Tag Archives: investment adviser representative

Investment Adviser Representative Information Now Publicly Available on IAPD

IAPD Update Provides Information on IA Reps

The Investment Adviser Public Disclosure (IAPD) was updated this week so that information on investment adviser representatives will now be available online.  Previously the search function allowed members of the public to access information on IA firms only.  The previous information available through the adviser search function consisted of an advisory firm’s Form ADV, Form ADV Part II and Schedule F.  Now, the IAPD provides the following information on each representative of a registered investment advisory firm:

  • Current employer (including employer’s IARD number and adress)
  • Number of jurisdictions representative is registered in
  • Whether the representative is suspended in any jurisdictions
  • Registration and Employment History (including dates registered at previous firms)
  • Disclosure information (including any U-4 disclosures and current and past complaints)
  • Whether there is information on representative in BrokerCheck (run by FINRA)

Certain representatives will not show up in the system if the person is not currently registered with a state, has not been registered with a state in the last two years, or has not been the subject of a final regulatory event that has been reported to IARD.

It is important for representatives of investment advisory firms to understand that the above information will now be publicly available and may be accessed by investors during the due diligence process.   Accordingly, we recommend reps occasionally check their profile on the IAPD to make sure there is no incorrect information listed.

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Cole-Frieman & Mallon LLP provides comprehensive regulatory support and hedge fund registration services.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Investment Adviser Representative Registration Requirement

Employees of Registered IAs Must Generally be Registered

State-registered investment advisory firms need to make sure that their employees who are deemed to be “investment advisory representatives” are appropriately registered. This means that any employee (or owner) of the IA firm who provides investment advice or who has supervisory authority will generally need to be registered with the state as a representative of the firm. In order to register, the applicant will need to have certain qualifications and generally the series 65 will be sufficient for these purposes.

There are consequences for not properly registering employees as investment advisor representatives. In an earlier article on whether IA firms can have silent owners, we discussed the fact that many state administrators have the power to censure or fine IA firms if they do not follow the registration rules. I recently stumbled across an example of a state taking such an action.

In the attached Disciplinary Order, the Texas State Securities Board (“Board”) concluded that the “unregistered employee” of the registered investment advisory firm provided investment advice to IA clients for compensation and that the IA firm failed to maintain a supervisory system reasonably designed to ensure compliance with the Texas Securities Act and Board Rules. The Board reprimanded the IA firm and also ordered an administrative fine of $5,000. The firm was required to comply with the Act and Board Rules moving forward.

The two important take-aways from this order are:

  1. Always make sure employees are registered or clearly exempt from registration, and
  2. Always ensure that you have an up-to-date compliance program that helps to ensure that the firm will operate within all applicable laws and regulations.

We always recommend that registered IA firms discuss any registration and compliance related matters with an experienced investment management attorney with detailed knowledge of the laws of the state where the firm is registered.

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Other related hedge fund law articles:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund or if you have questions about your investment advisor compliance program, please contact us or call Mr. Mallon directly at 415-868-5345.

Question: can my firm have a “silent owner”

Question: I am a manager registered as an investment adviser in [State]. Can I have a “silent owner” who solicits clients for the management company or the fund? Also, since the owner is only a “silent owner” who does not do any of the trading, will the “silent owner” need to be registered as an investment adviser representative and have to take the Series 65?

Answer: Maybe surprisingly, this is a question which comes up on a very regular basis. In many situations, the manager will have some friends with a great network of high net worth individuals and these friends think they will be able to help the manager raise assets. As noted in my previous article on the broker-dealer issues, there is a potential broker-dealer issue if the person will be compensated for helping to sell interests in a hedge fund. Additionally, there is a potential state investment adviser representative registration issue.

As mentioned in a previous aritcle, almost all of the state securities laws are based off of the Uniform Securities Act, which has a general definition of what constitutes an “investment adviser representative.” Generally, each “investment adviser representative” will need to be registered as such at the state level.

The definition form Uniform Securities Act (Last revised or Amended in 2005), Section 102(16) (emphasis added) provides:

“Investment adviser representative” means an individual employed by or associated with an investment adviser or federal covered investment adviser and who makes any recommendations or otherwise gives investment advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, provides investment advice or holds herself or himself out as providing investment advice, receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice, or supervises employees who perform any of the foregoing. The term does not include an individual who: (A) performs only clerical or ministerial acts; (B) is an agent whose performance of investment advice is solely incidental to the individual acting as an agent and who does not receive special compensation for investment advisory services; (C) is employed by or associated with a federal covered investment adviser, unless the individual has a “place of business” in this State as that term is defined by rule adopted under Section 203A of the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-3a) and is (i) an “investment adviser representative” as that term is defined by rule adopted under Section 203A of the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-3a); or (ii) not a “supervised person” as that term is defined in Section 202(a)(25) of the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-2(a)(25)); or (D) is excluded by rule adopted or order issued under this [Act].

http://www.uniformsecuritiesact.org/usa/DesktopDefault.aspx?tabindex=2&tabid=48

From the plain language of the statute (if adopted in substantially the same manner as above), a “silent owner” will generally fall within the definition of investment adviser representative. This means that the investment adviser representative will need to be registered as such with the state unless the state has an exemption from the registration provisions. While maybe contrary to what one would expect, it seems that some states may be willing to go along with an investment manager. I have heard of some states informally (over the phone) taking the position that when a “silent owner” merely tells people about the IA firm and does not involve himself further in the negotiation process, then such a “silent owner” would not be deemed to be an investment adviser representative. However, managers should consult with legal counsel if they would like to take this aggressive position. It is also highly recommended that before proceeding without registration, the IA firm should seek a no-action letter from the state on this topic. The no-action letter can be drafted by your attorney. There will probably be a filing fee at the state (around $100) in addition to any legal fees you may incur; generally answers can be received within 30 days.

A manager should also be aware that the firm can be fined if an employee acts in the capacity of an investment adviser representative without being registered. On February 4, 2008, the Kentucky Office of Financial Services levied a $54,668.53 fine against an investment advisor for failing to properly supervise the activities of an employee who was acting in the capacity of an investment adviser representative. Office of Financial Institutions v. Questar Capital Corp., Case No. 2008-AH-008, 2008 Ky. Sec. LEXIS 3 (Feb. 4, 2008). In this case, an unregistered employee of an investment fund was soliciting clients to a hedge fund. As a result of these referrals, the management company received compensation totaling $54,668.53. The Kentucky Office of Financial Institutions ruled that the investment advisor who oversaw the employee to be violation of KRS 292.330(1), and fined the fund $54,668.53 to disgorge its illicit profit. The investment adviser representative was to be put on heightened supervisory status and was also barred from receiving any compensation relating to advisory accounts until he was registered as an investment adviser representative.