Emergency Action “Necessary” because of SEC Inaction
The California Department of Corporations has provided a temporary six-month extension of Section 260.204.9 which exempts hedge fund managers from registration in California if the manager has more than $25M of AUM. The exemption will be slightly modified to account for the changes to federal law as a result of the Dodd-Frank Act. The exemption is also scheduled to become inoperative on January 21, 2012.
The emergency action was taken by California because the SEC recently announced that they intended to delay implementation of the federal hedge fund registration regulations until 2012. The SEC is expected to formally announce that registration will be delayed until next year in an Open Meeting on June 22. On such date we are expected to have a better timeline of when registration might be required.
Reasons for the Emergency Action
California provides the following background on the emergency action and why the state decided to move forward with extending the exemption:
… persons that may be required to register under final SEC rules would have a very limited time period in which to prepare their registration documents. In order to allow such persons to determine how SEC rules will ultimately affect their registration status, it is necessary to provide sufficient time for regulated persons to analyze the final rules and prepare any required application materials.
Additionally, the extension is necessary to allow the Department to study how best to regulate advisers to alternative investment vehicles, while balancing the regulatory burden on such advisers, with any corresponding investor protections issues.
Lastly, this extension is necessary to ensure the stability of California capital and labor markets. Alternative investment vehicles, including venture capital funds, have historically provided a crucial source of financing for California businesses.
These emergency regulations address the marketplace uncertainty that exists as a consequence of the operative date of the change in federal law, by temporarily continuing the existing California registration exemption for private advisers. The emergency regulations further will provide the Department and industry the opportunity for thoughtful dialogue on the appropriate measure of state oversight after the federal adoption of rules. These emergency regulations are intended to prevent a marketplace reaction of seeking registration in the face of uncertainly; resulting in businesses prematurely incurring costs to comply with a regulatory scheme that ultimately may prove unnecessary for some private advisers. Moreover, it is likely that most private advisers would not be able to secure registration prior to July 21, 2011, thus requiring that they immediately cease providing investment advisory services for compensation in California.
Other States Next?
There are a number of other states which have IA registration exemptions which are similar to the California exemption. We expect to see similar pronouncements in the coming weeks from other states. Then, after the SEC finalizes the registration regulations, we will see states drafting new laws that better integrate with the
new federal regulations.
The modified exemption can be found here: Section 260.204.9 (Effective July 21, 2011)
Background information and the finding of emergency can be found here: California Finding of Emergency
The notice can be found here: Notice of Emergency Action
Bart Mallon is an attorney with a practice focused on hedge funds and investment adviser registration. He can be reached directly at 415-868-5345.