File No. 171

Senate, March 25, 2009

The Committee on Banks reported through SEN. DUFF of the 25th Dist., Chairperson of the Committee on the part of the Senate, that the substitute bill ought to pass.

AN ACT CONCERNING HEDGE FUNDS.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. Subsection (e) of section 36b-6 of the general statutes is repealed and the following is substituted in lieu thereof (Effective October 1, 2009):

(e) The following investment advisers are exempted from the registration requirements under subsection (c) of this section: Any investment adviser that (1) is registered or required to be registered under Section 203 of the Investment Advisers Act of 1940; (2) is excepted from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940; or (3) has no place of business in this state. [and, during the preceding twelve months, has had no more than five clients who are residents of this state.] Any investment adviser claiming an exemption pursuant to subdivision (1) or (2) of this subsection that is not otherwise excluded under subsection (11) of section 36b-3, as amended by this act, shall first file with the commissioner a notice of exemption together with a consent to service of process as required by subsection (g) of section 36b-33 and shall pay to the commissioner or to any person designated by the commissioner in writing to collect such fee on behalf of the commissioner a nonrefundable fee of two hundred fifty dollars. The notice of exemption shall contain such information as the commissioner may require. Such notice of exemption shall be valid until December thirty-first of the calendar year in which it was first filed and may be renewed annually thereafter upon submission of such information as the commissioner may require together with a nonrefundable fee of one hundred fifty dollars. If any investment adviser that is exempted from registration pursuant to subdivision (1) or (2) of this subsection fails or refuses to pay any fee required by this subsection, the commissioner may require such investment adviser to register pursuant to subsection (c) of this section. For purposes of this subsection, a delay in the payment of a fee or an underpayment of a fee which is promptly remedied shall not constitute a failure or refusal to pay such fee.

Sec. 2. (NEW) (Effective October 1, 2009) (a) As used in this section, "hedge fund" means any investment company, as defined in Section 3(a)(1) of the Investment Company Act of 1940, located in this state (1) that claims an exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940; (2) whose offering of securities is exempt under the private offering safe harbor criteria in Rule 506 of Regulation D of the Securities Act; and (3) that meets any other criteria as may be established by the Banking Commissioner in regulations adopted under subsection (c) of this section. A hedge fund is located in this state if such fund has an office in this state where employees regularly conduct business on behalf of the hedge fund.

(b) Any investment adviser to a hedge fund shall disclose to each investor or prospective investor in such hedge fund, not later than thirty days before any such investment, any financial or other interests the investment adviser may have that conflict with or are likely to impair the investment adviser's duties and responsibilities to the fund or its investors.

(c) The Banking Commissioner may adopt regulations, in accordance with chapter 54 of the general statutes, to implement the provisions of this section.

Sec. 3. Section 36b-3 of the general statutes is repealed and the following is substituted in lieu thereof (Effective October 1, 2009):

As used in sections 36b-2 to 36b-33, inclusive, as amended by this act, and section 2 of this act, unless the context otherwise requires:

(1) "Agent" means any individual, other than a broker-dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. "Agent" does not include an individual who represents an issuer in (A) effecting transactions in a security exempted by subdivision (1), (2), (3), (4), (6), (9), (10), (11) or (22) of subsection (a) of section 36b-21, (B) effecting transactions exempted by subsection (b) of section 36b-21, except for transactions exempted by subdivisions (10), (13) or (14) of said subsection, (C) effecting transactions with existing employees, partners or directors of the issuer if no commission or other remuneration is paid or given directly or indirectly for soliciting any person in this state, or (D) effecting transactions in any covered security, except for covered securities within the meaning of Sections 18(b)(2) or 18(b)(4)(D) of the Securities Act of 1933. "Agent" does not include such other persons not within the intent of this subdivision as the commissioner may by regulation or order determine. A general partner, officer or director of a broker-dealer or issuer, or a person occupying a similar status or performing similar functions, is an agent only if such person otherwise comes within this definition and any compensation that such person receives is directly or indirectly related to purchases or sales of securities.

(2) "Associated person" has the meaning given to that term in Section 3(a)(21) of the Securities Exchange Act of 1934.

(3) "Blank check company" means any company that (A) devotes substantially all of its efforts to establishing a new business in which planned principal operations have not commenced or, that has commenced planned principal operations, but has not derived significant revenue from such operations; and (B) has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.

(4) "Branch office" means any location other than the main office at which an agent or investment adviser agent regularly conducts business on behalf of a broker-dealer or investment adviser, or any location that is held out as such, excluding: (A) Any location that is established solely for customer service or back-office-type functions where no sales activities are conducted and that is not held out to the public as a branch office, (B) any location that is the agent's or investment adviser agent's primary residence, provided (i) only agents or investment adviser agents who reside at the location and are members of the same immediate family conduct business at the location, (ii) the location is not held out to the public as an office and the agent or investment adviser agent does not meet with customers at the location, (iii) neither customer funds nor securities are handled at that location, (iv) the agent or investment adviser agent is assigned to a designated branch office, and such designated branch office is reflected on all business cards, stationery, advertisements and other communications to the public by such agent or investment adviser agent, (v) the agent's or investment adviser agent's correspondence and communications with the public are subject to the supervision of the broker-dealer or investment adviser with which such agent or investment adviser agent is associated, (vi) electronic communications, including e-mail, are made through the electronic system of the broker-dealer or investment adviser, (vii) all orders for securities are entered through the designated branch office or an electronic system established by a broker-dealer that is reviewable at the branch office, (viii) written supervisory procedures pertaining to supervision of activities conducted at the residence are maintained by the broker-dealer or investment adviser, and (ix) a list of the residence locations is maintained by the broker-dealer or investment adviser, (C) any location, other than a primary residence, that is used for securities or investment advisory business for less than thirty business days in any one calendar year, provided the broker-dealer or investment adviser complies with the provisions of subparagraph (B)(ii), (iii), (iv), (v), (vi), (vii) and (viii) of this subdivision, (D) any office of convenience, where associated persons occasionally and exclusively by appointment meet with customers, which is not held out to the public as an office, (E) any location that is used primarily to engage in nonsecurities activities and from which the agent or investment adviser agent effects no more than twenty-five securities transactions in any one calendar year, provided any advertisement or sales literature identifying such location also sets forth the address and telephone number of the location from which the agent or investment adviser agent conducting business at the nonbranch locations is directly supervised, (F) the floor of a registered national securities exchange where a broker-dealer conducts a direct access business with public customers, (G) a temporary location established in response to the implementation of a business continuity plan, or (H) any other location not within the intent of this subdivision as the commissioner may determine. As used in this subdivision, the term "business day" does not include any partial business day, provided the agent or investment adviser agent spends at least four hours on such day at the designated branch office of such agent or investment adviser agent during the hours that such office is normally open for business.

(5) "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for such person's own account. "Broker-dealer" does not include (A) an agent, (B) an issuer, (C) a bank, as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, when conducting activities that would except it from the definitions of "broker" or "dealer" under Sections 3(a)(4) or 3(a)(5) of the Securities Exchange Act of 1934, (D) a person who has no place of business in this state if such person effects transactions in this state exclusively with or through (i) the issuers of the securities involved in the transactions, (ii) other broker-dealers, or (iii) a bank and trust company, a national banking association, a savings bank, a savings and loan association, a federal savings bank, a federal savings and loan association, a credit union, a federal credit union, a trust company, an insurance company, an investment company as defined in the Investment Company Act of 1940, a pension or profit-sharing trust, or other financial institution or institutional buyer, whether acting for itself or as trustee, or (E) such other persons not within the intent of this subdivision as the commissioner may by regulation or order determine.

(6) "Commissioner" means the Banking Commissioner or any person appointed or designated by the Banking Commissioner to administer sections 36b-2 to 36b-33, inclusive, as amended by this act.

(7) "Covered security" has the meaning given to that term in Section 18(b) of the Securities Act of 1933.

(8) "Fraud", "deceit" and "defraud" are not limited to common-law deceit.

(9) "Guaranteed" means guaranteed as to payment of principal, interest or dividends.

(10) "International banking institution" means an international financial institution, as defined in 22 USC 262r, as from time to time amended, of which the United States is a member and whose securities are exempt from registration under the Securities Act of 1933.

(11) "Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. "Investment adviser" does not include (A) an investment adviser agent; (B) a bank, as defined in Section 202(a)(2) of the Investment Advisers Act of 1940, or a bank holding company, as defined in the Bank Holding Company Act of 1956, that is excepted from the definition of "investment adviser" in Section 202(a)(11) of the Investment Advisers Act of 1940; (C) a lawyer, accountant, engineer, or teacher whose performance of these services is solely incidental to the practice of such person's profession; (D) a broker-dealer whose performance of these services is solely incidental to the conduct of such person's business as a broker-dealer and who receives no special compensation for them; (E) a publisher of any bona fide newspaper, news magazine, or business or financial publication of general, regular, and paid circulation; (F) a person whose advice, analyses or reports relate only to securities exempted by subdivision (1) of subsection (a) of section 36b-21; (G) any insurance company under the supervision of the Insurance Commissioner or any affiliate thereof, as defined in subsection (b) of section 38a-129, when providing services to separate accounts of that insurance company or registered investment companies all of whose shares are owned by such insurance company or its insurance company affiliates or by the separate accounts of that insurance company or its insurance company affiliates; and (H) such other persons not within the intent of this subdivision as the commissioner may by regulation or order designate.

(12) (A) "Investment adviser agent" includes (i) any individual, including an officer, partner or director of an investment adviser, or an individual occupying a similar status or performing similar functions, employed, appointed or authorized by or associated with an investment adviser to solicit business from any person for such investment adviser in this state and who receives compensation or other remuneration, directly or indirectly, for such solicitation; or (ii) any partner, officer, or director of an investment adviser, or an individual occupying a similar status or performing similar functions, or other individual employed, appointed, or authorized by or associated with an investment adviser, who makes any recommendation or otherwise renders advice regarding securities to clients and who receives compensation or other remuneration, directly or indirectly, for such advisory services.

(B) "Investment adviser agent" does not include an individual employed, appointed or authorized by, associated with or acting on behalf of an investment adviser exempt from registration under subdivision (1) or (2) of subsection (e) of section 36b-6, as amended by this act, who is a "supervised person", as defined in Section 202(a)(25) of the Investment Advisers Act of 1940, unless such supervised person is an "investment adviser representative", as defined in Securities and Exchange Commission Rule 203A-3, 17 CFR 275.203A-3.

(C) "Investment adviser agent" does not include such other individuals not within the intent of this subdivision as the commissioner may by regulation or order designate.

(13) "Issuer" means any person who issues or proposes to issue any security; except that (A) with respect to a certificate of deposit, a voting-trust certificate, or a collateral-trust certificate, or with respect to a certificate of interest or a share in an unincorporated investment trust not having a board of directors or persons performing similar functions or of the fixed, restricted management, or unit type, "issuer" means any person performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which the security is issued; (B) with respect to an equipment trust certificate or similar security serving the same purpose, "issuer" means any person who uses or will use the property, any person to whom the property or equipment is or will be leased or conditionally sold or any person who is otherwise contractually responsible for assuring payment of the certificate; and (C) with respect to a fractional undivided interest in oil, gas or other mineral leases or in payments out of production under a lease, right or royalty, "issuer" means any owner of an interest in the lease or in payments out of production under a lease, right or royalty, whether whole or fractional, who creates fractional interests for the purpose of sale.

(14) "Nonissuer" means not directly or indirectly for the benefit of the issuer.

(15) "Person" means an individual, a corporation, a limited liability company, a partnership, a limited partnership, a limited liability partnership, an association, a joint-stock company, a trust where the interests of the beneficiaries are evidenced by a security, an unincorporated organization, a government or a political subdivision of a government.

(16) (A) "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value. (B) "Offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. (C) Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing shall be conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value. (D) Nothing in this subdivision shall limit or diminish the full meaning of the terms "sale", "sell", "offer" or "offer to sell" as construed by the courts of this state. (E) A purported gift of assessable stock is considered to involve an offer and sale. (F) Every sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer, as well as every sale or offer of a security which gives the holder a present or future right or privilege to convert into another security of the same or another issuer, is considered to include an offer of the other security. (G) The terms defined in this subdivision do not include: (i) Any bona fide pledge or loan; (ii) any stock dividend, whether the corporation distributing the dividend is the issuer of the stock or not, if nothing of value is given by stockholders for the dividend other than the surrender of a right to a cash or property dividend when each stockholder may elect to take the dividend in cash or property or in stock; (iii) any act incident to a class vote by security holders on a merger, exchange of securities for securities, consolidation, reclassification of securities, or sale of assets in consideration of the issuance of securities or securities and cash of another person other than an individual; or (iv) any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved by any state or federal court.

(17) "Securities Act of 1933", "Securities Exchange Act of 1934", "Public Utility Holding Company Act of 1935", "Investment Advisers Act of 1940" and "Investment Company Act of 1940" mean the federal statutes of those names, as from time to time amended.

(18) "Securities and Exchange Commission" means the United States Securities and Exchange Commission.

(19) "Security" means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, interests of limited partners in a limited partnership, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, put, call, straddle, option, or privilege on any security or group or index of securities, including any interest in or based on the value of such security, group or index, put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. "Security" includes (A) a certificated and an uncertificated security, and (B) as an "investment contract", an interest in a limited liability company or limited liability partnership, but does not include any insurance or endowment policy or annuity contract issued by an insurance company that is subject to regulation by the Insurance Commissioner.

(20) "Self-regulatory organization" means a national securities exchange, a national securities association of broker-dealers or a clearing agency registered under the Securities Exchange Act of 1934 or the Municipal Securities Rulemaking Board established under the Securities Exchange Act of 1934.

(21) "Shell company" or "dormant company" means any company which does not pursue nor has the financial capacity to pursue a business plan or purpose.

(22) "State" means any state, territory or possession of the United States, the District of Columbia and Puerto Rico.

The following Fiscal Impact Statement and Bill Analysis are prepared for the benefit of the members of the General Assembly, solely for purposes of information, summarization and explanation and do not represent the intent of the General Assembly or either chamber thereof for any purpose. In general, fiscal impacts are based upon a variety of informational sources, including the analyst's professional knowledge. Whenever applicable, agency data is consulted as part of the analysis, however final products do not necessarily reflect an assessment from any specific department.

OFA Fiscal Note

State Impact:

Note: BF=Banking Fund

Municipal Impact: None

Explanation

The bill results in a potential cost of as much as $25,000 to the Department of Banking (DOB) in FY 10. These costs are associated with the potential development of regulations by the DOB. Since the development of regulations concerning hedge funds is not required under the bill the DOB could develop such regulations over time and thus avoid any actual costs.

OLR Bill Analysis

sSB 953

AN ACT CONCERNING HEDGE FUNDS.

SUMMARY:

Current law exempts investment advisers from registering with the Connecticut Banking Department if they have a place of business in the state and five or fewer Connecticut resident clients during the preceding 12 months. The bill eliminates the client number requirement; thus, any investment adviser without a place of business in the state is exempt. Also exempt from Connecticut registration, and unchanged by the bill, are investment advisers required to register with the Securities and Exchange Commission (SEC) and those excluded from the SEC's definition of the term.

The bill also defines the term hedge fund and requires any investment adviser to a hedge fund to disclose to each investor or prospective investor in the fund, at least 30 days before their investment, any financial or other interests the investment adviser may have that conflicts with or are likely to impair his or her duties and responsibilities to the fund or its investors. The bill allows the banking commissioner to adopt regulations to implement this requirement.

EFFECTIVE DATE: October 1, 2009

HEDGE FUND DEFINITION

Hedge Fund Definition

The bill defines the term “hedge fund” as any investment company, as defined under the Investment Company Act of 1940, located in this state:

1. that claims an exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940;

2. whose offering of securities is exempt under the private offering safe harbor criteria in Rule 506 of Regulation D of the Securities Act; and

3. that meets any other criteria the banking commissioner establishes in the regulation he adopts to implement the bill.

A hedge fund is located in the state if it has an office in this state where employees regularly conduct business on the fund's behalf.

BACKGROUND

Investment Company Registration Exemptions

Under Section 3(c)(1) of the federal Investment Company Act, an issuer (1) whose outstanding securities are beneficially owned by 100 or fewer persons and (2) who does not plan to make public offerings is exempt from registering as an investment company.

There is also a “sophisticated investor” exemption under Section 3(c)(7) of the Investment Company Act. Issuers are exempt from registering under this section if (1) their outstanding securities are owned by “qualified purchasers” and (2) they do not make a public offering of securities. A “qualified purchaser” is defined as an (1) individual who owns $5 million worth of investments and (2) certain entities that own $25 million worth of investments.

Offering Registration Exemption and the Regulation D “Safe Harbor”

Since hedge fund interests are considered securities under the Securities Act of 1933, they would ordinarily be subject to SEC regulation. However, the 1933 act provides an exception to the registration requirements if the interests are not sold in a “public offering.” Under federal regulations, offers and sales of securities by an issuer that satisfy certain conditions are deemed to be transactions not involving any public offering (and therefore, exempt from registration requirements.)

To meet the commonly used “safe harbor” in Regulation D, hedge funds may sell their interests to an unlimited number of “accredited investors.” This term includes:

1. a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase;

2. a natural person with income exceeding $200,000 in each of the two most recent years, or joint income with a spouse, exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;

3. institutional investors (corporations and other corporate entities must have $5 million in assets); and

4. an officer of the company selling the securities. Regulation D also allows an issuer to sell its interests to a limited number of non-accredited investors (up to 35) if they have sufficient financial knowledge.

COMMITTEE ACTION

Banks Committee

Joint Favorable Substitute