Administrative Rules of the State of Montana

BEFORE THE COMMISSIONER OF SECURITIES AND INSURANCE

OFFICE OF THE MONTANA STATE AUDITOR

In the matter of the adoption of NEW RULE I pertaining to a Registration Exemption for Investment Advisors to Private Funds and the amendment of ARM 6.10.501 pertaining to Examinations

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NOTICE OF PUBLIC HEARING ON PROPOSED ADOPTION AND AMENDMENT

TO: All Concerned Persons

1. On July 17, 2024, at 9:00 a.m., the Commissioner of Securities and Insurance, Office of the Montana State Auditor (commissioner or CSI) will hold a public hearing in the basement conference room of CSI, at 840 Helena Avenue, Helena, Montana, to consider the proposed adoption and amendment of the above-stated rules.

2. CSI will make reasonable accommodations for persons with disabilities who wish to participate in this rulemaking process or need an alternative accessible format of this notice. If you require an accommodation, contact CSI no later than 5:00 p.m. on July 2, 2024, to advise us of the nature of the accommodation that you need. Please contact Laura Shirtliff, Creative and Digital Services Director, 840 Helena Avenue, Helena, Montana, 59601; telephone (406) 444-2040 or 1-800-332-6148; fax (406) 444-3413; TDD (406) 444-3246; or e-mail [email protected].

3. The rule as proposed to be adopted provides as follows:

NEW RULE I PRIVATE FUND INVESTMENT ADVISOR REGISTRATION EXEMPTION (1) For purposes of this rule, the following definitions apply:

(a) "Beneficial owner" means any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise enjoys the benefits of ownership even though the title to the private fund is in another name.

(b) "Private fund adviser" means an investment adviser who provides advice solely to one or more qualifying private fund(s).

(c) "Qualifying private fund" means an issuer that qualifies for the exclusion from the definition of an investment company under one or more of sections 3(c)(1), 3(c)(5), and 3(c)(7) of the Investment Company Act of 1940, as amended (15 U.S.C. 80a-3(c)(1), (5) and (7)).

(d) "Retail buyer fund" means a qualifying private fund that is not a venture capital fund and that qualifies for the exclusion from the definition of an investment company under one or both of sections 3(c)(1) and 3(c)(5) of the Investment Company Act of 1940, as amended (15 U.S.C. 80a-3(c)(1) and (5)).

(e) "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.

(f) "Venture capital fund" means a private fund that meets the definition of a venture capital fund in SEC Rule 203(l)-1, 17 C.F.R. § 275.203(l)-1.

(2) Subject to the additional requirements of (3), a private fund adviser shall be exempt from the registration requirements of 30-10-201, MCA, applicable to investment advisors if the private fund adviser satisfies each of the following conditions:

(a) neither the private fund adviser nor any of its advisory affiliates are subject to a disqualifying event as described in 30-10-201(13), MCA, and/or Rule 506(d)(1) of SEC Regulation D, 17 C.F.R. § 230.506(d)(1);

(b) the private fund adviser makes available to the department upon written request:

(i) each report and amendment thereto that an exempt reporting adviser is required to file with the Securities and Exchange Commission pursuant to SEC Rule 204-4, 17 C.F.R. § 275.204-4; and

(ii) if the private fund adviser is not required to submit such filings to the Securities and Exchange Commission, the private fund adviser prepares the reports and amendments referenced in (2)(b)(i) on or before the date(s) such report(s) would be required to be filed pursuant to SEC Rule 204-4;

(c) the private fund adviser pays the fees specified in 30-10-209, MCA, for each calendar year in which it relies upon the exemption established by this rule. If the private fund adviser has paid an initial fee pursuant to this rule and it intends to rely on the exemption in a succeeding calendar year, it must pay the renewal fee specified by 30-10-209, MCA, before January 1 of the succeeding year.

(3) In order to qualify for the exemption described in (2), a private fund adviser who advises at least one retail buyer fund shall, except as otherwise provided in (9) below, in addition to satisfying each of the conditions specified in (2), comply with the following requirements:

(a) The private fund adviser shall advise only those retail buyer funds whose outstanding securities (other than short-term paper) are beneficially owned entirely by persons who:

(i) at the time the securities are purchased from the issuer, either:

(A) after deducting the value of the primary residence from the person's net worth, would each meet the definition of "accredited investor" in SEC Rule 501(a) of Regulation D, 17 C.F.R. § 230.501(a); or

(B) were employees, managers, directors, or officers of the private fund advisor; or

(ii) obtained the securities through a transfer not involving the sale of that security.

(b) The private fund adviser shall not enter into, perform, renew, or extend any investment advisory contract that provides for compensation to the investment adviser based on a share of the capital gains upon, or the capital appreciation of, the funds, or any portion of the funds of an investor in the private fund that is not a qualified client as defined in SEC Rule 205-3, 17 C.F.R. § 275.205-3.

(c) At the time of purchase, the private fund adviser shall disclose the following in writing to each beneficial owner of a retail buyer fund:

(i) all services, if any, to be provided to individual beneficial owners, and to the fund itself;

(ii) all duties, if any, the investment adviser owes to the beneficial owners, and to the fund itself; and

(iii) any other material information affecting the rights or responsibilities of the beneficial owners that the private fund advisor is required to disclose under other state or federal law.

(d) The private fund adviser shall obtain on an annual basis and at liquidation financial statements of each retail buyer fund audited by an independent certified public accountant (CPA). A copy of the audited financial statements shall be delivered to each beneficial owner of the fund within 180 days after the end of each fiscal year and within 180 days of liquidation, and shall be made available to CSI on written request.

(4) If a private fund adviser is registered with the Securities and Exchange Commission, the adviser is not eligible for this exemption and shall comply with the state notice filing requirements applicable to federal covered investment advisers in 30-10-201, MCA, and the fees found at 30-10-209, MCA.

(5) A person is exempt from the registration requirements of 30-10-201, MCA, applicable to investment advisor representatives if the person is employed by or associated with an investment adviser that is exempt from registration in this state pursuant to this rule and does not otherwise act as an investment adviser representative.

(6) Upon a written request from the department, an investment adviser relying on an exemption provided by this rule shall make available the records set forth in (2)(b) or (3)(d). Failure to comply with the request will result in the loss of the exemption provided by this rule.

(7) An investment adviser who becomes ineligible for the exemption provided by this rule must comply with all applicable laws and rules requiring registration or notice filing within 90 days after the date the investment adviser's eligibility for this exemption ceases.

(8) An investment advisor may request, pursuant to the process in 30-10-209(4), MCA, an exemption or exception to the requirements of (2)(a). The requirements of (2)(a) may be waived upon the commissioner's discretion after a determination is made that the waiver would be in the public interest.

(9) An investment adviser to a retail buyer fund that has one or more beneficial owners who do not satisfy the conditions set forth in (3)(a) is eligible for the exemption contained in (2) if the following conditions are satisfied:

(a) the subject fund existed prior to the effective date of this rule;

(b) as of the effective date of this rule, the subject fund ceases to accept beneficial owners other than those described in (3)(a);

(c) the investment adviser discloses in writing the information described in (3)(c) to all beneficial owners of the fund; and

(d) as of the effective date of this rule, the investment adviser delivers audited financial statements as required by (3)(d).

(10) Investment advisers to qualified private funds shall have 120 days from the effective date of this rule to establish compliance with this rule. CSI shall take no administrative action relating to registration failures during such grace period. However, the anti-fraud provisions of (11) remain in effect.

(11) Nothing in this rule shall be construed to provide an exemption from the operation of the anti-fraud provisions of 30-10-301, MCA.

AUTH: 30-10-105, 30-10-107, MCA

IMP: 30-10-105, 30-10-201, MCA

REASON: The Commissioner of Securities and Insurance, Montana State Auditor, Troy Downing (commissioner) is the statewide elected official responsible for administering the Securities Act of Montana, including regulating investment advisors. The North American Securities Administrators Association (NASAA) is an organization of securities regulators representing state and provincial securities regulators in the United States, Canada, and Mexico; it provides a forum for the development of uniform policy and regulation when uniformity is appropriate. To date, over 40 states have adopted some form of the NASAA Registration Exemption for Investment Advisers to Private Funds Model Rule (October 2013).

The commissioner finds that adoption of a similar regulation is appropriate in the public interest and consistent with the purposes of the Securities Act of Montana in promoting uniformity among the states and facilitating capital formation in Montana. (Sections 30-10-102(2) and (3), 30-10-107(1), MCA.)

4. The rule as proposed to be amended provides as follows, new matter underlined, deleted matter interlined:

6.10.501 REGISTRATION AND EXAMINATION - SECURITIES SALESPERSON, INVESTMENT ADVISER REPRESENTATIVES, BROKER-DEALERS, AND INVESTMENT ADVISERS (1) through (3) remain the same.

(4) Any individual who has been registered as an agent in any state within two years from the date of filing an application for registration shall not be required to retake the examinations in (1) to be eligible for registration.

(5) Any individual who is not registered as an agent in any state for more than two years but less than five years, who has elected to participate in the FINRA Maintaining Qualifications Program (MQP) pursuant to FINRA Rule 1240(c), and whose appropriate FINRA qualifying examinations remain valid pursuant to effective participation in the MQP shall be deemed in compliance with the examination requirements of (1) as long as the individual elects to participate in the NASAA Examination Validity Extension Program (EVEP) within two years of agent registration termination.

(6) Any individual who has not been registered as an agent in any state for more than two years but less than five years, who has elected to participate in the FINRA MQP pursuant to FINRA Rule 1240(c), and whose appropriate FINRA qualifying examinations remain valid pursuant to effective participation in the FINRA MQP shall be deemed in compliance with the examination requirements of (1).

(7) Successful participation in the FINRA MQP shall not extend the Series 66/Uniform Combined State Law Examination for purposes of investment adviser representative registration.

(4) remains the same but is renumbered (8).

(9) An individual who terminates their registration as an investment adviser representative may maintain the validity of their Series 65/Uniform Investment Adviser Law Examination (Series 65 Examination) or the investment adviser representative portion of the Series 66/Uniform Combined State Law Examination (Series 66 Examination), as applicable, without being employed by or associated with an investment adviser or federal covered investment adviser for a maximum of five years following the termination of the effectiveness of the investment adviser representative registration if the individual meets all of the following:

(a) the individual previously passed the examination for which they seek to maintain validity under this rule;

(b) the individual was registered as an investment adviser representative for at least one year immediately preceding the termination of the investment adviser representative registration;

(c) the individual was not subject to a statutory disqualification as defined in Section 3(a)(39) of the Exchange Act while registered as an investment adviser representative or at any period after termination of the registration;

(d) the person elects to participate in EVEP under (9) within two years from the effective date of the termination of the investment adviser representative registration;

(e) the individual does not have a deficiency under the investment adviser representative continuing education program at the time the investment adviser representative registration becomes ineffective;

(f) the person completes annually on or before December 31 of each calendar year in which the person participates in the IAR EVEP:

(i) six credits of IAR CE Ethics and Professional Responsibility Content offered by an Authorized Provider, including at least three hours covering the topic of ethics; and

(ii) six credits of IAR CE Products and Practice Content offered by an Authorized Provider;

(g) an individual who elects to participate in EVEP is required to complete credits required by (9)(f) for each calendar year that elapses after the individual's investment adviser representative registration became ineffective regardless of when the individual elects to participate in EVEP; and

(h) an individual who complies with the FINRA MQP under FINRA Rule 1240(c) shall be considered in compliance with (9)(f)(ii).

(5) and (6) remain the same but are renumbered (10) and (11).

AUTH: 30-10-107, 30-10-209, MCA

IMP: 30-10-201, MCA

REASON: The commissioner is the statewide elected official responsible for administering the Securities Act of Montana, including regulating registration and qualifications of broker-dealers and investment advisor representatives. The North American Securities Administrators Association (NASAA) is an organization of securities regulators representing state and provincial securities regulators in the United States, Canada, and Mexico; it provides a forum for the development of uniform policy and regulation when uniformity is appropriate. To date, several states have adopted or incorporated all or part of NASAA's Investment Adviser Representative Examination Validity Extension Program Model Rule (adopted April 17, 2023) (EVEP Model Rule), as well as NASAA's Model Rule for Examination Requirements for Broker-Dealer (adopted September 18, 2022) (BD Examination Model Rule). The model rules also rely, in part, on the requirements of the Maintaining Qualifications Program (MQP) under the Financial Industry Regulatory Authority (FINRA).

Both FINRA's MQP and the two NASAA model rules allow for broker-dealer salespersons and investment advisor representatives (IARs) to maintain their licensure after they have left the industry for a period of up to five years. The commissioner finds that adoption of similar regulations is appropriate in the public interest and consistent with the purposes of the Securities Act of Montana in promoting uniformity among the states and protecting the public interest as well as investors. (Sections 30-10-102(1) and (2), 30-10-107(1), MCA.)

Although FINRA requires salespersons to complete continuing education throughout the duration of their licensure, IARs are not similarly required, and Montana does not impose a separate continuing education requirement on IARs with current, active registration. The commissioner thus proposes to adopt the NASAA model rules with slight revisions so that the continuing education components only apply when IARs are attempting to maintain licensure while not actively practicing.

5. Concerned persons may submit their data, views, or arguments either orally or in writing at the hearing. Written data, views, or arguments may also be submitted to: Laura Shirtliff, Creative and Digital Services Director, 840 Helena Avenue, Helena, Montana, 59601; telephone (406) 444-2040 or 1-800-332-6148; fax (406) 444-3413; TDD (406) 444-3246; or e-mail [email protected], and must be received no later than 5:00 p.m., July 26, 2024.

6. Kirsten Madsen, Interim Deputy Securities Commissioner, has been designated to preside over and conduct this hearing.

7. CSI maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list must make a written request that includes the name, e-mail, and mailing address of the person to receive notices and specifies for which program the person wishes to receive notices. Notices will be sent by e-mail unless a mailing preference is noted in the request. Such written request may be mailed or delivered to the contact person in paragraph 5 or may be made by completing a request form at any rules hearing held by CSI.

8. An electronic copy of this proposal notice is available through the Secretary of State's website at http://sosmt.gov/ARM/Register.

9. The bill sponsor contact requirements of 2-4-302, MCA, do not apply.

10. With regard to the requirements of 2-4-111, MCA, CSI has determined that the adoption and amendment of the above-referenced rules will not significantly and directly impact small businesses.

/s/ Kirsten Madsen /s/ Mary Belcher

Kirsten Madsen Mary Belcher

Rule Reviewer Deputy Auditor

Commissioner of Securities and Insurance, Office of the Montana State Auditor

Certified to the Secretary of State, June 11, 2024.