Compliance Solutions for Investment Advisers

Proposed Changes to Massachusetts Adviser Regulations

On April 21, 2011, the Massachusetts Securities Division released for comment proposed regulations that would affect registered investment advisers operating in Massachusetts.

Investment Adviser Discretion and Custody Requirements

The Division proposes to modify the minimum financial requirements for investment advisers found at 950 CMR 12.205(5). The proposal would remove the option of maintaining a segregated account instead of a bond, raise the bonding requirement for discretion to $50,000.00, and remove the bonding requirement for custody. In addition, advisers with custody would be required to comply with Advisers Act Rule 206(4)-2, the SEC’s safekeeping requirements.

Use of Expert Network Consultants

The Division proposes to add a new section under 950 CMR 12.205(9)(c)(16) to the existing list of dishonest and unethical practices in order to address the rising use of expert network firms by investment advisers.

Some investment advisers have paid expert networks and consultants to access confidential information about publicly traded companies. The rise of expert network firms, and the number of abuses which have been addressed by regulators, make it clear that additional measures are required to ensure that confidential information is not being accessed and traded upon. The Division’s proposed regulations, while not altering investment advisers’ existing duty not to trade on insider information, seek to provide investment advisers with greater clarity as to what is impermissible conduct when paying consultants for information.

Change in Exclusion/Exemption Requirements for Hedge Funds and other “Private Funds”

On July 21, 2010, Congress passed the most sweeping financial legislation enacted since the 1930s: the Dodd-Frank Consumer Protection and Regulatory Reform Act. The proposed amendments to the Massachusetts regulations referenced in this section are necessary to promote consistency between state and new federal requirements, including regulation of “private funds.”

12.205(1)(a)(6) – Definition of Institutional Buyer

The proposed amendment to 12.205(1)(a)(6) will phase out existing subsection (b), which defined institutional buyer as including “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.” Following the date of implementation, investment advisers will no longer be able to rely on this exemption for new beneficial owners or additional funds for existing investors. However, advisers can continue to rely upon the exemption for business that existed prior to the implementation date.

12.205(2)(c) Exemption for Exempt Reporting Advisers

The Division proposes to adopt an exemption in order to ensure proper regulation of investment entities whose regulatory oversight has come within the ambit of state responsibility. ┬áThe proposed addition to 12.205(2) creates a registration exemption for “exempt reporting advisers.” The proposal would exempt advisers to 3(c)(7) and venture capital funds from Massachusetts registration requirements, subject to certain limitations. These exempt advisers will file the same report and amendment thereto that an exempt reporting adviser is required to file with the SEC.

 

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