The Nebraska Department of Banking and Finance has proposed new regulations related to the registration of investment advisers. The regulations will establish a private fund adviser exemption from registration. The regulations were the subject of a rulemaking hearing held on January 7, 2016. There was no opposition to the regulations at the hearing and the regulations are expected to be adopted in the spring or summer of 2016.
The regulations are a welcome change in Nebraska for the advisers to hedge funds and other private funds. The general partners and managers of these funds are typically regulated as investment advisers under federal or Nebraska law (depending on the size of the fund). Currently, there is no exemption for advisers to private funds under Nebraska law. Any private fund adviser in the State of Nebraska must register with the Nebraska Department of Banking and Finance unless it is registered with the U.S. Securities and Exchange Commission (the “SEC”). The regulations in Nebraska are similar to the federal exemptions put in place under the Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Congress in July 2010.
The Nebraska regulations will establish a private fund adviser exemption from registration for advisers whose only clients are “qualifying private funds” and who are not otherwise subject to certain disqualification events. Private fund advisers who satisfy the requirements set out in the regulations will be exempt from registration, but will be required to file with the state the same reports and amendments as are required by the SEC of exempt reporting advisers.
“Qualifying private funds” is defined by reference to Rule 203(m)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”) and generally means any private fund that is not registered under the Investment Company Act of 1940 (the “Investment Company Act”) in reliance on an exemption under Section 3 of the Investment Company Act, including 3(c)(1) and 3(c)(7) funds (as defined under the Investment Company Act).
Under the Investment Company Act, all investors in a 3(c)(7) fund must be “qualified purchasers”, which is generally defined to include individuals with at least $5 million in investments and entities with at least $25 million in investments.
Advisers to 3(c)(1) funds (other than venture capital funds) must, in addition to the above reporting obligations, satisfy the following conditions in order rely on the exemption for private fund advisers: (i) all investors in the fund must be “qualified clients”; (ii) at the time of an investor’s subscription, the adviser must disclose in writing the services and duties provided or owed (or a lack thereof) as well as any other material information affecting the rights and responsibilities of the investors; and (iii) the adviser must obtain and deliver audited financial statements to each investor on an annual basis.
“Qualified client” is defined by reference to Rule 205-3 of the Advisers Act and generally means an investor with $2 million in net worth (excluding the value of the investor’s primary residence absent certain circumstances) or $1 million under management of the adviser.
“Venture capital fund” is defined by reference to Rule 203(1)-1 of the Advisers Act.
The private fund adviser exemption is available for a 3(c)(1) fund that was in existence prior to the effective date of the regulation; provided that such fund ceased to accept any non-qualified clients as new beneficial owners as of such date, and the adviser complies with the disclosure and audited financial statements requirements for 3(c)(1) funds referenced above.
Under the Nebraska regulations, a person will also be exempt from the investment adviser representative registration requirements if he or she is employed by or associated with an exempt private fund adviser.