The Tennessee Department of Commerce & Insurance’s Securities Division recently amended its current rules to allow certain investment advisers, private fund advisers, and venture capital firms whose only clients are private funds, that meet the new rule’s definition, to be exempt from registration and custody requirements. However, these firms will be required to notice file and annually renew this notice filing with the Division.
Since that time, the Division understands there has been some confusion among advisers who should be utilizing the new exemption with notice filing but are relying on the de minimis exemption and believing the custody requirements do not apply.
To clarify, the de minimis exemption never exempted an investment adviser from the requirement to comply with the custody rules.
However, those who meet the requirements of the newly created private fund exemption, found at Tennessee Securities Rule 0780-04-03-.05 (1)(c) are not subject to the custody requirements.
To help investors, we’ve prepared the following frequently asked questions (FAQ) page to provide greater clarification.
The private fund exemption allows a qualifying investment adviser to notice file as an exempt reporting adviser with the Division rather than registering as an investment adviser. The advisers who qualify for the exemption and notice file will also require an annual renewal filing. All filings are completed through the Investment Adviser Registration Depository (IARD) system.
Pursuant to TN Securities Rule 0780-04-03-.05(1)(c)(10), an investment adviser who meets all the requirements of the private fund exemption, TN Securities Rule 0780-04-03-.05(1)(c), is not subject to the requirements of the custody rule, TN Securities Rule 0780-04-03-.07.
The de minimis exemption, found in TN Securities Rule 0780-04-03-.05(1)(b), exempts an investment adviser from the registration requirements if the adviser is domiciled in Tennessee and, during the course of the preceding 12 months, has had fewer than 15 clients and neither holds itself out generally to the public as an investment adviser or acts as an investment adviser to any investment company registered under the Investment Company Act.
However, the anti-fraud provision found in T.C.A. § 48-1-121(b)(3), makes it unlawful for an investment adviser to take or have custody of any securities or funds of any client except as the Commissioner may by rule permit, or unless the person is registered as a broker-dealer. Such rule permitting custody is found in TN Securities Rule 0780-04-03-.07, the reliance of such requires an investment adviser to be registered.
This means an investment adviser cannot rely on the de minimis exemption once it takes custody or possession of funds or securities, unless it is an SEC-registered investment adviser that complies with SEC Rule 206(4)-2 (17C.F.R. § 275.206(4)-2). See also TN Securities Rule 0780-04-03-.07(5).
Custody requirements may be found under TN Securities Rule 0780-04-03-.07. These requirements include annual audited financials and a surprise examination of client funds.
Simply put, if an investment adviser has custody in any capacity – it cannot rely on the de minimis exemption, unless it is an SEC-registered investment adviser that complies with SEC Rule 206(4)-2 (17C.F.R. § 275.206(4)-2).
For more information about this ruling or to contact TDCI’s Securities Division, please visit tn.gov/securities, email securities.2@tn.gov, or call 800-863-9117.