Private Funds & Advisers
April proved to be a busy month for legislation. The purpose of this Compliance Alert is to flag two pieces of recent legislation that are generating significant “chatter” in the adviser community and to explain what might be expected moving forward.
First, on April 5, 2012, President Obama signed the Jumpstarting Our Business Startups Act (the “JOBS Act”). Among other provisions, the bill directs the SEC to remove the prohibition against general solicitation of transactions effected pursuant to Rule 506 of Regulation D and 144A under the Securities Act of 1933.
Rule 506 of Regulation D is the primary mechanism through which private funds conduct offers of their securities. Previously, Rule 506 provided a registration exemption to the extent a private fund did not generally solicit or advertise. Pursuant to the JOBS Act, offerings that are advertised will still be deemed private under Rule 506 so long as all purchasers of the offering are accredited investors. Issuers will be required to take reasonable steps to verify each purchaser is an accredited investor.
Private funds also rely primarily on exemptions found in Section 3(c)(1) or 3(c)(7) under the Investment Company Act of 1940 to avoid registering as an investment company with the SEC. Each of these exemptions also contains a prohibition from making a public offering of its securities; however, Section 201(b) of the JOBS Act specifies that offerings under Rule 506 “shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation.” Therefore, it appears private funds that engage in general solicitation may still qualify for the 3(c)(1) or 3(c)(7) exemptions.
Additionally, the JOBS Act directs the SEC to revise Rule 144A to allow general solicitation and general advertising of these securities provided that the securities are resold to persons reasonably believed to be ”qualified institutional buyers.”
It is not clear whether the JOBS Act will impact CFTC Rule 4.13(a)(3), which is known as the de minimis exemption that certain Commodity Pool Operators (CPOs) rely on to avoid registration with the CFTC. One important factor in Rule 4.13(a)(3) is the prohibition against publicly marketing interests in the pools. Accordingly, CPOs relying on this exemption could remain prohibited from engaging in general solicitation and advertising.
The JOBS Act directs the SEC to revise Rules 506 and 144A within 90 days from the date the bill was signed into law; thus, a Final Rule should be forthcoming by July 5, 2012. Given the concerns over the impact the revisions could have on investors, it is possible the SEC will seek to define “general solicitation” as narrowly as possible so as to limit the scope of permissible advertisements. Therefore, it is premature to speculate on the extent to which private funds will soon be able to advertise. We will update you as the SEC finalizes the rules.
INVESTMENT OVERSIGHT ACT
Second, on April 25, 2012, House Financial Services Committee Chairman Spencer Bachus introduced the Investor Advisor Oversight Act of 2012. The bill would require all SEC and state-registered investment advisers to become members of an investment adviser self-regulatory organization (SRO). However, the newly introduced bill includes exemptions for investment advisers with primarily high net worth or institutional clients, including advisers with at least one mutual fund client.
Regardless, the SRO legislation is in its infancy. Even if the bill does make it through the House, there is no guarantee the Senate will address the issue in the near future. However, because of the significant impact an SRO would have on the adviser industry, we will continue to monitor the legislation closely and keep you informed of any significant developments.