Part IV. Exclusions
21VAC5-80-210. Exclusions from definition of "investment advisor" and "federal covered advisor".
A. The terms "investment advisor" and "federal covered advisor" do not include any person engaged in the investment advisory business whose only client is one (or more) of the following:
1. An investment company as defined in the Investment Company Act of 1940.
2. An insurance company licensed to transact insurance business in this Commonwealth.
3. A bank, a bank holding company as defined in the Bank Holding Company Act of 1956, a trust subsidiary organized under Article 3.1 (§ 6.1-32.1 et seq.) of Chapter 2 of Title 6.1 of the Code of Virginia, a savings institution, a credit union, or a trust company if the entity is either (i) authorized or licensed to transact such business in this Commonwealth or (ii) organized under the laws of the United States.
4. A broker-dealer so registered under the Act and under the Securities Exchange Act of 1934.
5. An employee benefit plan with assets of not less than $5,000,000.
6. A governmental agency or instrumentality.
B. Any investment advisor or federal covered advisor who (i) does not have a place of business located within this Commonwealth and (ii) during the preceding 12-month period has had fewer than six clients who are residents of this Commonwealth other than those listed in subsection A of this section is excluded from the registration and notice filing requirements of the Act.
C. The term "investment advisor" does not include any certified public accountant who holds a valid CPA certificate as defined by § 54.1-2000 of Title 54.1 of the Code of Virginia and who during the ordinary course of business:
1. Issues publications, writings, reports, or testimony in a court of law or in an arbitration as to the value of privately held securities in a transaction involving the purchase, sale or valuation of a business;
2. Issues publications, writings, reports or testimony in a court of law or in an arbitration as to the advisability of investing in, purchasing, or selling privately held securities in a transaction involving the purchase, sale or valuation of a business; or
3. Advises clients about the disposition or value of assets, of which ownership is evidenced by privately held securities and such assets are the subject of (i) bankruptcy, (ii) estate or gift tax planning or settlement, (iii) divorce, (iv) sale of a business, whether whole or in part, (v) employee stock option plan, or (vi) an insurance settlement.
Statutory Authority
§§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes
Derived from Rule 1300, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 28, Issue 2, eff. September 9, 2011.
21VAC5-80-215. Exemption for certain private advisors.
A. For purposes of this section, the following definitions shall apply:
1. "Value of primary residence" means the fair market value of a person's primary residence, subtracted by the amount of debt secured by the property up to its fair market value.
2. "Private fund advisor" means an investment advisor who provides advice solely to one or more qualifying private funds.
3. "Qualifying private fund" means a private fund that meets the definition of a qualifying private fund in SEC Rule 203(m)-1, 17 CFR 275.203(m)-1.
4. "3(c)(1) fund" means a qualifying private fund that is eligible for the exclusion from the definition of an investment company under § 3(c)(1) of the Investment Company Act of 1940, 15 USC § 80a-3(c)(1).
5. "Venture capital fund" means a private fund that meets the definition of a venture capital fund in SEC Rule 203(l)-1, 17 CFR 275.203(l)-1.
B. Subject to the additional requirements of subsection C of this section, a private fund advisor shall be exempt from the registration requirements of § 13.1-504 of the Act if the private fund advisor satisfies each of the following conditions:
1. Neither the private fund advisor nor any of its advisory affiliates are subject to a disqualification as described in Rule 262 of SEC Regulation A, 17 CFR 230.262;
2. The private fund advisor files with the commission each report and amendment thereto that an exempt reporting advisor is required to file with the Securities and Exchange Commission pursuant to SEC Rule 204-4, 17 CFR 275.204-4; and
3. The private fund advisor pays a notice fee in the amount of $250.
C. In order to qualify for the exemption described in subsection B of this section, a private fund advisor who advises at least one (3)(c)(1) fund that is not a venture capital fund shall, in addition to satisfying each of the conditions specified in subsection B of this section, comply with the following requirements:
1. The private fund advisor shall advise only those 3(c)(1) funds (other than venture capital funds) whose outstanding securities (other than short-term paper) are beneficially 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 in SEC Rule 205-3, 17 CFR 275.205-3, at the time the securities are purchased from the issuer;
2. At the time of purchase, the private fund advisor shall disclose the following in writing to each beneficial owner of a 3(c)(1) fund that is not a venture capital fund:
a. All services, if any, to be provided to individual beneficial owners;
b. All duties, if any, the investment advisor owes to the beneficial owners; and
c. Any other material information affecting the rights or responsibilities of the beneficial owners; and
3. The private fund advisor shall obtain on an annual basis audited financial statements of each 3(c)(1) fund that is not a venture capital fund, and shall deliver a copy of such audited financial statements to each beneficial owner of the fund.
D. If a private fund advisor is registered with the Securities and Exchange Commission, the advisor shall not be eligible for this exemption and shall comply with the notice filing requirements applicable to federal covered investment advisors in § 13.1-504 of the Act.
E. A person is exempt from the registration requirements of § 13.1-504 of the Act if he is employed by or associated with an investment advisor that is exempt from registration in this Commonwealth pursuant to this section and does not otherwise act as an investment advisor representative.
F. The report filings described in subdivision B 2 of this section shall be made electronically on IARD. A report shall be deemed filed when the report and the notice fee required by subdivision B 3 of this section are filed and accepted by IARD on the commission's behalf.
G. An investment advisor who becomes ineligible for the exemption provided by this section must comply with all applicable laws and regulations requiring registration or notice filing within 90 days from the date the investment advisor's eligibility for this exemption ceases.
H. An investment advisor to a 3(c)(1) fund (other than a venture capital fund) that has one or more beneficial owners who are not qualified clients as described in subdivision C 1 of this section is eligible for the exemption contained in subsection B of this section if the following conditions are satisfied:
1. The subject fund existed prior to May 7, 2012;
2. As of May 7, 2012, the subject fund ceases to accept beneficial owners who are not qualified clients, as described in subdivision C 1 of this section;
3. The investment advisor discloses in writing the information described in subdivision C 2 of this section to all beneficial owners of the fund; and
4. As of May 7, 2012, the investment advisor delivers audited financial statements as required by subdivision C 3 of this section.
Statutory Authority
§§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes
Derived from Virginia Register Volume 28, Issue 2, eff. September 9, 2011; amended, Volume 28, Issue 19, eff. May 7, 2012; Volume 29, Issue 20, eff. June 3, 2013.
21VAC5-80-220. Performance based fees.
A. In accordance with § 13.1-503 C of the Act, an investment advisor may enter into, extend, or renew any investment advisory contract to provide for compensation to the investment advisor on the basis of a share of the capital gains upon, or the capital appreciation of, the funds or any portion of the funds of a client, provided that the following conditions of this section are satisfied.
B. Nature of the client:
1. a. The client entering into the contract subject to this section must be a natural person or a company, as defined in subdivision 2 of this subsection and in the definition of "company" in subsection E of this section, who immediately after entering into the contract has at least $1 million under the management of the investment advisor; or
b. A person who the registered investment advisor (and any person acting on his behalf) entering into the contract reasonably believes, immediately prior to entering into the contract, is a natural person or a company, as defined in subdivision 2 of this subsection and in the definition of "company" in subsection E of this section, whose net worth at the time the contract is entered into exceeds $2 million. (The net worth of a natural person may include assets held jointly with such person's spouse.)
2. The term "company" as used in subdivision 1 of this subsection does not include:
a. A private investment company, as defined in subsection E of this section;
b. An investment company registered under the Investment Company Act of 1940; or
c. A business development company, as defined in § 202(a)(22) of the Investment Advisers Act of 1940 (15 USC § 80b-2(a)(22))
unless each of the equity owners (other than the investment advisor entering into a contract under this section) of any such company identified in subdivision 2 of this subsection, is a natural person or company described in this subsection.
C. Disclosure. In addition to the disclosure requirements of Form ADV, the advisor shall disclose to the client, or the client's independent agent, prior to entering into an advisory contract permitted by this section, all material information concerning the proposed advisory arrangement including the following:
1. That the fee arrangement may create an incentive for the advisor to make investments that are riskier or more speculative than would be the case in the absence of a performance fee;
2. Where relevant, that the advisor may receive increased compensation with regard to unrealized appreciation as well as realized gains in the client's account;
3. The time period which will be used to measure investment performance throughout the term of the contract and its significance in the computation of the fee;
4. The nature of any index which will be used as a comparative measure of investment performance, the significance of the index, and the reason the advisor believes the index is appropriate; and
5. Where an advisor's compensation is based on the unrealized appreciation of securities for which market quotations are not readily available, how such securities will be valued and the extent to which the valuation will be independently determined.
D. Arm's-length contract. The investment advisor (and any person acting on its behalf) who enters into the contract must reasonably believe, immediately prior to entering into the contract, that the contract represents an arm's-length arrangement between the parties and that the client (or in the case of a client which is a company as defined in subsection E of this section, the person representing the company), alone or together with the client's independent agent, understands the proposed method of compensation and its risks. The representative of a company may be a partner, director, officer, or an employee of the company or the trustee, where the company is a trust, or any other person designated by the company or trustee, but must satisfy the definition of client's independent agent set forth in subsection E of this section.
E. Definitions. For the purpose of this section:
The term "affiliated person" has the same meaning as in § 2 (a)(3) of the Investment Company Act of 1940 (15 USC § 80a-2(a)(3)).
The term "client's independent agent" means any person agreeing to act as the client's agent in connection with the contract other than:
1. The investment advisor acting in reliance upon this section, an affiliated person of the investment advisor, an affiliated person of an affiliated person of the investment advisor, or an interested person of the investment advisor as defined in this subsection;
2. A person who receives, directly or indirectly, any compensation in connection with the contract from the investment advisor, an affiliated person of the investment advisor, an affiliated person of an affiliated person of the investment advisor or an interested person of the investment advisor as defined in this subsection; or
3. A person with any material relationship between himself (or an affiliated person of such person) and the investment advisor (or an affiliated person of the investment advisor) that exists, or has existed at any time during the previous two years.
The term "company" has the same meaning as in § 202 (a)(5) of the Investment Advisers Act of 1940 (15 USC § 80b-2(a)(5)).
The term "interested person" as used in the definition of "client's independent agent" of this section means:
1. Any member of the immediate family of any natural person who is an affiliated person of the investment advisor;
2. Any person who knowingly has any direct or indirect beneficial interest in, or who is designated as trustee, executor, or guardian of any legal interest in, any security issued by the investment advisor or by a controlling person of the investment advisor if the beneficial or legal interest of the person in any security issued by the investment advisor or by a controlling person of the investment advisor:
a. Exceeds one tenth of one percent of any class of outstanding securities of the investment advisor or a controlling person of the investment advisor; or
b. Exceeds 5.0% of the total assets of the person (seeking to act as the client's independent agent); or
3. Any person or partner or employee of any person who at any time since the beginning of the last two years has acted as legal counsel for the investment advisor.
The term "private investment company" means a company which would be defined as an investment company under § 3 (a) of the Investment Company Act of 1940 (15 USC § 80a-3(a)) but for the exception provided from that definition by § 3 (c)(1) of such Act.
The term "securities for which market quotations are readily available" in subsection C of this section has the same meaning as in Rule 2a-4 (a)(1) under the Investment Company Act of 1940 (17 CFR 270.2a-4 (a)(1)).
The term "securities for which market quotations are not readily available" in subsection C of this section means securities not described in the above paragraph.
Statutory Authority
§§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes
Derived from Rule 1301, Case No. SEC900034, eff. July 1, 1990; amended by Case No. SEC920008, eff. October 15, 1992; Virginia Register Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999; Volume 31, Issue 25, eff. July 31, 2015.