Changes to Minnesota Investment Adviser Regulation for Investment Advisers and Private Fund Managers

October 1, 2013

By Lisa Holter

New legislation effective August 1 changes the registration requirements and exemptions for investment advisers and representatives in Minnesota, and will likely affect managers of private funds. Investment advisers and fund managers who have less than $100 million in assets under management, or who advise only private funds with less than $150 million in assets under management, will need to comply with new state exemptions or register with Minnesota.

Changes in Registration and Exemptions for Investment Advisers and Managers of Private Funds

Previously, an investment adviser or fund manager could be exempt from registration in Minnesota if its clients were either institutional investors or accredited investors. These exemptions are no longer available. A new private fund adviser exemption is available for investment advisers and fund managers whose only clients are one or more qualifying private funds, provided that the following criteria are met:

  • Any qualifying private funds (other than venture capital funds) which are exempt under Section 3(c)(1) of the Investment Company Act must only be offered to qualified clients. Generally, qualified clients (a) are individuals who have at least $1 million under the management of the investment adviser; (b) have $2 million in net worth (including, for individuals, with a spouse, but excluding the value of a principal residence); or (c) meet the qualified purchaser definition in Section 2(a)(51)(A) of the Investment Company Act (generally having investible assets of $5 million).

  • Offering materials for each private fund disclose services to be provided to individual owners, duties the investment adviser owes to the fund’s owners, and any other material information.

  • Each fund (with certain exceptions) has audited financial statements prepared and delivered to its owners annually.

  • The adviser or fund manager must annually file with the State of Minnesota the same reports that an exempt reporting adviser is required to file with the SEC pursuant to SEC Rule 204-4. Generally, exempt reporting advisers are required to complete certain items of Form ADV. For advisers relying on the new exemption, then the filing would need to be made within 60 days, or by September 30.

The law provides some grandfathering for investment advisers to 3(c)(1) funds with non-qualified clients, if the following conditions are satisfied: (a) the fund existed before the legislation became effective, (b) the fund stops accepting new investors who are not qualified clients, (c) the disclosures with regard to services and duties are made to all beneficial owners and (d) financial statements are provided as required. Thus, these funds can continue to accept investments from current investors who are not qualified clients, however only qualified clients may make new investments.

Other existing exemptions for investment advisers will continue to be available under the revised law.

Regulations Regarding Investment Adviser Representatives

Investment adviser representatives (IARs) must register with Minnesota by completing Form U-4 and include evidence that the individual has taken and passed either (a) the Series 65 exam, or (b) the Series 7 and Series 66 exams. The registration process will involve using the IARD system. The MN Department of Commerce has been advised by FINRA that the system will not be ready to accept new Investment Adviser Representative registrations until at least the last week of October 2013.

Professional designations of CFP, CHFC, CFA, PFS and CIC will be accepted in lieu of the examinations. Representatives who are registered in other states and have passed the required tests will be automatically registered. The Minnesota Department of Commerce indicates IARs will have 90 days to become registered, effective November 1, 2013. The Department will waive the testing requirement for individuals who are employed as IARs as of August 1, but all individuals hired after will need to register and either meet the qualifying exams or have a current professional designation. Formal adoption of the Department’s position is expected in the next few weeks.

New Regulation of Funding Portals

Funding portals that have a principal place of business in Minnesota must register with the State of Minnesota. Information that is required to be filed with FINRA and/or the SEC for registration of the funding portal is the same information that must be filed with the State of Minnesota.