An adviser relies on the federal private fund adviser exemption and manages one hedge fund that is a 3(c)(1) fund and is not a venture capital fund. The state has adopted the NASAA model rule on private fund advisers. Assume the adviser satisfies all other conditions of the NASAA model rule, including the required state exempt-reporting filings and fees, investor disclosure, and annual audited financial statements. The current qualified client thresholds are $1.4 million in assets under management with the adviser and $2.7 million in net worth, excluding the primary residence. The fund is considering four prospective investors.
Under the NASAA model rule, which prospective investor may the fund admit? Answer: An individual with $1.5 million under management with the adviser immediately after entering the contract and a net worth of $1.5 million, excluding the primary residence.
NASAA model rule on private fund advisers, applying the qualified client standard under SEC Rule 205-3. A 3(c)(1) fund that is not a venture capital fund may admit only qualified clients, with disclosure and annual audited financials. The individual with $1.5 million under management immediately after entering the contract satisfies the $1.4 million assets-under-management prong, so that investor is the one who may be admitted; the net-worth prong need not also be met. The individual with $1.3 million under management and $2.6 million net worth fails both prongs. The accredited investor is not a qualified client: accredited investor status is a different, lower standard, and as described the investor has only $1.2 million under management and $2.2 million net worth, failing both prongs. The individual with $1.35 million under management and $2.75 million net worth including $100,000 of primary residence equity also fails both prongs: excluding the residence, net worth is $2.65 million, below the $2.7 million threshold, and the assets-under-management figure is below $1.4 million.
- Under NASAA rules, which investor may be admitted to a non-venture-capital 3(c)(1) fund sponsored by an adviser relying on the private fund adviser exemption?
Answer: An individual who already has $1.3 million under the adviser's management and contributes $200,000, for $1.5 million total under management.
Under the NASAA model rule for advisers relying on the private fund adviser exemption, a non-venture-capital 3(c)(1) fund may admit only qualified clients as defined in SEC Rule 205-3: a natural person with at least $1.4 million in assets under the adviser's management immediately after entering the contract, or a net worth over $2.7 million excluding the primary residence. The investor with $1.3 million already under management who contributes $200,000 has $1.5 million under management immediately after contracting, so she meets the qualified-client test. The $2.6 million net-worth investor is below the $2.7 million threshold; the $250,000 income investor is an accredited investor but not a qualified client; and the $1.5 million net-worth investor is also below the qualified-client net-worth standard.
- Which statement is true regarding an adviser that is registered with the SEC and also meets the tests for the private fund adviser exemption?
Answer: It may not rely on the private fund adviser exemption while SEC registration remains in effect; it must withdraw from SEC registration first.
Under Investment Advisers Act §203(m), the private fund adviser exemption is an exemption from registration. An adviser that is already registered with the SEC cannot simultaneously hold exempt reporting adviser status; it must withdraw from SEC registration before relying on the exemption. Electing the exemption while remaining registered is not permitted, transferring the fund to an affiliate is not a statutory prerequisite, and prior SEC registration does not permanently disqualify the adviser.
An investment adviser has its only office in a state that registers and examines mid-sized advisers. It manages $80 million for a single operating company that owns a manufacturing business; the adviser has no other clients and does not manage any pooled investment vehicles.
Which statement is correct regarding the adviser's registration obligations? Answer: The adviser must register with its home state because the operating company is not a private fund and no exemption applies.
Investment Advisers Act § 203(m). A private fund is an issuer that would be an investment company under the Investment Company Act but for § 3(c)(1) or § 3(c)(7). An operating company that owns a manufacturing business is not a private fund, so the private fund exemption is unavailable regardless of AUM. With $80 million, the adviser is a mid-sized adviser ($25 million to $100 million) and must register with its home state because that state registers and examines mid-sized advisers and no exemption applies. The $150 million option ignores the requirement that all clients be private funds. The 100-owner option confuses the 3(c)(1) beneficial-owner limit with the definition of a private fund; that limit is irrelevant to a client that is not an investment company at all. The $25 million option misstates the framework: the $25 million figure is the general floor below which SEC registration is prohibited, not a mandate to register with the SEC.
- Which statement is true regarding an adviser that files as an exempt reporting adviser under the private fund adviser exemption?
Answer: The adviser is exempt from SEC registration but remains subject to the antifraud provisions of federal and state securities law.
An exemption from registration under Investment Advisers Act §203(m) does not remove an adviser from the definition of investment adviser or from the antifraud provisions. The exemption requires that the adviser advise only private funds, so adding qualified-client accounts outside private funds would cause the adviser to lose the exemption. The 100-investor benchmark is an Investment Company Act private-fund threshold, not an adviser registration threshold.
An adviser has been registered with the SEC for five years and manages $85 million, all in private funds. Its assets under management recently fell below the level at which it must remain SEC-registered, and it wishes to rely on the private fund adviser exemption to reduce its regulatory burden.
Under the Investment Advisers Act of 1940, which statement is correct? Answer: The adviser may rely on the exemption only after withdrawing its SEC registration, because an SEC-registered adviser may not use the exemption.
Investment Advisers Act § 203(m). The exemption excuses an eligible adviser from registering with the SEC; it does not permit an already registered adviser to remain registered while claiming exempt status. The adviser must withdraw its SEC registration (Form ADV-W) before relying on the exemption. The immediate-reliance option ignores the withdrawal step. The home-state registration option is wrong because the exemption is from registration and is not conditioned on registering with a state. The $110 million option is wrong because falling below the must-register threshold does not, by itself, make the exemption available to a currently registered adviser.
- Under the Investment Advisers Act of 1940, which statement is true regarding the venture capital fund adviser exemption?
Answer: It has no $150 million AUM cap, but an adviser relying on it must file reports as an exempt reporting adviser.
Investment Advisers Act §203(l) and SEC Rule 204-4. §203(l) exempts advisers that advise solely one or more venture capital funds from SEC registration. Unlike the private fund adviser exemption under §203(m), §203(l) has no $150 million AUM cap, and an adviser relying on it must still file reports with the SEC as an exempt reporting adviser. The statements that a $150 million cap applies, that the adviser is excused from SEC reporting, or that all fund investors must be qualified clients each misstate the exemption.
An investment adviser manages $180 million in assets, all invested in funds that meet the statutory definition of venture capital funds. The adviser has never been registered with the SEC and has no plans to accept non-venture-capital clients.
Under the Investment Advisers Act of 1940, which statement is correct regarding this adviser? Answer: The adviser may rely on the venture capital exemption and is not required to register with the SEC.
Investment Advisers Act § 203(l). An adviser whose clients are solely one or more venture capital funds is exempt from SEC registration, and this venture capital exemption has no assets-under-management cap. The $110 million option ignores the exemption. The private fund adviser exemption under § 203(m) does carry a $150 million cap, so it is unavailable at $180 million, but the adviser does not need it. The option that would condition the venture capital exemption on reducing AUM below $150 million confuses § 203(l) with § 203(m).
- Under the Investment Advisers Act, which adviser may rely on the private fund adviser exemption?
Answer: An adviser that manages only private funds with combined regulatory AUM of $140 million and has no disqualifying events.
Investment Advisers Act §203(m) and Rule 203(m)-1 permit an adviser to rely on the private fund adviser exemption only if it advises solely private funds and has less than $150 million of regulatory AUM. The adviser with only private funds and $140 million meets both conditions. The adviser with a separately managed account or with qualified-client accounts is not advising only private funds, and the adviser with $150 million of private fund AUM is at, not below, the threshold.
An investment adviser manages $180 million in regulatory assets under management, all in the United States. Of this amount, $160 million is in a venture capital fund and $20 million is in a 3(c)(1) fund that is not a venture capital fund. The 3(c)(1) fund's investors are all qualified clients, and the fund is audited annually. The adviser wants to avoid SEC registration by relying on an exemption for private fund advisers.
Under the Investment Advisers Act, which statement is correct? Answer: It may not rely on either exemption because it advises both a venture capital fund and a non-venture-capital private fund, making total private fund AUM $180 million.
The venture capital exemption (IAA § 203(l)) applies only when the adviser advises solely venture capital funds; the $20 million non-venture 3(c)(1) fund breaks that condition. The private fund adviser exemption (IAA § 203(m) and Rule 203(m)-1) applies only when the adviser's private fund AUM is below $150 million. Because the $160 million venture capital fund is itself a private fund and is counted together with the $20 million fund, total private fund AUM is $180 million, above the cap. The qualified-client and audited-financials facts satisfy a NASAA condition for a non-venture 3(c)(1) fund but do not reduce the AUM total. The answer saying the adviser may rely on the venture capital exemption ignores the disqualifying non-venture fund. The answer saying the venture capital fund has no AUM limit confuses § 203(l) with the combined § 203(m) calculation. The answer saying $180 million always requires SEC registration is overbroad because an adviser solely to venture capital funds may rely on § 203(l) with no AUM cap.
An investment adviser manages $95 million in assets: $85 million in two private funds and $10 million in a separately managed account for one high-net-worth individual. The adviser has no other clients and would like to avoid registration under the Investment Advisers Act of 1940.
Which statement is correct regarding the adviser's eligibility for the private fund adviser exemption? Answer: The adviser may not rely on the exemption because it has a client that is not a private fund.
Investment Advisers Act § 203(m). The private fund adviser exemption is available only to an adviser whose clients are solely private funds and whose assets under management are less than $150 million. The separately managed account for the high-net-worth individual is a non-private-fund client, so the adviser fails the solely-private-funds condition regardless of the $95 million total. The $150 million option ignores that condition. The qualified client option is wrong because treating the individual as a qualified client does not make the account a private fund; qualified client status is a separate limitation on whom a 3(c)(1) fund may admit, not a cure for a non-private-fund client. The $25 million option misstates the SEC registration framework: $25 million is the general floor below which SEC registration is prohibited, not a threshold that compels SEC registration; a mid-sized adviser registers with its home state.
- Under NASAA rules on exempt reporting advisers, which statement is true regarding a disqualifying bad-actor event?
Answer: A disqualifying bad-actor event prevents an otherwise eligible private fund adviser from using the state exempt reporting adviser filing.
Under the NASAA model rule on exempt reporting advisers, a private fund adviser relying on the state exempt reporting filing must have no disqualifying bad-actor event; disclosure and payment of the required fee do not cure the event. A disqualifying event therefore bars the state exempt reporting filing. The statement that the event requires SEC registration below the SEC registration threshold is wrong because the SEC registration thresholds still apply, so a sub-threshold adviser does not become SEC-registered merely because it loses the exempt reporting filing. The statement that the event only affects SEC reporting status is also wrong because the no-bad-actor condition is part of state filing eligibility. The statement that the event prevents use of the state exempt reporting adviser filing is correct.
An investment adviser relies on the federal private fund adviser exemption. It has $90 million in assets under management, all in private funds, and its investors are located in several states that have adopted the NASAA model rule on private fund advisers.
Which statement is correct regarding the adviser's obligations in those states? Answer: The adviser must file exempt reporting reports with the states, pay the required fees, and have no disqualifying bad-actor event.
NASAA model rule on private fund advisers (exempt reporting advisers). An adviser relying on the federal private fund exemption must have no disqualifying bad-actor event and must file exempt reporting reports with adopting states and pay the required fees; the model rule does not require full state registration. The registration option is wrong because the model rule imposes exempt reporting filings rather than registration. The SEC registration option is wrong because the location of fund investors across states does not affect the § 203(m) exemption and the adviser is below the $110 million must-register threshold. The no-filing option is wrong because exemption from SEC registration does not eliminate the state reporting obligations imposed by the adopted model rule.
- Which statement is true regarding an exempt reporting adviser's obligations in a state that has adopted the NASAA model rule?
Answer: It must file an exempt reporting adviser notice and pay the required fee instead of filing a full registration application.
Under the NASAA model rule adopted under the Uniform Securities Act, an exempt reporting adviser files a notice with the state and pays the required fee instead of filing a full state registration application. The federal private fund adviser exemption does not preempt state notice requirements. Full registration in every state, registration only in a home state, and conditioning the notice on custody are not requirements of the model rule.
