Extension of Comment Period Delays Implementation of Private Adviser Exemption

As we have advised previously, states are responding to the Federal overhaul of investment adviser registration requirements by evaluating and in some

case changing their own laws governing investment advisers. This response, spearheaded by the National Association of Securities Administrators, or NASAA, includes exemptions for advisers to certain private funds.

In December, California’s Department of Corporations (the “Department”) released its own proposed exemption, which we discuss in detail here. In sum, the proposed rule, if

adopted, will exempt many hedge fund managers from registration with the state of California. The firm must provide advice solely to one or more “qualifying private funds,” which includes Section 3(c)(1), Section 3(c)(7) funds and certain other funds that fall under an Investment Company Act of 1940 exception. In addition, the adviser must:

• have not violated securities laws;
• file periodic reports (an abbreviated version of the Form ADV);
• pay the existing investment adviser registration and renewal fees ($125); and
• comply with additional safeguards when advising funds organized under Section 3(c)(1) (other than venture capital companies).

The initial deadline for comments on the proposal was February 20, 2012. However, the Department has extended that deadline to March 25, 2012.

While the rule is being considered, California has extended its existing private adviser exemption until April 19, 2012. If the new rule is not adopted by that time and the current exemption is not extended, those fund managers with over $25 million in assets under management must register in California. If however, the new rule is adopted, such managers will be exempt from registration. As long as their assets under management fall below $100 million, they will only have to file certain reports (similar to the reports filed by Exempt Reporting Advisers) with California. Once their assets under management exceed $100 million, they will have to register with the SEC unless an exemption applies (e.g. the Private Adviser Exemption).

The proposed exemption will significantly change the registration regime in California. Firms that solely manage qualifying funds and meet the additional requirements will not have to register and those that are currently registered may withdraw their registration. California fund managers with less than $100M in AUM generally will not be registered with any regulatory agency.

Conclusion

The original comment period ending February 20 gave California fund managers plenty of time to evaluate their current business, future plans and potential eligibility for the exemption prior to the deadline for the ADV Annual Updating Amendment (deadline March 31). With the comment period extended to March 25, and final adoption of the exemption likely pushed to early April, managers will now need to plan on filing their annual updating amendment as usual; managers whose registrations are pending should proceed with that process until the final rule is released.

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Cole-Frieman & Mallon LLP provides hedge fund and adviser registration services to managers throughout the United

States. Bart Mallon can be reached directly at 415-868-5345.