Securities Advisory Releases
Advisory Release AR-11-04:
Commissioner of Securities Issues No-Action Determination to Missouri Investment Adviser Previously Exempt under Investment Advisers Act of 1940 Section 203(b)(3) and MO 15 CSR 30-51.180(6)
The Commissioner of Securities for the State of Missouri (the “Commissioner”) is issuing this advisory release to alert Missouri’s investment advisers of a recent no-action determination in connection with the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) 1 on Missouri’s investment advisers.
On June 22, 2011, the Securities and Exchange Commission (“SEC”) adopted rules implementing provisions of the Dodd-Frank Act that require some advisers to hedge funds and other private funds to register with the SEC. Consequently, the exemption from registration under section 203(b)(3) of the Investment Advisers Act of 1940 that such advisers may have relied upon no longer exists. Specifically, advisers to investment entities excluded from the definition of “investment company” under sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (“3(c)(1) and 3(c)(7) funds”), which typically rely on the section 203(b)(3) exemption, are no longer exempt from registration.
The Effect of the SEC’s Adoption of New Registration Rules on Investment Advisers in Missouri
The elimination of section 203(b)(3) not only impacts federal securities laws, but Missouri securities laws as well. Under MO 15 CSR 30-51.180(6) (the “Private Fund Adviser Exemption”), investment advisers are exempt from registration in Missouri if they meet two conditions: (1) the adviser provides advice to 15 or fewer clients, and (2) the adviser is exempt under section 203(b)(3). Because section 203(b)(3) is no longer effective, the second prong of the Private Fund Adviser Exemption is no longer available, and the Private Fund Adviser Exemption is no longer relevant. As a result, investment advisers relying on that exemption from state registration, that is, advisers to 3(c)(1) and 3(c)(7) funds, are required to either register or find another exemption to operate under.
Interactions with Missouri’s IA Community
In the months leading up to the SEC’s adoption of this new rule, the Commissioner began preparing for the rule’s impact on the regulation of Missouri’s investment advisers. In response to the SEC’s proposed changes, the Commissioner published information on a website developed to serve entities affected by the changes and to provide regulatory direction to those entities. However, because the Private Fund Adviser Exemption requires no filing with the state, it remained unclear how many advisers would be affected and who those advisers were. In an effort to reach out to the investment adviser community, the Commissioner met across the state with advisers, attorneys, and other interested parties, discussing the regulatory impact on advisers, and more specifically advisers to 3(c)(1) and 3(c)(7) funds.
EdgeHill’s Letter & Commissioner’s No-Action Determination
On July 18, 2011, EdgeHill Capital Partners, LLC (the “Adviser”), a Missouri investment adviser, submitted a request for a no-action determination. According to that letter, the Adviser advises entities excluded from the definition of an investment company under section 3(c)(1) of the Investment Company Act of 1940, qualified for the exemption at section 203(b)(3) of the Investment Advisers Act of 1940, and therefore is neither federally nor state registered. Further, the Adviser’s submission asserted that the Adviser qualified for the Private Fund Adviser Exemption and requested that the Commissioner not take enforcement action against the Adviser if the Adviser continued its investment advisory business in accordance with the Private Fund Adviser Exemption without registering as an investment adviser.
The Commissioner responded to the Adviser’s request on July 20, 2011 by issuing a no-action determination in accordance with section 409.6-605(d), RSMo. (Cum. Supp. 2010). The no-action determination asserts that the Commissioner, based solely on the representations the Adviser made in its request, will take no action against the Adviser if it continues its advisory business consistent with the representations made in its request, prior to the sooner of June 28, 2012, or the promulgation of a state regulation similar to the Private Fund Adviser Exemption and available to the Adviser.
The Commissioner has received additional similar inquiries from advisers to section 3(c)(1) funds who were exempt under the Private Fund Adviser Exemption. To date, the Commissioner has not received any request, inquiry or communication related to a no-action determination from an adviser to a section 3(c)(7) fund.
If you have any questions, please contact the Securities Division at (573) 751-4136, or for more information on the impact of Dodd-Frank on securities regulation in Missouri, visit: http://www.sos.mo.gov/securities/iaswitch/
July 20, 2011
1 Dodd-Frank Wall Street Reform and Consumer Protection Act, section 410, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”).