State registered investment advisory firms usually have annual compliance requirements. The following discusses the major issues for investment advisors (both hedge fund and separately managed account managers) who are registered in California. In general, there is (i) an annual updating requirement and (ii) an annual financial filing requirement.
Annual ADV Updating Amendment
Registered investment advisers will need to update Form ADV (including Part II and Schedule F) on an annual basis. For California registered investment advisers the annual update is due within 90 days after the end of the firm’s fiscal year end (which will normally end on December 31). In general the advisor should review the entire ADV, Part II and Schedule F to make sure everything is accurate as of the date of filing. The advisor may want to make this filing itself (usually the chief compliance officer of the firm will complete) or the advisor may want to have its law firm or compliance firm complete the update for them.
Note: in additional to annual update, each advisor will need to make sure that certain information is updated on a continuous basis. If the information contained in Part I, Items 1, 2, 3, 4, 5, 8, 11, 13A, 13B, 14A and 14B of Form ADV, Form U-4 or any representation or undertaking contained in any affidavit filed with the state securities division, changes in any respect, or if the information contained in Part I, Items 9 and 10 and all items of Part II of Form ADV changes in any material respect, an amendment shall be filed promptly with the state securities division. Such amendment must be filed in writing no more than ten business days after the registrant has knowledge of the circumstances requiring such notification.
Annual Financial Filing Requirement
California registered advisors will also need to submit annual financial reports to the California Securities Regulation Division. Such advisors must submit the following to the division:
- a balance sheet prepared in accordance with generally accepted accounting principles
- an income statement prepared in accordance with generally accepted accounting principles
- CA Minimum Financial Requirements Worksheet
- CA Financial Verification Form
The above items should be sent directly to the California Securities Regulation Division at:
California Financial Services Division
1515 K Street
Sacramento, CA 95814
Note: in general both hedge fund managers and separately managed account advisors (who directly debit fees from client brokerage accounts) will be deemed to have “custody” of client assets and would need to make sure that, among other requirements, the balance sheet above is audited. Most advisors, however, will institute certain procedures (including a gatekeeper arrangement) which will allow them to submit unaudited financials. If you have questions, please contact your lawyer or compliance professional.
Other Compliance Issues
In California, like most of the states, there are a number of items that advisors will need to do a continuous basis. The most important is probably to properly maintain their books and records. California has also provided an overview of important issues for California investment advisor and has also provided an overview of the post-effective requirements.
- State Hedge Fund Laws and Issues
- Dealing with Ambiguous State Securities Laws
- California Investment Adviser FAQ
Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. Cole-Frieman & Mallon LLP will also help state based Investment Advisors to register with their state securities division. If you are a hedge fund manager who is looking to start a hedge fund or an investment advisor looking to register, please call Mr. Mallon directly at 415-868-5345.