Alert June 21, 2011

NASAA Revises Proposed State Adviser Registration Exemptions

The North American Securities Administrators Association (“NASAA”), a voluntary organization of securities agencies across the United States, Canada and Mexico, has released a revised version of its proposed model rule (the “Revised Proposal”) 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 that are excluded from the definition of “investment company” under Section 3(c)(7) or, in certain cases, Section 3(c)(1) of the Investment Company Act of 1940 (the “1940 Act”).

The Revised Proposal’s registration exemptions are broader than in NASAA’s original December 10, 2010 proposal (discussed in the February 1, 2011 Alert) primarily because the Revised Proposal exempts advisers to 3(c)(1) funds that either: (i) qualify as “venture capital funds” (to be defined by the SEC in regulations that the SEC is expected to adopt at its June 22 open meetings (as discussed in the June 14, 2011 Alert)); or (ii) admit only investors that are “qualified clients” (as defined in the Investment Advisers Act of 1940) (so long as the adviser also makes certain disclosures to those investors when they invest and delivers annual audited financial statements to them).  The Revised Proposal also includes what NASAA describes as an “optional grandfathering provision” designed to allow states that currently provide a registration exemption for advisers to 3(c)(1) funds to offer a continuing exemption for advisers to 3(c)(1) funds that include non-“qualified client” investors, provided those investors were admitted prior to the adoption of the Revised Proposal.  Under the Revised Proposal, advisers exempt from state registration obligations would still be required to make certain state notice filings and pay state filing fees. 

Despite the fact that it would provide broader exemptive relief at the state level than NASAA’s original proposal, uncertainty remains around the interaction between the Revised Proposal (to the extent it is adopted by the states relevant to a particular adviser’s business) and the relevant final SEC regulations, particularly because the SEC has not finalized its rulemaking.

NASAA is considering any comments on the Revised Model Rule before finalizing its proposal.  The deadline for submitting comments is July 13, 2011.  Once NASAA finalizes the Revised Proposal, one or more states may choose to formally adopt it (as proposed or in modified form) through legislation, rulemaking or other appropriate means.