The Massachusetts Securities Division has amended proposed rules relating to the regulation of investment advisers. We outlined the previous proposals in our April 21, 2011 Foley Adviser - " Massachusetts Secretary of State Proposes New Regulations for Investment Advisers in response to Dodd-Frank Act."
The amended proposal, after consideration of previously submitted public comments, makes substantive changes to (i) the definition of "institutional buyer," (ii) the proposed private fund adviser exemption (including the introduction of a grandfathering provision), and (iii) requirements for advisers with discretion over, or custody of, client funds.
Proposed Change to the Definition of Institutional Buyer
Currently, Massachusetts exempts from registration any investment adviser whose only clients are "institutional buyers," including pooled investment vehicles in which each investor is "accredited" and has invested at least $50,000. The amended proposal would phase out the exemption provided to advisers of such funds by limiting it to advisers whose funds existed prior to the effective date of the regulations and which, as of the effective date of the regulations, ceased to accept new investors. Such funds would be permitted to accept additional investments from investors that were in the fund as of the effective date of the regulation.
This exemption would be unavailable to advisers to private funds that come into existence after the effective date or that remain open to new investors.
Proposed Private Fund Exemption
Massachusetts' original proposed new exemption for advisers would have conditionally exempted from registration advisers whose only clients were 3(c)(7) funds and venture capital funds. The original Massachusetts proposal did not provide for an exemption for advisers to 3(c)(1) funds. Massachusetts' amended proposal would now exempt advisers to 3(c)(1) funds from registration where the fund investors are all "qualified clients", as defined by the Investment Advisers Act of 1940. Generally, an investor with a $2 million net worth or $1 million under management of the adviser is a "qualified client." The amended proposal would require the value of the beneficial owner's primary residence to be excluded from the net worth calculation.
As an additional condition of the exemption from registration, advisers to 3(c)(1) funds would have to disclose in writing at the time of the investor's subscription the services and duties provided...