a de minimis exemption from registration for private advisers to hedge funds under federal law, under Georgia proposed rule 590-4-4-.13(b), investment advisers are exempt from registration if they have fewer than six clients in the state, even if the adviser has an office in the state. This proposed rule would therefore be broader than the existing statutory exemption for advisers without an office in the state and no more than 5 clients within the state, as required by the National Securities Markets Improvements Act. Under the proposed rule, an investment pool organized as a limited partnership or limited liability company is counted as a single client.
Another proposed rule relates to solicitors. The Georgia Uniform Act, for the first time, expressly includes within the definition of “investment adviser representative” a person who solicits or negotiates for providing investment advice or advisory services. O.C.G.A. § 10-5-2(19). Proposed Rule 590-4-4-.12, however, would exclude certain solicitors from the definition of “investment adviser representative.”
Under that rule, some solicitors would be disqualified from relying on the exclusion contained in the rule. They are: (a) any person who would be an “investment adviser representative” by reason other than his or her solicitation activities; (b) a person who actually provides investment advice on behalf of the adviser whose services are being solicited; (3) one who is under the control of an investment adviser; or (d) one who is “regulated or required to be regulated by the SEC.”
Assuming none of those disqualifiers exists, a person is excluded from the definition of “investment adviser representative” if, in the conduct of his or her solicitation activities, he or she either:
(1) Does not make a suitability determination or representation regarding a specific adviser, and merely provides a list of one or more advisers; or
(2) receives compensation for soliciting 10 or fewer persons in the state in any calendar year and is not otherwise engaged in the business of soliciting; or
(3) is a licensed attorney or C.P.A. whose solicitation activities are confined to their clients.
The rule also requires that, in order to take advantage of the exclusion, the solicitor must disclose in writing the relationship to the adviser and that compensation will be paid for the solicitation activities. A separate proposed rule, Rule 590-4-19(22), prohibits an investment adviser from paying a unregistered solicitor who does not meet the terms of the exclusion of 590-4-4-.12.
The proposed rule has no counterpart among the rules adopted under the prior Georgia Act, although the substance of the rule was implemented by Order adopted in 2010. The regulatory regime under the federal Investment Advisers Act of 1940 is quite different. Solicitors for SEC-registered firms have never been subject to registration under federal law; rather, it is deemed fraudulent conduct for a registered adviser to use a solicitor unless the requirements of Adviser Act Rule 206(4)-3 are met. The requirements contained in the proposed Georgia rule are different in several material respects from Rule 206(4)-3.
Any interested party may submit comments on the proposed rules. All comments must be received no later than 5:00 p.m. on November 15, 2011, and should be addressed to: Commissioner of Securities, Securities Division, 2 Martin Luther King, Jr. Drive, S.E., 802 West Tower, Atlanta, Georgia 30334. Comments should be in writing and submitted either by mail, by facsimile to (404) 656-0513, or by email to SECRules@sos.ga.gov. The reference line of any comments submitted should refer to the Notice Number (not the rule number), in the format “SEC-2011-XX.”
For further information about the notice, comment process, or proposed rules, please contact Tom Zagorsky at (404) 463-0344.