Category Archives: Investment Advisor

Series 65 Exam Opinions Requested

Seeking Opinions on How to Pass to the Series 65 Exam

I am hoping readers of this blog would be able to provide some feedback on their experiences with the Series 65 exam. As a

little background, many of our firm's clients are managers who will be state registered investment advisers and therefor these groups will need to make sure certain individuals take the Series 65 exam in order to become registered in the state of principal residence.

The North American Securities Administrators Association (NASAA) is the group in charge of creating the Series 65 and the exam is administered by FINRA at any number of locations across the U.S. and in different countries. At the beginning of 2010 NASAA changed the grading of the Series 65 exam so that it was more difficult to pass. From that time forward we have anecdotally noticed that there were in fact less people who were passing the exam on the first try.  Accordingly, we are trying to gather information on the exam to help out those people who will be taking it in the future.

If you have taken the e

xam over the last year we are asking if you can provide us with a little information on your experiences and some thoughts on how you would prepare for the exam, given what you know now. For example, we think the following information would be helpful:

  • Date you took the exam (month, year)
  • Final score
  • Series 65 Exam prep / study guide(s) you used
  • Amount of time spent studying (approximate number of hours)
  • Number of practice exams you took? Scores on those exams?
  • Areas you did well on/ could have done better on
  • Overall impressions – was it similar to the practice exams?
  • How would you study for the exam differently?

If you have other comments or information that might be helpful, please feel free to post that as well.  Responses can be posted in the comment section below or you can contact us directly.

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Cole-Frieman & Mallon LLP is a boutique law firm focused on the hedge fund industry.  We help fund managers with investment adviser registration and hedge fund formation matters.  Bart Mallon can be reached directly at 415-868-5345.

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Family Office Definition

SEC Releases New Rule on Family Offices for IA Registration Exclusion

The Dodd-Frank Act created a new “family office” exclusion from the definition of investment adviser because the private advisor exemption was repealed.  While Congress believed that family offices should not be subject to the SEC registration requirements, it did grant authority to the SEC to define what constitutes a “family office”.  On June 22, 2011 the SEC issued a final rule which narrowly defined a family office to essentially include only an office which represents a single family that does not exceed 10 generations.  The new regulation takes effect on August 29, 2011 and those companies which do not fall within the new family office definition will be required to register with the SEC by March 30, 2012.

Family Office Definition

The term “family office” means a company that :

  • provides investment advice only to certain “family clients”;
  • is wholly owned by the “family clients” and controlled by family members or family entities; and
  • does not hold itself out to the public as an investment adviser.

The term “family clients” includes:

  • current and former family members,
  • certain employees of the family office (and, under certain circumstances, former employees),
  • charities funded exclusively by family clients,
  • estates of current and former family members or key employees,
  • trusts existing for the sole current benefit of family clients,
  • revocable trusts funded solely by family clients,
  • certain key employee trusts, and
  • companies wholly owned exclusively by and operated for the sole benefit of, family clients.

The term “family member” includes:

  • all lineal descendants of a common ancestor (who may be living or deceased)*
  • current spouses or spousal equivalents of those descendants
  • former spouses or spousal equivalents of those descendants

* The common ancestor cannot be more than 10 generations removed from the youngest generation of family members.  For an example of how this works, please see this ancestor diagram.

Notably, the exclusion does not extend to family offices serving multiple families.

Also, it is important to note that family offices are excluded from the definition of investment adviser as opposed to being exempted from registration requirements.  Previously family offices would have been exempt from registration because of the private adviser exemption.

Grandfathering Provision & Exemptive Orders

The Dodd-Frank Act included a grandfathering provision that precluded the SEC from excluding certain persons from the definition of “family office” solely because those persons provide investment advice to certain clients and provided that advice prior to January 1, 2010. The SEC’s rule incorporated that grandfathering provision such that employees of a family officer who are accredited investors (as defined by Regulation D) and companies controlled by a family member are permitted clients of a family office.

A family office that previously received a SEC exemptive order under section 202(a)(11)(G) of the Advisers Act will be able to continue to rely on the exemptive order and will thus not be required to register as an investment adviser.

Our Thoughts

The family office definition may have received more attention recently than it normally would have because of the Soros news.  However, it seems more important that the new rule does not include in the definition those groups which provide advisory services to more than one family.  This means that groups traditionally deemed to be family offices (albeit that services were provided to multiple families) will need to register with the SEC by March 30, 2012.  While we encourage managers to begin the registration process as soon as possible, we believe that managers will not begin the process en mass until the fourth quarter of 2011 and into the first quarter of 2012.

The full rule is reprinted below.

The full adopting release can be found here: IA-3220 – Final Family Office Rule.

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§ 275.202(a)(11)(G)-1 Family offices.

(a) Exclusion. A family office, as defined in this section, shall not be considered to be an investment adviser for purpose of the Act.

(b) Family office. A family office is a company (including its directors, partners, members, managers, trustees, and employees acting within the scope of their position or employment) that:

(1) Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to be a family client for purposes of this section 275.202(a)(11)(G)-1 for one year following the completion of the transfer of legal title to the assets resulting from the involuntary event;

(2) Is wholly owned by family clients and is exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and

(3) Does not hold itself out to the public as an investment adviser.

(c) Grandfathering. A family office as defined in paragraph (a) above shall not exclude any person, who was not registered or required to be registered under the Act on January 1, 2010, solely because such person provides investment advice to, and was engaged before January 1, 2010 in providing investment advice to:

(1) Natural persons who, at the time of their applicable investment, are officers, directors, or employees of the family office who have invested with the family office before January 1, 2010 and are accredited investors, as defined in Regulation D under the Securities Act of 1933;

(2) Any company owned exclusively and controlled by one or more family members; or

(3) Any investment adviser registered under the Act that provides investment advice to the family office and who identifies investment opportunities to the family office, and invests in such transactions on substantially the same terms as the family office invests, but does not invest in other funds advised by the family office, and whose assets as to which the family office directly or indirectly provides investment advice represents, in the aggregate, not more than 5 percent of the value of the total assets as to which the family office provides investment advice; provided that a family office that would not be a family office but for this subsection (c) shall be deemed to be an investment adviser for purposes of paragraphs (1), (2) and (4) of section 206 of the Act.

(d) Definitions. For purposes of this section:

(1) Affiliated Family Office means a family office wholly owned by family clients of another family office and that is controlled (directly or indirectly) by one or more family members of such other family office and/or family entities affiliated with such other family office and has no clients other than family clients of such other family office.

(2) Control means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of being an officer of such company.

(3) Executive officer means the president, any vice president in charge of a principal business unit, division or function (such as administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions, for the family office.

(4) Family client means:

(i) Any family member;

(ii) Any former family member;

(iii) Any key employee;

(iv) Any former key employee, provided that upon the end of such individual’s employment by the family office, the former key employee shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the end of such individual’s employment, except that a former key employee shall be permitted to receive investment advice from the family office with respect to additional investments that the former key employee was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former key employee.

(v) Any non-profit organization, charitable foundation, charitable trust (including charitable lead trusts and charitable remainder trusts whose only current

beneficiaries are other family clients and charitable or non-profit organizations), or other charitable organization, in each case for which all the funding such foundation, trust or organization holds came exclusively from one or more other family clients;

(vi) Any estate of a family member, former family member, key employee, or, subject to the condition contained in paragraph (d)(4)(iv) of this section, former key employee;

(vii) Any irrevocable trust in which one or more other family clients are the only current beneficiaries;

(viii) Any irrevocable trust funded exclusively by one or more other family clients in which other family clients and non-profit organizations, charitable foundations, charitable trusts, or other charitable organizations are the only current beneficiaries;

(ix) Any revocable trust of which one or more other family clients are the sole grantor;

(x) Any trust of which: (A) each trustee or other person authorized to make decisions with respect to the trust is a key employee; and (B) each settlor or other person who has contributed assets to the trust is a key employee or the key employee’s current and/or former spouse or spousal equivalent who, at the time of contribution, holds a joint, community property, or other similar shared ownership interest with the key employee; or

(xi) Any company wholly owned (directly or indirectly) exclusively by, and operated for the sole benefit of, one or more other family clients; provided that if any such entity is a pooled investment vehicle, it is excepted from the definition of “investment company” under the Investment Company Act of 1940.

(5) Family entity means any of the trusts, estates, companies or other entities set forth in paragraphs (v), (vi), (vii), (viii), (ix), or (xi) of subsection (d)(4) of this section, but excluding key employees and their trusts from the definition of family client solely for purposes of this definition.

(6) Family member means all lineal descendants (including by adoption, stepchildren, foster children, and individuals that were a minor when another family member became a legal guardian of that individual) of a common ancestor (who may be living or deceased), and such lineal descendants’ spouses or spousal equivalents; provided that the common ancestor is no more than 10 generations removed from the youngest generation of family members.

(7) Former family member means a spouse, spousal equivalent, or stepchild that was a family member but is no longer a family member due to a divorce or other similar event.

(8) Key employee means any natural person (including any key employee’s spouse or spouse equivalent who holds a joint, community property, or other similar shared ownership interest with that key employee) who is an executive officer, director, trustee, general partner, or person serving in a similar capacity of the family office or its affiliated family office or any employee of the family office or its affiliated family office (other than an employee performing solely clerical, secretarial, or administrative functions with regard to the family office) who, in connection with his or her regular functions or duties, participates in the investment activities of the family office or affiliated family office, provided that such employee has been performing such functions and duties for or on behalf of the family office or affiliated family office, or substantially similar functions or duties for or on behalf of another company, for at least 12 months.

(9) Spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.

(e) Transition.

(1) Any company existing on July 21, 2011 that would qualify as a family office under this section but for it having as a client one or more non-profit organizations, charitable foundations, charitable trusts, or other charitable organizations that have received funding from one or more individuals or companies that are not family clients shall be deemed to be a family office under this section until December 31, 2013, provided that such non-profit or charitable organization(s) do not accept any additional funding from any non-family client after August 31, 2011 (other than funding received prior to December 31, 2013 and provided in fulfillment of any pledge made prior to August 31, 2011).

(2) Any company engaged in the business of providing investment advice, directly or indirectly, primarily to members of a single family on July 21, 2011, and that is not registered under the Act in reliance on section 203(b)(3) of this title on July 20, 2011, is exempt from registration as an investment adviser under this title until March 30, 2012, provided that the company:

(i) During the course of the preceding twelve months, has had fewer than fifteen clients; and

(ii) Neither holds itself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a), or a company which has elected to be a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-54) and has not withdrawn its election.

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Cole-Frieman & Mallon LLP is a hedge fund law firm which provides investment adviser registration and compliance services to hedge fund managers and other members of the investment management community such as family offices.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.

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Hedge Fund Registration Rules Finalized

Registration required by March 30, 2012

We are obviously a bit late on reporting that the hedge fund registration regulations were finalized by the SEC recently (see releases at end of the post).  We are not going to detail all aspects of the regulations in this post, but we will be examining some of the more important issues related to the release over the coming weeks and months.

We do want to provide a quick overview of some of the more important items with respect to the new regulations.  These include:

  1. registration for many hedge fund managers will be required by March 30, 2012 [note: managers will need to file Form ADV with the SEC no later than February 14, 2012 to meet this deadline]
  2. Form ADV has been amended in a number of ways which provide more information regarding a fund’s activities and counterparties
  3. Exempt Reporting Advisers (“ERAs”) will need to complete and file a truncated version of Form ADV by March 30, 2012 [note: ERAs will be subject to recordkeeping requirements and will be subject to SEC examination]
  4. many currently registered fund managers will need to switch from SEC registration to state registration during the first part of 2012

IA Registration Overview and Exemptions

After the passage of the Dodd-Frank Act it was clear than many fund managers would be required to register as investment advisers with the SEC.  In general the following are the registration requirements/exemptions for asset managers:

  • managers to only hedge funds (no managed accounts) must register as an IA with the SEC if Regulatory AUM (discussed below) is over $150M
  • managers to hedge funds and managed accounts must register as an IA with the SEC if Regulatory AUM is over $100M
  • mid-sized advisers ($25M to $100M) will be subject to state registration, if applicable [note: some mid-sized advisers will be subject to SEC registration regardless]
  • managers to only VC funds are exempt from registration;
    • VC funds may have up to 20% of their assets in non-VC investments
    • while managers to VC funds will not be required to register as IAs with the SEC, they will still be Exempt Reporting Advisers and will thus need to completed the truncated Form ADV by March 30, 2012
  • non-U.S. managers who have a place of business in the U.S. and have U.S. clients (either directly or as investors in their fund) will generally be required to register as an IA with the SEC or will be deemed to be an ERA [note: non-U.S. managers with U.S. clients or investors will only be exempt from IA registration with the SEC in only limited circumstances]
  • private equity fund managers are generally going to be treated the same as hedge fund managers according to these regulations

Other Items

The following are some of the important items from the releases:

  • Form PF – Release 3221 makes specific reference to a “Form PF release” which indicates that the SEC will be moving forward with the highly controversial reporting form.
  • Regulatory AUM – a new definition for AUM called regulatory assets under management will be used when determining the thresholds for registration. The big issue is that the definition will include leverage (gross assets) and will also include uncalled capital commitments.  The Release 3221 essentially states that the new Regulatory AUM definition is necessary for more consistent

    reporting of AUM and because Form PF will essentially rely on the new definition.

  • Buffer for Mid-Sized Advisers – there is a buffer zone around the $100M mark for certain managers.  This buffer is put into place so that managers do not have to continually switch to and from SEC registration as AUM increases or decreases.  The buffer is $10M each way meaning a manager will not be required to register with the SEC until AUM reaches $110M and a SEC registered manager would not need to de-register or switch to state registration until the manager had less than $90M AUM.
  • Family Office – family offices are exempt from SEC IA registration.  The SEC defined the term “family office” (see Release IA-3220).

The SEC press release announcing the new regulations and providing an overview of the new regulatory requirements can be found here.

The full releases are below:

  • Release IA-3222 [Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers]
  • Release IA-3221 [Rules Implementing Amendments to the Investment Advisers Act of 1940]
  • Release IA-3220 [Family Offices]

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Cole-Frieman & Mallon LLP provides registration, compliance and other legal services for hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.

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California Extends Hedge Fund Registration Exemption

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

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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.

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California Extends IA Exemption for Hedge Fund Managers

Will Wait for SEC Final Registration Regulations to Propose New Rules

California currently has an exemption from the registration requirements for certain fund managers with more than $25M of AUM (Rule 260.204.9).  Back in March California requested input from the investment management community on how they might change the registration requirements when the SEC finalizes its IA registration rules as a result of the Dodd-Frank act.  At that time it was expected that the SEC would finalize its IA registration rules in time for managers to register before the July 21, 2011 registration deadline.  However, the SEC subsequently indicated that it would likely extend the registration deadline until the first quarter of 2012.  From this story by IA Watch, it looks like the Division of Investment Management is moving closer to officially moving the registration deadline to next year.

Because of the uncertaintly of rulemaking at the federal level, the states are left in limbo as to how to proceed with respect to fund managers who may or may not fit under certain exemptions after the federal laws

become effective (even if new federal rules are not yet effective).  California is addressing this exact scenario in a letter it addressed the investment management community on May 13, 2011.  The letter states:

“some uncertainty may exist about the need to become registered after July 21, 2011, for California IAs who are currently unregistered, in reliace on the existing exemption set forth in Rule 260.204.9.”

The letter goes on to state:

“The Department will soon issue emergency regulations to address this potential uncertainty.  These emergency regulations will amend Rule 260.204.9, but have the effect of preserving the status quo.  Therefore, California IAs who currently rely on the exemption from registration for private advisers, will be able to continue to rely on that exemption until such time as the Deparment adopts final rules related to private fund advisers.”

This is good news for current managers located in California and relying on the exemption from registration in California.  We believe that other states (such as Connecticut which has a similar exemption) will soon follow California and release emergency regulations to deal with issues related to the failure of the SEC to finalize the IA registration regulations.  Until the SEC does issue final regulations, it would seem that states would (or probably should) stop proposing changes to state regulations (see previous post on Massachusetts proposed changes).

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Cole-Frieman & Mallon LLP is a law firm focused on the investment management industry.  The firm provides investment adviser registration services to hedge funds and other investment managers.  Bart Mallon can be reached directly at 415-868-5345.

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States Beginning to Propose IA Registration/ Exemption Rules

Massachusetts Proposes Registration Requirement for 3(c)(1) Fund Managers

As we discussed earlier in our post of state regulation of expert networks, the states are beginning to propse rules for investment advisers based on changes to the federal securities laws as a result of the Dodd-Frank Act (see California Request for Comments).  The purpose of the rule changes at the state level are to create a uniform system of regulatory oversight of advisers and to avoid a form of regulatory arbitrage.  That is, if the state laws remained the same after the federal laws go into effect, many smaller fund managers could remain unregistered.

Massachusetts, which has a current investment adviser registration exemption for certain hedge fund managers, is proposing to essentially eliminate any registration exemption for hedge fund managers, except for those managers to Section 3(c)(7) funds.  This means that if the Massachusetts proposed regulations (reprinted below) are adopted as proposed, all Section 3(c)(1) hedge fund managers in Massachussets will need to register as investment advisers in order to continue accepting assets.

Proposed Regulations Overview

There are two main parts of the new proposed rules:

1.  Change in the definition of “institutional buyer”. The current MA regulations exempt managers from the registration requirements if they only provide investment advice to “institutional buyers”.  The term “institutional buyer” currently includes hedge funds with only accredited investors who contribute at least $50,000 to the fund.  The new definition will essentially erase hedge funds from the definition of institutional buyer.  There is a grandfathering provision for managers which currently rely on the exemption; however, those managers will not be able to accept any new investors into their funds

and they will not be able to allow existing investors to add additional subscription amounts (unless the manager subsequently registers as an investment adviser).

2.  Exemption for Certain Exempt Reporting Advisers. An Exempt Reporting Adviser is a fund manager which is not registered with the SEC becasue the manager has less than $150M of AUM.  For managers that are (i) exempt reporting advisers, (ii) located in Massachusetts and (iii) provide investment advice to one or more Section 3(c)(7) funds, an exemption from registration in Massachusetts is available if:

  • The firm and the representatives are not subject to certain “disqualification” provisions
  • The firm files the Exempt Reporting Adviser form with the commonwealth of Massachusetts (probably electronically through the IARD)
  • The firm pays a fee to the Securities Division

What This Means

Essentially fund managers who are located in Massachussets will need to register with the Securities Division (unless the manager provides advice only to Section 3(c)(7) funds).  Registration generally will take about two months and the firm and representatives will face certain regulatory requirements such as maintaining a bond and taking certain proficiency exams (generally the Series 65 exam).

For other state managers, this likely means that other states will follow suit and begin to propose new regulations requiring investment adviser registration.

Comment Period

The Division of Securities is accepting comments on the proposed rules prior to promulgating final regulations.  Interested persons have until June 24 to file comments with the Division.

Below we have provided the Division’s stated reason for proposing these regulations (which can also be found here) and we have also printed the full proposed changes.

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Change in Exclusion/Exemption Requirements for Hedge Funds and other “Private Funds”

On July 21, 2010, Congress passed the most sweeping financial legislation enacted since the 1930s: the Dodd-Frank Consumer Protection and Regulatory Reform Act. The proposed amendments to the Massachusetts regulations referenced in this section are necessary to promote consistency between state and new federal requirements concerning investment adviser regulation, including regulation of “private funds.”

In part to address the elimination of the exemption for advisers with fewer than fifteen clients, the Securities and Exchange Commission (“SEC”) has proposed to exempt: 1) advisers solely to private funds with less than $150 million in assets under management, and 2) venture capital funds regardless of the amount of assets under management. The SEC has proposed to define a “private fund” as a fund that would be Investment Company under the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of the Act. This new category of “exempt reporting” advisers must submit reports to the SEC and are subject to other regulatory requirements.

Exempt reporting advisers at the federal level will still be required to either register with the individual states in which they do business, or claim an available exclusion or exemption. The North American Securities Administrators Association (“NASAA”) has proposed a private funds model rule consistent with the new Dodd-Frank requirements.

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erline;”>12.205(1)(a)(6) – Definition of Institutional Buyer

The proposed amendment to 12.205(1)(a)(6) will phase out existing subsection (b), which defined institutional buyer as including “an investing entity whose only investors are accredited investors as defined in Rule 501(a) under the Securities Act of 1933 (17 CFR 230.501(a)) each of whom has invested a minimum of $50,000.” Following the date of implementation, investment advisers will no longer be able to rely on this exemption for new beneficial owners or additional funds for existing investors. However, advisers can continue to rely upon the exemption for business that existed prior to the implementation date.

12.205(2)(c) Exemption for Exempt Reporting Advisers

The Division proposes to remove the institutional buyer exemption located in 12.205(b), and adopt an exemption in order to ensure proper regulation of investment entities whose regulatory oversight has come within the ambit of state responsibility. In its place, the Division proposes to adopt a regulation consistent with the Dodd-Frank requirements.

The proposed addition to 12.205(2) creates a registration exemption for “exempt reporting advisers.” The proposal would exempt advisers to 3(c)(7) and venture capital funds from Massachusetts registration requirements, subject to certain limitations. These exempt advisers will file the same report and amendment thereto that an exempt reporting adviser is required to file with the SEC.

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Change in Exclusion/Exemption Requirements for Hedge Funds and other “Private Funds”

Changes to the “Institutional Buyer” Exclusion in 950 CMR 12.205(1)(a)(6)

Delete the current language of 950 CMR 12.205(1)(a)(6) and replace with the following:

6. Institutional Buyer shall include any of the following:

a. An organization described in Section 501(c)(3) of the Internal Revenue Code with a securities portfolio of more than $25 million.

b. An investing entity:

i. whose only investors are accredited investors as defined in Rule 501(a) under the Securities Act of 1933 (17 CFR 230.501(a)) each of whom has invested a minimum of $50,000; and

ii. which existed prior to [effective date]; and

iii. which, as of [effective date], ceased to accept beneficial owners or additional funds for existing investors.

c. An investing entity whose only investors are financial institutions and institutional buyers as set forth in M.G.L. c. 110A, § 401(m) and 950 CMR 12.205(1)(a)6.a. and b.

Registration Exemption for Exempt Reporting Advisers

Insert a new subsection (c) into 950 CMR 12.205(2) as follows:

(c) Registration Exemption for Exempt Reporting Advisers.

1. An investment adviser who provides advice solely to one or more 3(c)(7) funds or venture capital funds shall be exempt from the registration requirements of Section 201 of the Act if the investment adviser satisfies the following conditions:

a. Neither the investment adviser nor any of its advisory affiliates are subject to a disqualification as described in Rule 262 of SEC Regulation A, Section of title 17 CFR § 230.262.

b. The adviser files with the Commonwealth each report and amendment thereto that an exempt reporting adviser is required to file with the Securities and Exchange Commission pursuant to SEC Rule 204-4, 17 CFR 275.204-4.

c. The adviser pays the fee specified in 950 CMR 12.205(2)(b)1.b.

2. A Federal Covered Adviser shall not be eligible for this exemption and shall comply with the state notice filing requirements applicable to such advisers pursuant to 950 CMR 12.205(2)(b).

3. An investment adviser representative is exempt from the registration requirements of 950 CMR 12.205(2)(d) if registration would be required solely because of employment or association with an adviser exempt from registration under this subsection (c).

4. The report filings described in paragraph 1.b. above shall be made electronically through the IARD. A report shall be deemed filed when the report required by 950 CMR 12.205(2)(a)(1) and the fee are filed and accepted by the IARD on the state's behalf.

5. This exemption shall not be available to any investment adviser when one or more of the investment adviser's private funds accepts investments from non-natural persons for the purposes of evading registration or the conditions or limitation explicitly stated in this section.

6. Definitions:

a. “Private fund” means an issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940, 15 U.S.C. 80a-3, but for sections 3(c)(1) or 3(c)(7).

b. “3(c)(7) fund” means a private fund that is excluded from the definition of an investment company under section 3(c)(7) of the Investment Company Act of 1940, 15 U.S.C. 80a-3(c)(7).

c. “Venture capital fund” means a private fund that meets the definition of a venture capital fund in SEC Rule 203(l)-1, 17 C.F.R. § 275.203(l)-1.

Renumber the current subsection (c) of 950 CMR 12.205(2) as subsection (d) Registration of Investment Adviser Representatives.

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Cole-Frieman & Mallon LLP is a boutique hedge fund law firm which provides state and SEC investment advisor registration services for hedge funds.  Bart Mallon can be reached directly at 415-868-5345.

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