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Nebraska’s New Exemption for Advisors to Private Funds

on Tuesday, 8 November 2016 in The Closer - M&A, Securities & Corporate Counsel: Kevin P. Tracy, Editor

In May 2016, the Nebraska Department of Banking & Finance (the “Department”) adopted a new rule (the “Rule”) for private fund advisers, permitting certain fund advisers to be excluded from the definition of “investment adviser” under the Securities Act of Nebraska (the “Act”). Generally, under the Act, it is unlawful for any person to transact business in Nebraska as an “investment adviser” or “investment adviser representative” unless he or she is first registered under the Act. Investment adviser is broadly defined as “any person who for compensation engages in the business of advising others….as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.” The breadth of this definition historically has resulted in ambiguity of when to register as an investment adviser with the Department, and the Rule provides additional clarity for some advisers.

The new Rule excludes private fund1 advisers from the definition of “investment adviser” under the Act as long as the adviser satisfies all of the following conditions:

  1. Neither the private fund adviser nor any of its advisory affiliates are subject to the “bad actor” disqualifications under SEC Regulation D;
  2. The private fund adviser files with the Department each report and amendment thereto that an exempt reporting adviser is required to file with the SEC; and
  3. If the adviser advises at least one 3(c)(1) fund2 that is not a venture capital fund, then (a) the adviser shall advise only those 3(c)(1) funds, whose outstanding securities are owned entirely by persons who, after deducting the value of the primary residence from the person’s net worth, would each meet the definition of a “qualified client” (which are provided in the Rule); and (b) the adviser must provide certain disclosures to its clients and audited financial statements on an annual basis.

The Act further states it is unlawful for any investment adviser required to be registered under the Act to employ an investment adviser representative unless the investment adviser representative is registered. Under the new Rule, investment adviser representatives are exempt from registration in Nebraska as long as such person is employed by or associated with a private fund adviser that is excluded from the definition of investment adviser in the State of Nebraska and does not otherwise act as an investment adviser representative. The activities of such investment adviser representatives are limited by this Rule.

Finally, the Rule provides a transition period for any investment adviser who, in the future, becomes ineligible for the exclusion provided by this Rule. If the investment adviser can no longer comply with the requirements of the Rule, then such adviser (and its representatives) must comply with all applicable laws and rules requiring registration or notice filing within ninety days of the date the investment adviser ceases to be eligible for this exemption.

Amber N. Preston


1 A private fund includes funds that are not registered under the Investment Company Act of 1940, as amended (the “1940 Act”), including, without limitation, any private fund that qualifies for an exclusion from the definition of an “investment company,” in section 3(c)(1) or 3(c)(7) of the 1940 Act.
2 A 3(c)(1) fund is an unregistered fund with less than 100 beneficial owners.

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