Alert November 15, 2011

Massachusetts Issues Revised Proposal to Amend Investment Adviser Registration Exemptions

The Massachusetts Securities Division (the “Division”) published for public comment a revised proposal that would phase out a commonly-used exemption from registration as an investment adviser with the Commonwealth and create a new private fund adviser registration exemption.  The Division is seeking to adjust the Commonwealth’s regulation of investment advisers to accommodate the Dodd-Frank Act’s elimination of the federal registration exemption for advisers with fewer than 15 clients and the related creation of new federal registration exemptions.  (See the June 30, 2011 Goodwin Procter Alert for a discussion of rules adopted by the SEC to implement the registration exemptions under the Investment Advisers Act of 1940 (the “Advisers Act”) created by the Dodd‑Frank Act.)  The revised proposal is designed to address public comment on an initial proposal issued by the Division in April 2011 (as discussed in the April 26, 2011 Financial Services Alert).

Definition of Institutional Buyer.  The revised proposal would modify the definition of “institutional buyer” under Massachusetts regulations to limit the extent to which investment advisers are exempt from registration with the Commonwealth because their only clients are “institutional buyers.”  The revised proposal would carve back the existing category of institutional buyer that consists of any investing entity that accepts only “accredited investors,” each of whom has invested at least $50,000.  The revised proposal would make that category available only to funds that (i) existed prior to March 30, 2012 (the date the SEC’s new rules regarding investment adviser exemptions are to take effect) and (ii) have not accepted new investors since that date.  The revised proposal would, however, allow an adviser to continue to treat such a fund as an “institutional buyer” if the fund accepted additional investments from pre‑March 30, 2012 investors going forward.

Proposed Private Fund Adviser Exemption.  The revised proposal would also create a new Massachusetts registration exemption for advisers whose only clients are funds excluded from the definition of “investment company” under either Section 3(c)(1) (a “3(c)(1) fund”) or Section 3(c)(7) of the Investment Company Act of 1940.  An adviser seeking to rely on this exemption would be subject to additional conditions to the extent it advises a 3(c)(1) fund that is not a “venture capital fund” within the meaning of SEC Rule 203(l)-1 under the Advisers Act, which defines the term for purposes of the new venture capital fund adviser exemption created by the Dodd-Frank Act (as discussed in the June 30, 2011 Goodwin Procter Alert).  The adviser would have to (a) limit the investors in such a non-venture capital 3(c)(1) fund to “qualified clients” as defined in SEC Rule 205-3 under the Advisers Act (subject to a grandfathering provision for pre-March 30, 2012 funds with non-qualified client investors); and (b) provide the fund’s investors with (i) certain disclosures at the time of purchase and (ii) annual audited financial statements for the fund.  All advisers relying on the proposed Massachusetts exemption would be required to file in Massachusetts any reports they file with the SEC as “exempt reporting advisers.”  (The reporting requirements for exempt reporting advisers are discussed in the June 30, 2011 Goodwin Procter Alert.)  The proposed exemption is subject to additional conditions, including the absence of any disqualification based on certain disciplinary matters.

Hearing and Public Comment.  The Division will hold a public hearing on the revised proposal at 10:00 a.m. on December 6, 2011.  Comments on the revised proposal may be submitted to the Division through December 7, 2011.