Alert April 26, 2011

Massachusetts Proposes Revised Investment Adviser Registration Exemptions

The Massachusetts Securities Division (the “Division”) has proposed phasing-out a commonly-used investment adviser registration exemption and creating new, more narrow registration exemptions.  The Division’s proposals are responses to the Dodd-Frank Act’s elimination of the federal Advisers Act registration exemption for advisers with fewer than 15 clients and the related creation of new federal registration exemptions.  (See the July 23, 2010 Goodwin Procter Alert for a discussion of changes to Advisers Act exemptions under the Dodd-Frank Act and the November 24, 2010 Goodwin Procter Alert for a discussion of related SEC rulemaking.)  The Division’s proposals are also consistent with a similar proposal from the North American Securities Administrators Association, which was discussed in the February 1, 2011 Alert.

The Division’s proposals would narrow the existing Massachusetts registration exemption for advisers to “institutional buyer” entities (i.e., 501(c)(3) charitable entities and entities accepting only “accredited investors” investing at least $50,000) and make the exemption available only on a limited “grandfathered” basis.  Advisers could continue to rely upon the exemption only for currently existing “institutional buyer” entities, so long as those entities do not, in the future, accept additional beneficial owners or funds from existing investors.  (The Division did not specifically comment on whether the exemption, as modified, would allow for certain routine transactions, such as transfers of fund interests among investor affiliates and calling down existing capital commitments.)

The Division’s proposal would also create new Massachusetts registration exemptions for advisers whose only clients are “venture capital funds” or funds excluded from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act of 1940.  For this purpose, “venture capital fund” would be defined by reference to the SEC’s definition of the term, which has been proposed, but not finalized (as discussed in the November 24, 2010 Goodwin Procter Alert).  Advisers relying upon the new exemptions would be required to file in Massachusetts any reports they file with the SEC as “exempt reporting advisers.”  (The SEC has proposed, but not adopted, reporting requirements for exempt reporting advisers, as discussed in the November 24, 2010 Goodwin Procter Alert.)  The Division’s proposed exemptions are subject to additional conditions, including the absence of any disqualification based on certain disciplinary matters. 

The ultimate impact of the Division’s proposal will depend on how it interacts in its final form with yet-to-be finalized SEC rules regulating investment advisers.  Assuming the Massachusetts and SEC proposals become final in their current forms, these interactions could be especially meaningful for Massachusetts advisers that provide advice to even a single so-called “3(c)(1) fund” that relies upon the existing “institutional buyer” exemption and do not expect to register with the SEC (perhaps based upon another exemption such as the “family office” exemption (see the October 19, 2010 Alert for a discussion of SEC rulemaking regarding this exemption)).  Those advisers could be required to register in Massachusetts and, in some cases, comply with the SEC’s requirements for “exempt reporting advisers.”  The resulting dual compliance obligations for those advisers could prove duplicative and onerous (perhaps leading some advisers to conclude that registering with the SEC, if available as an alternative, would be more cost efficient).

The Division is considering comments on its proposals through June 24, 2011.  However, since the Division’s proposals rely upon regulations that the SEC must promulgate, the SEC’s adoption of its final rules can be expected to impact the Division’s overall timing.  The SEC is expected to finalize its relevant rules before July 21, 2011.