The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) repeal of the private adviser exemption could eliminate the ability of some California fund managers to charge performance fees (often referred to as the manager’s carried interest).
Effective July 21, 2011, private equity, venture capital and hedge fund managers will no longer be able to rely upon Section 203(b)(3) of the Investment Advisers Act of 1940 as an exemption from the investment adviser registration requirements. Under that exemption, managers with fewer with 15 clients and who do not hold themselves out to the public as investment advisers are not required to register as investment advisers with the SEC. Instead, private fund managers with $150 million or more in assets under management will be required to register with the SEC or rely upon new exemptions for venture capital funds advisers, foreign private advisers, SBIC advisers and family offices.
That leaves state registration requirements for private fund managers with less than $150 million under management. In California, private fund managers have often relied upon Rule 260.204.9, which exempts from California's registration requirement fund managers relying on the Section 203(b)(3) exemption, if they don't hold themselves out generally to the public as investment advisers; have fewer than 15 clients; and either have at least $25 million in assets under management or provide investment advice only to venture capital companies (as defined). The California Commissioner of Corporations recently announced that he is considering amending Rule 260.204.9 in light of the changes to the federal Advisers Act.
It is possible that the Commissioner will adopt amendments that will require private fund managers with less than $150 million in assets to register with the state. As California registered investment advisers, they will be subject to the prohibition on performance compensation in Corporations Code Section 25234 , unless exempt under Rule 260.234 or the Commissioner adopts grandfathering or other protection to existing fund managers.
Private fund managers, particularly those that have been relying on the Section 203(b)(3) and Rule 260.204.9 exemptions, should have a strong interest in these changes because they may affect both their registration status and their ability to receive performance fees.
