Starting a Hedge Fund in New York

It is no secret that New York is the center of the investment management universe and the home of a large majority of hedge funds.  For both small and large managers New York offers many befits, namely a proximity to Wall Street and many of the investment banks and also an exemption from investment advisor registration (see discussion below).  This article discusses the New York investment advisor exemption, the Form 99 filings and New York investment advisor FAQs.

New York Investment Advisor Definition

In New York hedge fund managers do not need to be registered as investment advisors because of the “de minimis exemption.”  As you can see from the definition below, managers would fall generally within the definition of investment advisor and would need to register but for the de minimis exemption.

Definition

Investment adviser shall mean any person who, for compensation, engages in the business of advising members of the public, either directly or through publications or writings within or from the State of New York, as to the value of securities or as to the advisability of investing in, purchasing, or selling or holding securities, or who, for compensation and as a part of a regular business issues or promulgates analyses or reports concerning securities to members of the public within or from the State of New York.  [See NY Inv. Adv. Reg. 11.12(f)]

De Minimis Exemption

The following investment advisers are exempted from the registration provisions of the Investment Adviser Act and the regulations issued thereunder: … a person who sells investment advisory services to less than six (6) persons in this state exclusive of financial institutions and institutional buyers; [See NY Inv. Adv. Reg. 11.13(a)(5)]

A copy of the rules can be found here.

Form D and Form 99 Filings

While hedge fund managers enjoy favorable investment advisory rules, the Form 99 rules for private placements to investors in New York are onerous.  The Form 99 cost is also significant.  For more information, please see Form 99 information (forthcoming).

Investment Advisor FAQ

For those managers who are located in New York and choose to register, such managers may want to review the following New York investment advisor frequently asked questions.  The list can also be found here.

Question: Where can I find the investment adviser regulations?

Answer: They are available at www.oag.state.ny.us/bureaus/investor_protection/investors/investors.html

Question: What are some important issues?

Answer: Registration or notice filing is required with 6 or more clients through the Investment Adviser Regulatory Depository system (“IARD”). For state registered investment adviser representatives, there is a qualification requirement for passing an exam or meeting other qualifications. Firms have record keeping requirements.

Question: Are state registered advisers required to have a Code of Ethics and provide information about it on the ADV?

Answer: Yes, it is required by Item 9 of Part 2 of the ADV.

Question: What are the requirements for Securities Exchange Commission (“SEC”) registered advisers?

Answer: If you have more than 5 NY clients, you must do a notice filing by adding NY as a notice filing state on the IARD and submit to this office a copy of Part 2, Schedule F and any other part of Form ADV that is not on the IARD. If there are amendments to any section of the Form ADV not on the IARD, submit a copy to this office.

Question: Are there any requirements for investment adviser representatives of SEC registered investment advisers?

Answer: No, there are no requirements for investment adviser representatives of SEC registered firms.

Question: May I register or notice file with less than 6 NY clients?

Answer: Yes.

Question: May I file a paper copy of the ADV?

Answer: No, Part 1 plus Schedules A-D must be filed electronically.

Question: How do I file the ADV electronically?

Answer: Go to www.iard.com and click on “How to get started on IARD.” Print out the “State Registrant Entitlement Packet.” Read the package, complete the forms and mail to the address provided in the packet. You will receive information on how to complete the IARD filing along with instructions on how to fund the IARD account.

Question: Where do I obtain a copy of the ADV?

Answer: It is available at www.sec.gov/iard or at www.oag.state.ny.us/bureaus/investor_protection/investors/investors.htmll. It is recommended you print and read the entire application before starting the process. The SEC website may have other helpful information for both state and federally registered advisers.

Question: Does anything else need to be submitted in addition to the IARD filing?

Answer: State registered advisers must submit all parts of the Form ADV not currently on the IARD. For most advisers, this is Part2 and Schedule F, and an income statement and balance sheet either audited or certified by management. On the OAG website, see the cover sheet at the Registration and Application Forms w/Index for the Investment Protection Bureau and the regulations.

Question: Is a balance sheet required if I am a sole proprietor, new investment adviser, etc.?

Answer: All state registered investment advisers must submit a balance sheet. (Federally registered advisers are not required to do so.) There is currently no net capital or bonding requirement in NY.

Question: If I receive a deficiency letter for additional information, am I required to respond?

Answer: Yes, a response is necessary to complete the filing.

Question: Where do I mail Part 2, Schedule F, financial statements and other required paper filings?

Answer:

NYS Department of Law
Investment Protection Bureau
Investment Advisory Unit
120 Broadway, 23rd floor
New York, NY 10271

Question: Must I pay the $200 annual fee is I register/notice file voluntarily?

Answer: Yes, if you wish to be registered or notice filed, you must pay the fee and be in compliance with all regulations.

Question: Are there annual filing requirements for state registered advisers?

Answer: Yes, in addition to the annual fee, an annual updating amendment must be done on the IARD system and fiscal year end financial statements must be submitted all within 90 days after your fiscal year end.

Question: Will I receive a notice to submit my annual filings?

Answer: It is your responsibility to submit annual filings on a timely basis as well as comply with all sections of the investment adviser regulations whether or not you receive a notice from this office.

Question: If I amend the ADV, do I need to send a copy to you?

Answer: If you amend any part of the ADV that is not on the IARD system, yes. Do not send copies of what is on the IARD, we receive the information electronically.

Question: What is the annual filing fee?

Answer: $200 is the required fee. This fee should be paid though the IARD system.

Question: Does New York register investment adviser representatives?

Answer: No, but there are requirements for those individuals who represent state registered investment advisers.

Question: How do I know if I am required to take an exam?

Answer: All individuals that represent a state registered investment adviser must meet the requirements of NYCRR §11.6 or §11.7 of Title 13 of the investment adviser regulations. If you have taken the Series 65 or both the Series 66 and Series 7 within the last two years, you do not have to do anything. If you have not taken the required exams within the last two years, look at §11.7 of the investment adviser regulations to see if you qualify for a waiver. If you think you are eligible for a waiver, then complete the Form NY-IAQ and subit to this office. If not eligible for a waiver, you must arrange to take the exam. Please do not submit Form NY-IAQ if you do not have any of the qualifications listed.

Question: If I don’t qualify for a waiver, when must I pass the exam?

Answer: Prior to providing advice to the public.

Question: Does New York sponsor individuals for the series 65 exam?

Answer: No, a sponsor is not required. For information about the Series 65 exam, go to www.nasaa.org and go to the exam section on the drop down box.

Question: If the company ceases operations, seeks to withdraw or no longer seeks registration, is a filing required?

Answer: Yes, file a Form ADV-W. using the IARD system.

Question: If I still have a question after reading all materials, is there someone I can call?

Answer: (Please note you may need to leave a voice mail message due to the volume of calls.)
Margaret Kurta 212-416-8285

Please contact us if you are thinking of starting a hedge fund in New York or are contemplating investment advisor registration.  Other related hedge fund law articles include:

• Nevada Hedge Fund Law
• How to register as an Investment Advisor
• Important Information for Registered Investment Advisors