In April, I reported on SB 54 (Skinner), a bill that would have required institutional Investors, securities and real estate brokers, and others to report on the diversity status of "founding teams".  At the time, I criticized the bill as being "so poorly drafted as to amount to gibberish".  The bill has since been amended several times and has been advancing in the legislative process.  In its current iteration, the bill would require certain investment advisers to report annually to the Civil Rights Department information about the diversity of the founding members of enterprises.   

The bill purports to impose reporting requirements on "covered persons" which it defines as a person who acts as an investment adviser to a venture capital company (as defined in 10 CCR § 260.204.9(a)(4)) and who meets any of the following three criteria:

• Advisers licensed by the Department of Financial Protection and Innovation pursuant to Section 25231 of the Corporations Code.

• Advisers who have filed an annual notice with the Commissioner of Financial Protection and Innovation pursuant to subdivision  Section 25230.1(b) of the Corporations Code.  This category covers investment advisers conducting business in California who are registered with the Securities and Exchange Commission and have six or more clients

• Advisers who are exempt from registration under the Investment Advisers Act of 1940 pursuant to 15 U.S.C. § 80b-3(l) and have filed a report with the Commissioner of Financial Protection and Innovation pursuant to 10 CCR § 260.204.9(b)(2).  This category covers investment advisers to venture capital funds who are exempt from federal and California registration.

The second category is highly problematical because Section 307 of the National Securities Markets Improvement Act provides that states may only require SEC registered investment advisers to provide, for notice purposes, copies of any filings made with the SEC.  

The bill also authorizes the imposition of fees in violation of Section 307 of the NSMIA which permits states to collect filing fees under state law in effect before the enactment of the NSMIA in 1996.  

Although the bill appears to be directed at investments made by venture capital funds, it requires disclosure of "information for the founding teams of all of the businesses in which the covered person made a venture capital investment in the prior calendar year".   As the bill repeatedly refers to investments made by the covered person, it is apparent that the bill's author simply does not understand that in most cases the investment will be made by venture capital fund, not the "covered person".