Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers

Virginia’s previous private fund adviser exemption could be short-lived because it may be replaced by a new proposed rule. The previous rule was effective September 7, 2011 and the current proposed rule is expected to be effective on May 1, 2012. Interested persons may submit their comments on the proposed rule on or before April 12, 2012. This new rule is also currently being considered by California, Massachusetts and Rhode Island. We previously discussed the California proposed exemption rule in a blog, California Extends Comment Date on its Proposed Private Fund Exemption Rule.

Currently, the rule provides for an exemption for any adviser where the adviser advises only clients that are either a corporation, general partnership, limited partnership, limited liability company, trust or other organization that:

  • Has assets of $5,000,000 or more and
  • Receives investment advice based on the investment objectives of the entity instead of individual investment objectives, provided that the adviser was exempt from registration pursuant to §203(b)(3) of the Investment Advisers Act of 1940 and the adviser is subject to SEC rule 203 1(e).

Under the current proposed rule, which is similar to the California rule previously mentioned, a private fund adviser will qualify for the exemption if he or she advises at least one 3(c)(1) fund that is not a venture capital fund and satisfies the additional conditions:

  • Each investor in the 3(c)(1) fund must, after deducting the value of the primary residence, have a net worth that would make the investor a “qualified client.” We previously discussed the definition of a “qualified client” in a post, Final Rule on Advisers Charging Performance Fees.
  • At the time of purchase the adviser must disclose in writing to the beneficial owner of the fund all services to be provided to the investor, all duties the adviser owes to the investor, and any other material information regarding the investor’s rights or responsibilities;
  • The adviser should give the beneficial owner of the fund an audited financial statement annually.

Please note that the first requirement of the proposed rule differs from the California rule because it instead requires that all the investors meet the definition of a “qualified client” as opposed to an accredited investor.

Additionally, there are a few more requirements in order for an adviser to be exempt from registration. First, the adviser may not be subject to disqualification described in Rule 262 of Regulation A adopted by the Securities and Exchange Commission (SEC). Second, the adviser must file all the SEC reports and amendments required by an exempt reporting adviser. Finally, the adviser must pay a $250 fee.

In situations where one or more of the investors of the 3(c)(1) fund are not “qualified clients,” the adviser can still be eligible for the exemption because the proposed rule includes a “grandfather provision” which requires: (1) The fund existed prior to May 1, 2012, (2) the fund no longer accepts investors who are not considered “qualified clients” as of May 1, 2012, (3) the adviser discloses in writing all the aforementioned conditions in the previous paragraph, and (4) the adviser delivers audited financial statements in the same manner as previously mentioned.

If at any time an adviser becomes ineligible to qualify for this exemption, the rule requires registration or notice filing within ninety days from the date the investment adviser’s eligibility ceases.

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.

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