California’s Response to Dodd Frank and the Repeal of the “Private Advisers” Exemption

By Charles Rogerson

The Commissioner of the California Department of Corporations is considering amending Rule 260.204.9 of Title 10 of the California Code of Regulations in response to the repeal of the “private advisers” exemption mandated by the Dodd-Frank Act. The former exemption, found in the Investment Advisers Act of 1940 (“Advisers Act”), had allowed specified investment advisers with fewer than fifteen clients in any twelve-month period to forgo SEC registration. Notably, the exemption counted each fund as a single client, not each individual investor. This exemption had a corollary in the California Code under 260.204.9. As amended by Dodd-Frank, the Advisers Act requires investment advisers with assets in excess of a specified statutory amount ($25 to $100 million) to register with the SEC.

California will likely amend its rules to be consistent with the new structure. The Commissioner has expressed an intent to balance the regulatory burden on advisers with corresponding investor protection, while also protecting California’s overriding interest in venture capital funds’ assets. California’s Silicon Valley accounts for one third of all of the venture capital investment in the United States. The Commissioner has chosen to keep the previous definition of “venture capital company” in the current rule but is now considering adopting two provisions found in the Dodd-Frank amendments. Section 203(l) provides that no individual that acts as an investment adviser solely to one or more venture capital funds needs to register with the SEC, and Section 203(m) provides a similar exemption for private funds.

If the Commissioner does decide to mirror these provisions, qualifying advisers in California would not have to register with the SEC or the state. This stands in contrast to other states where advisers will likely have to register with the state even if they do not have to register with the SEC. If California were to adopt exemptions analogous to 203(l) and 203(m), this would make California a more attractive place for venture capital fund investment, as exempt advisers would not have to with deal with the many complex and costly obligations under the Advisers Act.

As of June 16 of this year, the Commissioner implemented emergency regulations to preserve the “private advisers” exemption for an additional six months. Consequently any amended rules under the Advisers Act will likely not take effect until 2012.