Connecticut Issues Orders Regarding Investment Adviser Registration

Three Orders Focused on New Hedge Fund Regulations

On June 11, 2011, Connecticut Department of Banking issued three orders relating to Connecticut investment adviser registration requirements in response to the SEC issuing final hedge fund registration regulations required by the Dodd-Frank Act.  The orders (1) create a registration transition period for previously exempt advisers, (2) provide several new exemptions from state registration and (3) define the term “client” for the purposes of Connecticut’s de minimus exemption.

First Order – State Registration Timeline

The first order establishes a state registration timeline for Connecticut advisers affected by the Dodd-Frank Act.  Under this order the following timelines will be in effect:

Investment advisers currently registered with the SEC with assets under management of less than $90 million as of March 30, 2012, will have until June 28, 2012 to withdraw from registration with the SEC and register as an investment adviser in CT.

Investment advisers who had relied on the repealed “private adviser” exemption under Rule 203(b)(3) will have until March 30, 2012 to either register with Connecticut or to register with the SEC and make a notice filing with Connecticut.

Investment advisers who are not eligible for SEC registration or for either of the above deferrals and new advisers starting their advisory business after July 21, 2011 must continue to comply with applicable Connecticut registration and notice filing requirements.

This first order can be found here.

Second Order – Exemptions from Connecticut IA Registration

Previously, Connecticut provided an exemption from investment adviser registration for those hedge fund managers who were located in Connecticut and had more than $25M in assets under management and managed less than 15 hedge funds. The new order repeals this previous exemption and adopts the same exemptions from Connecticut state registration as have been adopted by the SEC.

Accordingly, the following investment advisers are exempt from registration in Connecticut:

  • Foreign private advisers
  • Investment advisers that are registered with the CFTC
  • Investment advisers to small business investment companies
  • Investment advisers to venture capital funds
  • Investment advisers solely to private funds with assets under management of less than $150 million.

Some of these exempted advisers will still be subject to various reporting and recordkeeping requirements by the SEC and may need to make notice filings and/or reports available to Connecticut.

It is important for managers to understand that the above extensions don’t apply to investment advisers and fund managers commencing business on or after July 21, 2011. Those investment advisers and others that don’t fall into the described exemptions remain subject to applicable registration and notice filing requirements in Connecticut.

The second order can be found here.

Third Order – Definition of “Client” for Connecticut’s De Minimus Exemption

To further conform its regulations to the new SEC rules, Connecticut has adopted the definition of “client” in accordance with the Investment Advisers Act Rule 202(a)(30)-1 for Connecticut’s de minimus exemption. The de minimus exemption allows an investment adviser to not register with the state if the investment adviser:

  1. does not have a place of business in Connecticut AND
  2. during the preceding 12 month period had fewer than 6 “clients” who are residents of Connecticut

Under the new Connecticut rule, a single “client” generally means:

  1. a natural person, family members of the same household and accounts for such persons OR
  2. an entity (such as a hedge fund) to which the investment adviser provides investment advice based on the entity’s investment objectives (two entities with exactly the same ownership can, together, be counted as a single client)
The third order can be found here.

Conclusion

The new SEC rules implementing investment adviser regulation amendments under the Dodd-Frank Act have created new compliance and regulatory issues for investment advisers. States will need to amend their rules to coordinate their regulatory regime with the new changes. We expect to see similar releases from other states in the coming weeks, and will be providing updates as appropriate.

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Cole-Frieman & Mallon LLP provide advice with respect to hedge fund formation as well as investment adviser registration and compliance.  Bart Mallon can be reached directly at 415-868-5345.

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