Strictly Business is a business law blog for entrepreneurs, startups, venture capital, and the private fund industry. The author is Alexander J. Davie, an attorney at Riggs Davie PLC based in Nashville, Tennessee. His practice focuses on corporate, securities, and business law.
New investment advisers are typically focused on creating marketable investment programs and raising capital. Legal matters are often delegated to outside counsel and the adviser’s investment in operations, staffing and compliance is often kept at a minimum to start. While this strategy may make sense on a budgetary level, new advisers need to devote some attention to inevitable operational issues in order to minimize their cost and disruption. At the top of this list is the issue of trade errors.
Trade Errors Are Not Rare
Most new advisers assume that trade errors will not occur. While such optimism is widespread, it is unjustified. All firms, across the spectrum of size, structure, and investment programs, run the risk of trade errors. New advisers, which are simultaneously implementing a multitude of business functions required for launch, typically on a tight timeline, face a higher risk of these types of operational fails. The best way for advisers to minimize the costs of trade errors is to accept that such errors occur and create a sound plan of action for when they do.
What Is a Trade Error?
Before an adviser can prepare for trade errors, it must first consider the variety of actions which constitute a trade error. Examples include: buying or selling the wrong security, buying or selling the wrong amount of a security, buying instead of selling a security, executing at the wrong price, trading in the wrong account, violating a client’s investment program or trading restrictions, duplicating trades, and allocating incorrectly among clients, among other errors.
The list of trade errors is not finite and is subject to broad interpretation. As a result, an adviser may need to consult with counsel on whether a particular trade constitutes a trade error before determining the firm’s appropriate course of action.
Who Cares About Trade Errors? Investors and Regulators!
Most new advisers tune in to the significance of trade errors through their interactions with prospective investors and regulators. A standard investor due diligence request includes the question: “Please describe in detail any trade errors you have had and how they were addressed.” Even if an adviser denies having any trade errors, it should be prepared for further questions. A typical follow-up question is: “What are the types of trade errors you would expect in this strategy and what efforts do you take to avoid them?”
If a firm has had trade errors, investors will want to understand the frequency, magnitude and causes of such trade errors, and whether the fund or the adviser bore the related losses. While an adviser may try to demur on such questions, it runs the risk of losing prospective investors. To investors, how a firm handles trade errors is a measure of the firm’s competence and integrity.
The SEC and other regulators similarly devote a significant amount of attention to trade errors. The SEC’s list of exam priorities has consistently included trade errors. This means when the SEC or other regulator comes to examine an adviser and look for compliance deficiencies, it will take actions such as: (a) requesting a list of the firm’s trade errors and how they were addressed, (b) questioning whether such errors were handled in accordance with the adviser’s policies and fiduciary duties, (c) scrutinizing trade records for unreported trade errors, (d) requiring an adviser to reimburse one or more funds for losses caused by specific trade errors, or (e) referring material violations to the SEC’s Division of Enforcement. In sum, advisers have every incentive to be well versed in the topic of trade errors and take every action to prevent them.
What are Trade Error Best Practices for Private Fund Advisers?
While securities laws do not specifically require investment advisers to have a written policy addressing trade errors, it is the generally accepted practice. In creating a trade error policy, an adviser is expected to consider the specific investment strategies and operational systems it uses and customize the policy according to the particular risks presented. Factors to consider are: the types of securities traded, the frequency of trades, the types of counterparties used, how such trades are effected and reported, and the efficacy of operational checks at the firm, among others. Thus, an adviser specializing in high-volume automatic algorithmic trading will have very different trade error risks than an adviser who primarily manages private equity funds or hybrid hedge / private equity funds. Such firms will therefore have materially different trade error polices.
Despite the customization required for trade error policies, some common elements pervade most policies. For example, most trade error policies require that (a) a trade error be promptly reported, (b) immediate action be taken to correct a trade error, to the extent possible, (c) the adviser reimburse client losses in certain circumstances, (d) the Chief Compliance Officer or other supervisor create a detail report documenting the error and how the firm addressed it, and (e) the firm’s employees be trained on the subject.
Many advisers feel their work is done after creating their policy. However, nothing could be further from the truth. Once an adviser has created a customized trade error policy for its specific business, it must take steps to ensure that the policy is consistently followed. A firm that has a trade error policy (or other policy) which is not followed or respected risks its standing with regulators and investors, which ultimately puts its business at risk. Thus, creating a trade error policy is one of many important steps a private fund adviser must take to ensure a “culture of compliance” which protects client assets and the adviser’s business.
This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
One of the first questions that new private fund advisers often ask me is whether they will need to “register” with the SEC. They are often thinking in terms of registration as an investment adviser. However, even if a fund adviser is exempt from registration as an investment adviser with the SEC, he or she also needs to understand the impact of other federal securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940, as well as the impact of state securities laws, including state investment adviser registration requirements. I often hear new fund advisers say that they intend to rely on a particular exemption from one law and assume this exemption applies across the board to all securities laws. This post will explore the different statutes and regulations that govern private fund advisers and the registration exemptions which are usually relied upon.
The Securities Act of 1933
The Securities Act of 1933 was passed after the market crash of 1929 and the ensuing Great Depression. The Securities Act was the first federal legislation used to regulate the sale of securities. Generally, the Securities Act prohibits the offer and sale of securities to the public which are not registered with the Securities and Exchange Commission. As we have discussed previously, the definition of “security” is broad, which means the Securities Act applies to more transactions than you would ordinarily think and interests in private funds would be considered securities (see this post on a discussion of the treatment of limited partnership and limited liability company interests under securities laws). Due to the expense of registering an offering of securities with the SEC, private funds must rely on certain exemptions from registration under the Securities Act to sell their interests to investors.
Private funds almost always rely on one of two exemptions, Rule 506(b) or Rule 506(c), both of which are part of Regulation D, promulgated under the Securities Act. An offering is exempt from registration under Rule 506(b) if (i) the issuer does not solicit or advertise to market the securities (also known as a general solicitation), (ii) the issuer only offers or sales securities to accredited investors1, and (iii) the issuer takes reasonable care to ensure that the purchasers aren’t buying the securities with the intent to resell them. Rule 506(c) is similar to Rule 506(b), except that (i) the prohibition on general solicitation described above does not apply and (ii) the issuer takes reasonable steps to ensure that each purchaser is an accredited investor. These reasonable steps usually involve verifying the investor’s net worth or income, either by directly reviewing appropriate documents or by getting a verification letter from their accountant. This verification process can be burdensome and may discourage people from investing in the fund. As a result, most funds use Rule 506(b).
Securities purchased under a Rule 506 exemption need not be registered with the SEC. Instead, the fund must file Form D with the SEC within 15 days after the first sale.
Besides the federal registration requirements in the Securities Act, each state has its own registration requirements. One benefit of relying on Rule 506(b) or Rule 506(c) is that state registration requirements are preempted and therefore the fund need not find a separate exemption with each state. However, the fund must file a copy of Form D with each state where there are purchasers of the fund’s interests and also, potentially, the state where the fund adviser is located.2
Investment Company Act of 1940
The Investment Company Act of 1940 requires that issuers of securities that are in the business of holding and investing in other securities register with the SEC as an “investment company.” Registering an investment company with the SEC comes with numerous restrictions and additional statutory and regulatory hurdles. For example, registered investment companies must provide ongoing public reporting for investors on their investment holdings and be subject to restrictions on what those holdings can be.
The reporting requirements and investment restrictions in the Investment Company Act are incompatible with operating a private fund. Therefore, private fund advisers must find an exemption from the Investment Company Act. The two most common exemptions are Sections 3(c)(1) and 3(c)(7). Generally, private funds that rely on Section 3(c)(1), must (i) not make, or propose to make, a public offering of its securities (complying with Rule 506(b) or Rule 506(c) described above complies with this requirement) and (ii) limit the number of investors to no more than 100 investors. However, please note that counting the number of investors can actually be quite complex if some of the investors are entities rather than individuals (See this post for more information.) To rely on Section 3(c)(7), the fund must (i) not make, or propose to make, a public offering of its securities (same as for Section 3(c)(1)) and (ii) limit the offering to “qualified purchasers” (see this post for more information). For a further discussion on this exemption and the distinctions between Section 3(c)(1) and 3(c)(7), see this post.
Investment Advisers Act of 1940
Under the Investment Advisers Act of 1940, investment advisers, including private fund advisers may be required to register with the SEC. Generally, the Advisers Act defines an “investment adviser” as a person or firm that, for compensation, is engaged in the business of providing advice, making recommendations, issuing reports, or furnishing analyses on securities. Private fund advisers are considered investment advisers, and thus, they must register unless they fit within an exemption from registration.
New fund advisers rarely need to register with the SEC from the outset. Investment advisers located in a U.S. state with less than $25 million in assets under management and do not advise registered investment companies are prohibited from registering with the SEC, based on the policy goal of having such small advisers be regulated mainly by the states. (This prohibition is frequently known as the small adviser exemption.)
Beyond that, the most common exemption for private fund advisers is the private fund adviser exemption, which provides exempts from registration an investment adviser that only advises private funds and has less than $150 million in assets under management. Another commonly used exemption is the venture capital fund adviser exemption, which exempts an investment adviser that only advises venture capital funds, as described further in this post. A third exemption available to certain fund advisers is the foreign private adviser exemption, which exempts an investment adviser that: (i) has no place of business in the United States, (ii) has, in total, fewer than 15 clients in the United States and investors in the United States in private funds advised by the investment adviser, (iii) has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25 million; and (iv) does not hold itself out generally to the public in the United States as an investment adviser.
Fund advisers relying on the private fund adviser exemption and the venture capital fund adviser exemption are considered exempt reporting advisers and must file a truncated Form ADV (which is the form also used to register as an investment adviser with the SEC). Investment advisers using the foreign private adviser exemption or the small adviser exemption are not required to file as an exempt reporting adviser but doing so may be needed to take advantage of certain state exemptions from registration as an investment adviser (as discussed below).
As with the sale of securities, state law also plays an important role in regulating private fund advisers. Each state has its own investment adviser registration requirements, along with exemptions from those requirements. Many states have exemptions that may apply to private fund advisers. Some, however, do not, and it is possible to be exempt from SEC registration but nonetheless, be required to register with a state. Also, investment advisers with assets under management in the range of $25 million to $110 million that are required to register under the Investment Advisers Act may be required to register with the state they are located in, rather than with the SEC. This interaction between federal and state law is complex and is described in more detail here.
The term “exemption” is often misunderstood in the context of private fund regulation, leading to misunderstandings for new fund advisers. An exemption from registration under one law or with one regulator does not mean an exemption from the requirement of other laws or regulatory. In addition, some exemptions may still require a filing with the SEC or a state agency. A complete understanding of the laws applicable to private funds and the available exemptions from registration under those laws is an essential precondition to launching a new fund.
The text of the rule also permits sales to up to 35 non-accredited investors, but this is rarely actually used due to the factors described in this post.
Sometimes it’s possible to rely upon a separate state exemption for a particular state that doesn’t require a filing, allowing the fund adviser to avoid making the Form D filing in that state.
Section 203(l) of the Investment Advisers Act of 1940 (the “Advisers Act”), also known as the venture capital adviser exemption, provides that an investment adviser that solely advises venture capital funds is exempt from registration with the SEC under the Advisers Act. The term “venture capital fund” is not defined in the text of the Advisers Act; instead, the term is defined in SEC Rule 203(l)-1(a) as a private fund that meets certain conditions. This article looks at each of these conditions and explains what is needed to meet them.
Pursuing a Venture Capital Strategy
The first condition a fund must meet to qualify as a venture capital fund requires that the fund “[represent] to investors and potential investors that it pursues a venture capital strategy.” The standard for determining whether a fund is actually holding itself out as pursuing a “venture capital strategy” is a subjective one, depending on particular facts and circumstances. A fund is not necessarily required to use the words “venture capital” in the name of the fund. Rather, the SEC looks at the private fund adviser’s statements to investors and prospective investors as a whole. Nonetheless, in order to have a reasonable assurance that a private fund adviser is exempt from investment adviser registration, the offering materials of the fund should clearly and unambiguously state that the strategy being pursued is a venture capital strategy.
Investment Holding Limitation
The second condition requires that the fund:
“Immediately after the acquisition of any asset, other than qualifying investments or short-term holdings, holds no more than 20 percent of the amount of the fund’s aggregate capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments, valued at cost or fair value, consistently applied by the fund”
In other words, the second element requires that no more than 20% of the fund’s total assets (including committed but not yet invested capital) can be invested in assets that are not “qualifying investments” or “short term holdings.” Both of these terms are defined in the regulation.
A “qualifying investment” is one of three things: (i) an equity security issued by a “qualifying portfolio company” that is acquired directly by the private fund from such qualifying portfolio company; (ii) any equity security that is issued by a qualifying portfolio company in exchange for another equity security of such qualifying portfolio company; and (iii) any equity security issued by a parent of a qualifying portfolio company in exchange for an equity security in that qualifying portfolio company. Item (ii) allows the fund to retain its interest in a qualifying portfolio company after a corporate reorganization or some other situation where there is some kind of exchange of equity interests. Item (iii) allows the fund to retain its interest in a qualifying portfolio company after the qualifying portfolio company has been acquired by another company, including a publicly traded company. In that instance, the qualifying portfolio company would become a majority-owned subsidiary of the new parent company.
There are two main consequences to this definition. First, qualifying investments must be equity and not debt. The term equity security is, thankfully, defined rather broadly and includes preferred stock, warrants, securities convertible into common stock, such as convertible debt, and limited partnership interests. However, bridge loans that are not convertible would not be considered a qualifying investment.
Second, they must be acquired by making an investment directly into a company and not acquired by purchasing them from a third party. So the venture capital fund would not be able to treat as a qualifying investment any interest in a company that it acquires on the secondary market or through buying out existing owners or management without treating that interest as part of its 20% non-qualifying basket. However, a qualifying investment retains its status as such after a corporate reorganization or buyout where the qualifying portfolio company’s equity interests are exchanged for new equity interests in the same company or in another company which acquires the qualifying portfolio company.
Qualifying Portfolio Companies
The next important question is: what is a “qualifying portfolio company?” A “qualifying portfolio company” has three requirements: (i) at the time of the investment by the fund, the company must not be a reporting company under the Securities Exchange Act of 1934 nor be listed or traded on any foreign exchange and is not an affiliate of (i.e. directly or indirectly under common control with) an Exchange Act reporting company or a publicly traded foreign company; (ii) the company may not borrow or issue debt obligations in connection with the fund’s investment in the company and distribute to the fund the proceeds of such borrowing or issuance in exchange for the private fund’s investment (i.e. no leveraged buyouts); and (iii) it cannot be a mutual fund, hedge fund, private equity fund, another venture capital fund, a commodity pool fund, or an issuer of asset backed securities.
The first requirement of a “qualifying portfolio company” ensures that any company that a venture capital fund invests in (other than its 20% non-qualifying basket) is not a publicly traded company. This is not a controversial requirement given that an essential element of a venture capital strategy is to invest in a young company and potentially take it public. The venture capital fund can retain this investment even after the company goes public as the test for whether an investment is a “qualifying investment” is applied at the time of initial investment by a fund. However, if the fund acquires additional shares of a portfolio company after it goes public, then that investment would not be considered a “qualifying investment.” Therefore, if a venture capital fund is asked to enter into an agreement to participate in all future rounds of financing of a portfolio company, that any such requirement carves out shares sold in an IPO. Such an agreement could inadvertently require them to purchase non-qualifying investments, which could result in the venture capital fund’s investment adviser being required to register with the SEC under the Advisers Act. The second requirement of the “qualifying portfolio company” definition ensures that leveraged buyout funds or other private funds that finance their portfolio acquisitions by causing their portfolio companies to incur indebtedness will not fit within the definition of a venture capital fund. Together with the requirement that a “qualifying investment” must be an equity security acquired directly from the portfolio company, this requirement effectively limits the variety of transactions that venture capital funds can enter into while still maintaining an exemption for its investment adviser.
The final requirement of the definition ensures that the definition of the term “venture capital fund” will not include any kind of fund of funds, even if the underlying funds are themselves venture capital funds. Of course, a venture capital fund can invest in other funds as part of its non-qualifying basket.
Recall that at least 80% of the fund’s investments must be in “qualifying investments” or “short-term holdings.” The definition of “short-term holdings” is limited to the following: (i) bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments; (ii) U.S. Treasuries with a remaining maturity of 60 days or less; and (iii) money market funds. This definition is very restrictive. While some funds may want to park their assets in relatively low-risk liquid investments such as commercial paper, municipal bonds, foreign debt, and repurchase agreements, none of these assets would qualify. A venture capital fund may certainly invest in these assets as part of its 20% non-qualifying basket but must steer clear of them as a general cash management tool.
The Non-Qualifying Basket
The “non-qualifying basket” refers to the portfolio of investments which are not “qualifying investments” or “short-term holdings.” No more than 20% of a venture capital fund’s total assets, including committed but not yet invested capital, can be invested in the non-qualifying basket.
The fund must make the calculation as to whether it exceeds the 20% limit at the time each investment is made. However, the test is not applied continuously, so if certain qualifying investments subsequently decline in value or if non-qualifying investments increase in value, the fund will still be in compliance with regulations even if valuation changes would cause the non-qualifying basket to exceed the 20% limit. Nonetheless, the fund would be unable to acquire any non-qualifying investment until the percentage of non-qualifying investments fell back below the 20% threshold.
Another wrinkle is that all capital commitments must be bona fide; that is, a fund cannot have “investors” commit to provide capital with the understanding that the capital would never be called. The SEC has taken the position that any such arrangement would reduce the amount of committed capital used in calculating the ratio. However, if an investor never provides the capital despite the bona fide intent by the fund adviser to call it, the committed capital still counts in calculating the ratio.
In addition, venture capital funds may choose one of two methods in its ongoing calculations used to verify compliance with the limits on non-qualifying investments. A fund may choose to value each investment at its fair value, which essentially is a “mark to market” approach. So, if the value of a fund’s non-qualifying basket declined due to market fluctuations, the fund would be permitted to purchase additional non-qualifying investments if they did not cause the fund to exceed the 20% limit when all assets are valued at fair market value. However, this could get expensive, as many of the fund’s investments are likely to be illiquid and thus difficult to value, necessitating frequent appraisals. The other approach a fund may take is to value all investments at their historical cost so that the value of an investment never changes regardless of market fluctuations. This approach avoids the frequent appraisals that would be necessary if the fund chose to use fair value in its calculations. A fund adviser may be tempted to use one method on some occasions and another method on other occasions, but the SEC has taken the view that this is not permitted. The same method must be used to value all investments continuously throughout the life of the fund.
The non-qualifying basket is a useful tool for venture capital funds to enter into non-qualifying transactions, such as bridge loans to portfolio companies or potential portfolio companies or purchases of publicly traded securities, without losing their status as a venture capital fund.
Limits on Leverage
The third condition of a “venture capital fund” requires that the fund:
“Does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days, except that any guarantee by the private fund of a qualifying portfolio company’s obligations up to the amount of the value of the private fund’s investment in the qualifying portfolio company is not subject to the 120 calendar day limit”
The leverage restriction consists of two basic requirements. First, a venture capital fund may not borrow, incur indebtedness, or guarantee debts of portfolio companies in a total amount in excess of 15% of the fund’s aggregate capital contributions and uncalled committed capital. This means that during early periods in the lifespan of a fund, before it has called all its capital, it can incur significant leverage. For example, if a fund has total capital commitments of $10 million, but only $2 million has been called thus far, the fund could theoretically incur leverage of up to $1.5 million because the 15% calculation is made using the total aggregate number.
The second requirement is that any borrowing (including the borrowing incurred in compliance with the 15% limit) must be for a non-renewable term of no longer than 120 calendar days, except for guarantees of portfolio company debt. In addition, if the fund does guarantee portfolio company debt for a period greater than 120 days, the total debt guaranteed cannot be larger than the fund’s investment in that portfolio company. Outside of that exception, any borrowing that does occur by a fund must be short term.
As a result of these two requirements, the leverage restrictions contained in the SEC’s definition of a portfolio company are very limiting, effectively preventing any funds that use significant leverage from utilizing the venture capital exception to investment adviser registration.
No Redemption Rights for Investors
The fourth condition requires that the fund:
“Only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata.”
The SEC has provided some guidance as to what “extraordinary circumstances” means in its comments to the rule, where it states that the term would generally be limited to events beyond the control of the fund adviser or the investor. The sole example the SEC gives is a material change in law or regulation. Clearly the SEC intended that this exception will be extremely limited in scope.
One issue that could arise is whether the fund’s adviser would be able to take distributions from its carried interest without a pro rata distribution to investors, as some fund advisers do. The commentary to the rule implies that it can. The reason for this is that the regulations provide that a venture capital fund can only issue securities that do not have redemption rights. The fund adviser’s carried interest is usually in the form of a general partnership interest of a limited partnership or a managing member interest of a limited liability company, which in the context of a fund formation, would not be considered a security. However, there are some potential problems. Some fund advisers structure their carried interest as a limited partnership interest held by a “special limited partner” that is an entity separate from the fund adviser. Such a limited partnership interest may be deemed to be a security, and consequently, a fund structured in this manner may not be able to make distributions of the fund adviser’s carried interest without a corresponding pro rata distribution to investors.
Another issue that this requirement raises is whether it prohibits transfers of an investor’s interest in a venture capital fund. The offering documents of private funds must restrict the transferability of interests in the fund as a condition to making use of Regulation D; however, there are certain exemptions such as Rule 144, Section 4(a)(7) of the Securities Act of 1933, or the so-called “Section 4(1½) exemption” that permit resale. Consequently, fund offering documents frequently provide that an owner of an interest in the fund may transfer its interest upon obtaining an opinion of counsel stating that a resale exemption applies. Does such a provision violate the redemption restriction? The commentary to the rule implies that the SEC’s opinion is that it does not, provided that the fund adviser is not providing de facto redemption rights by regularly assisting the investors in finding potential transferees. Therefore, it is advisable that venture capital funds avoid offering to help their investors find potential transferees.
The restrictions on redemptions are largely in keeping with the venture capital fund industry’s practices. However, there will be some funds that will not qualify under the SEC’s definition as a result of this requirement. Funds that are “evergreen” (that continually accept new investors and allow redemptions as hedge funds usually do) or funds that utilize a “special limited partner” and intend to make distributions to the special limited partner that are not pro rata with the investors may have difficulty qualifying under the definition.
Prohibition Against Investment Company Act Registration
The fifth and final condition requires that the fund: (i) not be registered under the Investment Company Act of 1940 and (ii) not elected to be treated as a business development company pursuant to the Investment Company Act. This requirement should not significantly affect most venture capital funds.
Typically, funds that are registered as investment companies are publicly traded mutual funds. In contrast, most venture capital funds are private funds, which are funds that are exempt from the registration provisions of the Investment Company Act. A venture capital fund typically uses one of two exemptions: the “3(c)(1)” exemption or the “3(c)(7)” exemption. The 3(c)(1) exemption exempts from Investment Company Act registration any fund with 100 or fewer investors. The 3(c)(7) exemption exempts from Investment Company Act registration any fund that is sold exclusively to qualified purchasers (which roughly speaking, is a person or entity with $5 Million or more in investment assets). Practically speaking, this means that private funds, such as venture capital funds, are either (i) limited to 100 or less accredited investors or (ii) limited to qualified purchasers.
The venture capital exemption from investment adviser registration also does not apply to advisers to a fund which has elected to be treated as a business development company under the Investment Company Act. A business development company is a form of publicly traded private equity fund designed to provide capital to small, developing, and financially troubled companies. Advisers to such funds will be required to register as an investment adviser with the SEC, unless another exemption applies.
Although it may seem simple to qualify for the venture capital adviser exemption by limiting the adviser’s business to advising solely venture capital funds, whether a fund meets the complex conditions for being a “venture capital fund” can be quite complex. Also note that a private fund adviser exempt under the venture capital exemption is still an exempt reporting adviser, which means it will still be required to provide an abbreviated Form ADV to the SEC. In addition, fund advisers exempt from the SEC may also still nonetheless be subject to state investment adviser registration requirements. You should consult an attorney who is familiar with securities regulatory issues in assessing whether your particular fund management business is required to register with the SEC or with state authorities and what filings are required.