California Files Final Amendments to Private Fund Adviser Exemption

August 7, 2012 § 3 Comments

The California Department of Corporations has submitted its final amendments for rules creating a new exemptive framework for advisers to private funds. Once effective, the revised rule would permit advisers to private funds to file as “exempt reporting advisers” (ERAs) rather than undergoing full investment adviser registration. The rule is subject to review by the California Office of Administrative Law which generally has thirty business days to act. That review period will expire in late August 2012.

In brief, ERAs will be required to file only certain informational portions of Form ADV. They will not be required to prepare or file Part 2 brochures nor, apparently, will they be subject to the state’s minimum net capital requirement. The SEC has indicated that its expects to conduct only “for cause” examinations, not routine examinations, of exempt reporting advisers under its jurisdiction. California has not indicated whether they will follow this policy. Investment adviser representatives associated with ERAs will likewise be exempt from state qualification standards (e.g., Series 65 examination).

To qualify as an exempt reporting adviser, a fund manager must satisfy the following conditions:

  • the manager provides advisory services only to 3(c)(1) or 3 (c)(7) funds;
  • the manager is not subject to certain federal or state regulatory disqualifications;
  • the manager pays California’s investment adviser registration and renewal fees.

For each 3(c)(1) fund that the manager advises, the following additional conditions are required:

  • each of the fund’s investors are accredited investors;
  • the manager provides certain financial and organizational disclosures;
  • the fund provides audited financial statements within 120 days following the end of each fiscal year
  • any performance-based fees are charged only to investors meeting the qualified client standard.



Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433.

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