Rhode Island Issues Proposed Private Fund Exemption

Like numerous other states, Rhode Island has issued a proposed private fund exemption. We have previously discussed various other states that have created the same type of rule in Multiple States Create Private Fund Adviser Exemption, Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, and California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule.

Under the proposed rule, in order for a private fund adviser to be exempt from registration, the private fund adviser has to satisfy a number of conditions: (1) neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions under Rule 262 of SEC Regulation A, (2) pursuant to SEC Rule 204-4, the private fund adviser files with the state each report and amendment that an exempt reporting adviser is required to file with the Securities and Exchange Commission, and (3) the private fund adviser pays a $300 fee.

Private fund advisers who advise at least one (3)(c)(1) fund (other than a venture capital fund) must meet additional requirements to be exempt. (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.) The additional requirements include:

  • The fund’s beneficial owners must meet the definition of a “qualified client” as defined in SEC Rule 205-3 after deducting the value of the primary residence;
  • The private fund adviser has to disclose the following information in writing to each beneficial owner: (1) the fund, and not the beneficial owner individually, is the adviser’s client, (2) all services, if any, to be provided to beneficial owners, (3) all duties owed to beneficial owners, and (4) any other material information affecting the rights or responsibilities of the beneficial owners; and
  • The adviser, on an annual basis, must obtain audited financial statements of each fund and provide a copy to the beneficial owner.

If an investment adviser becomes ineligible for the exemption it has ninety days to register.

If an adviser has a 3(c)(1) fund that is beneficially owned by individuals who do not meet the definition of a “qualified client,” the fund may still be exempt if it meets the following conditions:

  • The fund had to be in existence before the effective date of the rule, and
  • After the effective date, the fund no longer accepts beneficial owners who are not “qualified clients.”

The Rhode Island Securities Division will hold a public hearing on the proposed rule on April 19, 2012 at 10 a.m. at 1511 Pontiac Avenue, Cranston, Rhode Island 02920. It will accept comments about the proposed rule until April 19th. Those comments can be submitted to Dennis Murray at dmurray@dbr.ri.gov.

Parker MacIntyre 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.