Don't let the title fool you: Amended Substitute Senate Bill No. 953, "An Act Concerning Hedge Funds," would impact investment advisers to all "private investment funds" including private equity funds, venture capital funds, real estate funds and hedge funds that either have offices located in Connecticut or, significantly, that offer or sell their interests to Connecticut investors ("Subject Advisers"). Once effective, the Bill would require all Subject Advisers, regardless of such investment adviser being registered with the U.S. Securities and Exchange Commission (the "SEC"), to comply with the delivery requirements of Rule 204-3 under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), with the exception that only "material conflicts of interest of the investment adviser" must be disclosed.
The Connecticut Senate approved the Bill by a vote of 24 to 12. The Bill will now be sent to the House, where it is expected to be approved, and will then be sent to Governor Rell for veto or signature. The Bill signals a shift away from previous efforts aimed at investment adviser registration and seeks to establish a disclosure requirement that would be applicable to both Connecticut-based Subject Advisers and those out-of-State Subject Advisers availing themselves of Connecticut investors.
For purposes of the Bill, a "private investment fund" means any investment company as defined in Section 3(a)(1) of the Investment Company Act of 1940, as amended (the "Investment Company Act"):
- that claims an exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act;
- whose offering of securities is exempt under the private offering safe harbor criteria in Rule 506 of Regulation D of the Securities Act of 1933, as amended;
- that offers or sells securities in Connecticut OR has an office in Connecticut where employees regularly conduct business on its behalf; and
- that meets any other criteria as may be established by the Connecticut Banking Commissioner. Under this definition, advisers to private investment funds of all types that either have a Connecticut office or solicit investors in Connecticut would be subject to the requirements of the Bill.
The primary thrust of the Bill is to require Subject Advisers to comply with the disclosure requirements of SEC Rule 204-3. These requirements include furnishing each existing and prospective advisory client with either a copy of Part II of form ADV, or a written document containing at least the information required by Part II of Form ADV. Under Rule 204-3, the written disclosure statement must be delivered:
- not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or
- at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
In addition, an investment adviser must annually offer, in writing, to deliver upon written request to each of its advisory clients the written disclosure statement. Notably, however, beyond the delivery requirements of the Rule, a Subject Adviser is not required to disclose any information other than "material conflicts of interest of the investment adviser" – a phrase not defined in Rule 204-3 or elsewhere under the Advisers Act or regulations. If the Bill becomes effective, the Banking Commissioner is charged with developing implementing regulations that will, presumably, shed light on such issues as the timing, frequency, and extent of the disclosure delivery to advisory clients.
The Bill if adopted would go into effect on January 1, 2010, but only if, on or before December 31, 2009, either (i) the U.S. Congress has not amended the Advisers Act in a manner that regulates advisers to private investment funds, or (ii) the SEC has not adopted regulations having a similar effect. And even if neither of these contingencies is satisfied and the Bill becomes effective, no Subject Adviser will be required to comply with the disclosure requirements until the Banking Commissioner develops implementing regulations – which under the permissive language of the Bill he is not obligated to do.