The North American Securities Administrators Association (“NASAA”), a voluntary organization of securities agencies across the United States, Canada and Mexico, has proposed a model rule (the “Model Rule”) that would generally exempt investment advisers from the obligation to register at the state level, if the advisers: (i) are not subject to disqualification based upon their prior disciplinary history; and (ii) solely advise funds excluded from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act of 1940 (the “1940 Act”). Advisers exempt from state registration obligations would still be required to make certain state notice filings and pay state filing fees.
As noted by NASAA itself, the interaction between the Model Rule (to the extent adopted by states) and federal investment adviser regulations would depend upon how state and federal regulations are finalized, and certain interactions could lead to unexpected results. For example, under proposed Advisers Act Rule 203A(a)(2), certain advisers that are required to register at the state level would be prohibited from registering with the SEC. However, if the Model Rule exempted those same advisers from state registration, they could elect to either: (i) register with the SEC (since the prohibition on registration under 203A(a)(2) would no longer apply); or (ii) operate as “exempt reporting advisers” under the Model Rule and proposed Advisers Act Rule 203(m)-1 (the “private fund adviser” exemption discussed in the Goodwin Procter Alert dated November 24, 2010). Since the compliance obligations on exempt reporting advisers could prove duplicative and onerous (particularly for advisers operating in multiple states with differing regulatory regimes), certain advisers might view registering with the SEC as the more cost efficient of these two alternatives.
NASAA is considering any comments on the Model Rule before finalizing its proposal. Once NASAA finalizes the Model Rule, one or more states may choose to formally adopt it (as proposed or in modified form) through legislation, rulemaking or other appropriate means.