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Another nugget from Keith Bishop, a former Commissioner of California’s Department of Corporations: Recently, the Department of Corporations issued a proposed rule that would require the registration of hedge fund advisers under California’s Corporate Securities Law of 1968 (the “CSL”). As you might expect, there is a bit of history to this new proposal.

In 1971, the Department issued Policy Letter No. 151 (the “1971 Letter”) indicating that a general partner of a single limited partnership would not have to be licensed as an “investment adviser” under the CSL. The basis of the 1971 letter was the Department’s view that a general partner is, in effect, giving advice to itself rather than to “others” as required under Section 25009 of the CSL. The 1971 Letter had generally been relied on by California-based general partners of venture capital companies (“VCCs”) seeking an exemption from licensing in California as an investment adviser.

In April 1998, the Department issued Release No. 110-C (the “1998 Release”), which essentially revoked the 1971 Letter. In the 1998 Release, the Department indicated that the position taken in the 1971 Letter was contrary to the treatment of investment advisers by the SEC under the Investment Advisers Act of 1940.

I was no longer Commissioner and objected strongly to the Department’s revocation of the 1971 Letter on a number of grounds. In particular, I was concerned with the effect on general partners of VCCs. At my urging, the Department in 2002 adopted Rule 260.204.9 which exempts any investment adviser that:

– Does not hold itself out generally to the public as an investment adviser;
– Has fewer than 15 clients;
– Is exempt from registration under the Federal Advisers Act by virtue of Section 203(b)(3) of that act; and either has “assets under management” of not less than $25 million or provides investment advice to only “venture capital companies,” as defined in the rule.

In 2004, the SEC adopted a new rule (Rule 203(b)(3)-2) and rule amendments to require advisers to certain private investment pools (aka “hedge funds”) to register with the SEC under the Advisers Act. Prior to that time, these hedge fund advisers relied upon the so-called “private adviser” exemption set forth in Section 203(b)(3) of the Advisers Act. That section exempts advisers who (i) has had fewer than fifteen clients during the preceding twelve months, (ii) does not hold itself out generally to the public as an investment adviser, and (iii) is not an adviser to any registered investment company.

Two years later, the DC Circuit in Goldstein v. Securities and Exchange Commission vacated the regulatory framework for hedge fund advisers established by the SEC through its adoption of Rule 203(b)(3)-2 and related amendments. As a result hedge fund advisers can now rely again on the Section 203(b)(3) exemption from the federal registration requirements. The DOC’s rule currently exempts these advisers if they have assets under management of not less than $25 million (i.e., above the threshold for federal registration).

The Department’s proposal represents an attempt to refill the lacuna in regulation that resulted from the Goldstein decision. For those advisers that deregistered under the Advisers Act or who have not registered with the SEC since the Goldstein decision, the Department’s rule would require state-level registration. The comment period for the Department’s proposal ends on November 26, 2007. Here is the Department’s notice, proposed text and initial statement of reasons.

Remember that the SEC adopted IA Rule 206(4)-8 in August. This rule prohibits advisers to pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles.

FINRA/NASD’s Fairness Opinion Proposal: Finally Final

After a long wait – and four amendments – the SEC has issued an Order approving FINRA (formerly NASD) Rule 2290 on an accelerated basis (this rule was first proposed in mid-’05). As noted in Amendment No. 4, Rule 2290 addresses disclosures and procedures in connection with the issuance of fairness opinions by a broker/dealer firm. In that amendment, FINRA stated that it will announce an effective date for the new rule in a Notice to Members to be published no later than 60 days following the SEC’s approval and that the effective date will be 30 days following publication of the Notice, so we should know that date soon. Look for a DealLawyers.com webcast on fairness opinions coming soon…

Rep. Barney Frank Opposes a SEC Vote on Shareholder Access

Here is an excerpt from a Tuesday Dow Jones article: “The Securities and Exchange Commission should not vote this year to finalize a rule on a controversial shareholder-democracy issue, and it runs the risk of being overturned by Congress if it does, House Financial Services Committee Chairman Barney Frank said Tuesday.

Frank, Democrat-Mass., said it would be ‘a great mistake’ for the SEC to act on such issues without a full complement of Democrats on the five-member commission. He added that it’s possible Congress could act this year to suspend any SEC action on proxy access.

SEC Chairman Christopher Cox last week reiterated plans to have the commission vote this year to clarify whether shareholders should be able to propose proxy-access measures, allowing them to place the names of their own candidates for corporate boards on company proxy ballots.”

– Broc Romanek