Massachusetts Is Looking to Dodd-Frank Investment Advisers and Fund Managers

Just to keep you on your toes if you have less than $150 million under management, states are now filling in the gaps left by Dodd-Frank. If you are under that threshold, you lose the ability to register with SEC and now have to look to at being regulated at the state level.

Massachusetts used to have a very broad exemption if your clients were all "institutional buyers."

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.

For a private fund manager, this was a great exemption since their investors would need to be accredited investors. As long they kept capital commitments at a minimum of $50, 000 they could usually take advantage of this exemption.

The Massachusetts Secretary of State has proposed removing this exemption as well as cleaning up other aspects of investment adviser/fund manager regulation to get ready for Dodd-Frank.

The proposal would also create new Massachusetts registration exemptions for advisers whose only clients are "venture capital funds" or funds excluded from the definition of "investment company" under Section 3(c)(7) of the Investment Company Act. As you might expect, the term "venture capital fund" would be defined by reference to the SEC's definition of the term. The SEC has proposed a draft definition of venture capital fund, but not yet finalized it.

What is abundantly clear is that the SEC has run out of time it trying to meet the July 21, 2011 deadline in Dodd-Frank. It's time to raise the white flag and move the deadline. Since the SEC has not yet finalized the rules, regulated parties would have no time to understand the rules and get changes in place by July 21. Given that thousands of advisers are being kicked out of SC registration and over to state registration, the states do not have the rules in place to deal with the regulatory changes.

Sources:

• 950 CMR 12.200 (.pdf) - Registration of Broker-Dealer, Agents, Investment Adviser, Investment Adviser Representatives and Notice Filing Procedures for Federal Covered Advisers
• Changes to the "Institutional Buyer" Exclusion in 950 CMR 12.205(1)(a)(6)
• Massachusetts Proposes Private Adviser Exemption to Coordinate with Dodd-Frank Act in Jim Hamilton's World of Securities Regulation
• Massachusetts Proposes Revised Investment Adviser Registration Exemptions in Goodwin Procter's Financial Services Alert

For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.

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