Pillsbury’s Investment Fund and Investment Management group recently submitted comment letters to the California Corporations Commissioner (the Commissioner) and the North American Securities Administrator’s Association (NASAA) on behalf of the private investment fund industry.
Specifically, the letter to the Commissioner was intended to seek clarification regarding the application of California’s securities license requirements for investment adviser representatives (IARs) of SEC-registered investment advisers and the letter to the NASAA was intended to provide comments regarding the proposed model custody rule of the NASAA that was released on February 17, 2011.
In its letter to the Commissioner, Pillsbury sought clarification regarding the application of California Section 260.236 to the IARs of SEC-registered investment advisers located in California. Section 260.236 requires IARs in California to pass the Series 65 examination or qualify for an exemption or a waiver. Section 260.236 seems to suggest that the supervised persons of SEC-registered investment advisers whose investors are all "qualified clients," as defined in Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), would not be IARs under California Section 25009.5(b), and, accordingly, the requirements of Section 260.236 would not apply to the SEC-registered adviser’s supervised persons. As a practical or business matter, most investment advisers only accept qualified clients as investors, because a performance fee may only be assessed on the assets of qualified clients.
Pillsbury contended that if an investment adviser is interacting with retail investors, it may be appropriate for the State of California to require some minimum licensing standards for an investment adviser’s IARs. However, if an investment adviser limits its interaction to non-retail investors in a private offering, such licensing standards should not be imposed. Pillsbury further urged the Commissioner to consider during his review of California’s investment adviser registration and licensing requirements (which we believe is currently ongoing) how those requirements may be made more business-friendly without compromising investor protection.
Pillsbury’s letter to the NASAA was written in response to the NASAA’s request for comment regarding its proposed revision to the model rules on NASAA Custody Requirements for Investment Advisers (the “Proposed Rule”). The letter requested that NASAA reconsider requiring state-registered investment advisers to hedge funds and other private investment funds to provide detailed quarterly statements of all fund trading activity to all investors in their funds. In Pillsbury’s view, this requirement falls seriously short of both protecting and advancing the interests of investors in such funds.
As written, the Proposed Rule would require state-registered investment advisers to unregistered pooled investment vehicles (i.e., private investment funds) to provide all fund investors with a list of all trading activity by the fund during the previous quarter. Pillsbury contended that disclosing such information amounts to a requirement that investment advisers disclose their trade secrets. A fund adviser’s trade secret is how it turns an easily described strategy into competitively differentiated results, and these trade secrets are expressed in the record of an adviser’s actual trade activity and positions over time. Pillsbury strongly urged the Director to consider revising the Proposed Rule so that it is analogous to the Securities and Exchange Act’s custody rule (i.e., Rule 206(4)-2 of the Advisers Act).
Pillsbury will continue to monitor this and other regulatory developments that affect investment advisers and their investment funds and stands ready to take appropriate action to ensure that the laws and regulations purporting to protect investors are not unduly burdensome for investment advisers and the investment fund industry.
