Source: https://www.ssb.texas.gov/texas-securities-act-board-rules/board-rules/recent-changes-board-rules/march-31-2014
Timestamp: 2019-04-19 17:06:18+00:00

Document:
The Texas State Securities Board adopts an amendment to §109.6, concerning investment adviser registration exemption for investment advice to financial institutions and certain institutional investors, with changes to the proposed text as published in the October 4, 2013, issue of the Texas Register (38 TexReg 6778). The text in subsection (e) was changed to a date certain (March 31, 2014) to coordinate the adoption of this amendment and new §139.23 with the SEC filing deadline for annual amendments to Form ADV.
The amendment coordinates with new §139.23, a registration exemption for investment advisers to private funds, which is being concurrently adopted. The exclusion from the exemption in subsection (c) for advisers to "private funds" is removed and language added to reference the new §139.23 exemption for private fund advisers. A grandfathering provision is added as new subsection (e) to allow an investment adviser currently relying on §109.6 as it now exists for advisory services rendered to a "private fund" (as defined in new §139.23) to continue using the exemption in certain circumstances - if the private fund was in existence on March 31, 2014, and the private fund ceases to accept new beneficial owners.
The preamble for the published proposal clarified that the following would not be considered "new beneficial owners": donees of gifts (where the donor is a natural person, and the donee is either a natural person family member of donor (or an entity composed only of such family members, i.e., trusts, etc.) or is an IRC 501(c)(3) charitable organization); a successor who received the interest due to an involuntary transfer (examples would be legal separation, divorce, death, devise, bankruptcy, or receivership); or a "knowledgeable employee" of the issuer or adviser who replaces a departing knowledgeable employee.
The exemption is preserved for investment advisers who currently come within its provisions.
The Board received a comment letter on the proposal from members of the subcommittee of the Securities Law Committee of the Business Law Section of the State Bar of Texas. The letter expressed support for the amendment to §109.6. The Board agreed and adopted the amendment substantially as published.
The amendment is adopted under Texas Civil Statutes, Articles 581-5.T, 581-12.C, and 581-28-1. Section 5.T provides that the Board may prescribe new exemptions by rule. Section 12.C provides the Board with the authority to prescribe new dealer, agent, investment adviser, or investment adviser representative registration exemptions by rule. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The adopted amendment affects Texas Civil Statutes, Articles 581-5, 581-12, 581-12-1, and 581-18.
§109.6. Investment Adviser Registration Exemption for Investment Advice to Financial Institutions and Certain Institutional Investors.
(3) a corporation, partnership, trust, estate, or other entity (excluding individuals) having net worth of not less than $5 million, or a wholly-owned subsidiary of such entity.
(c) Exclusions from exemption. There is no exemption under this section for an investment adviser providing investment advisory services to a natural person. A private fund adviser, as that term is defined in §139.23 of this title (relating to Registration Exemption for Investment Advisers to Private Funds), may not rely on this exemption except as provided in subsection (e) of this section.
(d) Financial statements. For purposes of determining an institutional investor's total assets or net worth under this section, an investment adviser or investment adviser representative may rely upon the entity's most recent annual balance sheet or other financial statement which shall have been audited by an independent accountant or which shall have been verified by a principal of the institutional investor.
(3) as of March 31, 2014, the private fund ceases to accept new beneficial owners.
The Texas State Securities Board adopts new §139.23, concerning registration exemption for investment advisers to private funds, without changes to the proposed text as published in the October 4, 2013, issue of the Texas Register (38 TexReg 6786).
This is a new registration exemption for investment advisers to private funds. A related amendment to §109.6, concerning investment adviser registration exemption for investment advice to financial institutions and certain institutional investors, is being concurrently adopted. Both the amendment to §109.6 and new §139.23 will take effect on March 31, 2014, to allow advisers affected by the changes to make an orderly transition and prepare and make any filings necessitated by the changes.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203 ("Dodd-Frank"), made substantial changes to the regulation of private funds. Dodd-Frank mandated Securities and Exchange Commission ("SEC") registration for investment advisers to private funds if they have assets under management of at least $150 million and subjected them to recordkeeping and disclosure requirements.
The SEC provides an exemption from the registration requirements under the Investment Advisers Act of 1940 for an investment adviser that acts solely as an adviser to private funds and has assets under management of less than $150 million. Although exempt from federal registration, these advisers must file reports with the SEC and are called "exempt reporting advisers." The new exemption extends this filing requirement to private fund investment advisers who utilize the exemption so that the Agency has comparable information on advisers using the exemption. Alternatively, some investment advisers to private funds with assets under management of more than $100 million can opt to register with the SEC.
The Form ADV filing required under subsection (b)(1) would be made on a comparable schedule as an exempt reporting adviser making the Form ADV filing with the SEC. Form ADV, General Instruction number 13, requires this filing to be made within 60 days of the adviser relying on §203(m) of the Investment Advisers Act because the adviser acts solely as an adviser to private funds. An adviser who is registered must file a Form ADV-W to withdraw from registration before submitting the first report as an exempt reporting adviser. No filing fee is imposed on either the investment advisers or their representatives who qualify for the exemption.
The exemption in §139.23 ceases to be available for an investment adviser once the adviser becomes registered with the SEC. At that point, the adviser makes a notice filing in Texas. As with other investment adviser exemptions, the adviser's representatives whose activities are similarly limited are covered by the adviser's exemption from registration. Although the exemption does not specifically address the disclosures that must be made by the exempt investment adviser, the general antifraud provisions of the Texas Securities Act would apply.
The exemption contains bad-actor disqualifications applicable to the investment adviser and to its advisory affiliates and imposes additional restrictions on advisers to 3(c)(1) funds.
Transparency will be enhanced for investment advisers who no longer qualify for the exemption contained in §109.6.
The Board received a comment letter on the proposal from members of the subcommittee of the Securities Law Committee of the Business Law Section of the State Bar of Texas. The letter expressed support for new §139.23. The Board agreed and adopted the rule as published.
The new rule affects Texas Civil Statutes, Articles 581-5, 581-7, 581-12, 581-12-1, and 581-18.

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