Alert March 22, 2011

California Seeks Comment on Proposed Changes to Investment Adviser Licensing Rules

The California Corporations Commissioner (the “Commissioner”) issued an invitation for comments on a proposal to amend the rules governing certain exemptions from California’s investment adviser licensing requirements (the “Amendments”).  The proposal is being made in anticipation of the July 21, 2011 effectiveness of changes to the federal regulatory scheme for adviser registration and oversight resulting from the Dodd‑Frank Act.  California currently exempts from its licensing requirements an investment adviser that relies on Section 203(b)(3) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), (the current federal “private adviser” exemption for advisers with fewer than 15 clients who meet certain additional conditions) provided that either (a) the adviser has not less than $25 million in assets under management, or (b) the adviser’s only clients are venture capital companies, as defined in the exemption.   In view of imminent changes in federal investment adviser regulation, particularly the Dodd-Frank Act’s elimination of the Section 203(b)(3) federal private adviser exemption upon which the current California exemption is in part based, the Commissioner’s proposal would replace the current conditions for the exemption with new requirements, including the following:

  • The adviser must be exempt from federal registration either as (a) a “venture capital fund adviser” under Section 203(l) of the Advisers Act or (b) a “private fund adviser” under Section 203(m) of the Advisers Act.  (Both exemptions are discussed in more detail in the November 24, 2010 Alert, which describes SEC rule proposals that would define and clarify these statutory exemptions and create reporting obligations for these “exempt reporting advisers.”)
  • The adviser must file the same reports with the Commissioner that an “exempt reporting adviser” would be required to file with the SEC (as discussed in the November 24, 2010 Alert).
  • The adviser must either (i) have assets under management (as defined in the proposal) of not less than $100,000,000 or (ii) provide investment advice only to “venture capital companies.”   This condition would use the definition of “venture capital company” in the current exemption, which, in general terms, requires that the entity in question meet an ongoing test regarding the proportion of its assets that constitute venture capital investments in operating companies (as defined in the exemption).

Comments are due by March 28, 2011.  A Goodwin Procter client alert addressing the Amendments in more detail will be made available to Alert readers.