Tag Archives: investment advisor registration

Wisconsin Based Hedge Funds – Wisconsin Investment Advisory Rules

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One of the key issues which hedge fund managers will need to determine early in the hedge fund formation process is whether the management company will need to be registered as an investment adviser with the state securities commission (or potentially with the SEC).  Generally the lawyer advising the management company will survey the state laws to determine whether or not registration is necessary.  While the lawyer will look directly to the state statutes through some sort of online legal database such as Lexis Nexis (to ensure that the most current and up to date information is provided to the client), the hedge fund manager can also check with his state securities commission to see if registration is required.  Sometimes states, such as Wisconsin, will include their registration information on their website.  The notice below is typical of such a practice. Continue reading →

Withdrawing from Investment Advisor Registration – the Form ADV-W

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For many different reasons a hedge fund manager will decide to de-register as an investment advisor.  The manager may no longer be required to be registered or a manager may have registered simply for marketing purposes and has found that it is too much of a hassle (and cost) to be registered.   In such instances a hedge fund manager can withdrawal from registration by filing Form ADV-W through the IARD (Investment Advisor Registration Depository) system.   The process for de-registering is substantially the same whether the manager is registered with the SEC or with the state securities commission.  This article will discuss (i) issues with de-registration for the hedge fund manager and (ii) detail the process of deregistering.  Continue reading →

How to Register as an Investment Advisor

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Many hedge fund managers come from brokerage firms or other investment advisory firms and may, accordingly, have some of the FINRA licenses like a Series 7 or a Series 65.  However, most managers have not registered an as investment advisor and do not understand the process.  This guide is designed to familiarize managers with the  investment advisor registration process.

Investment Advisor Compliance Firm

First, you will want to find a firm that will help you through the process of registering as an investment advisor.  A hedge fund lawyer or a hedge fund compliance firm (usually consisting of former SEC or state securities commission examiners) will be able to help you with this process. Potential investment advisors should not try to go through the registration process by themselves – it will take too much time and subject the advisor to potential liability.

Jurisdiction

The manager can register as an investment advisor with the SEC or the state securities commission of the state in which the manager resides.  The manager should have a conversation with the lawyer or complaice firm regarding the pros and cons of the registration with the SEC or state.  Generally, however, a manager will only be able to register with the SEC if the manager has at least $25 million under management.

Cost

The costs should be the same for the advisor whether they go with a hedge fund lawyer or with a compliance firm.  Generally, for state-registered investment advisers, the professional fees run anywhere from $2,500-$3,500 for the registration.  For SEC-registered investment advisors, the professional fees will run anywhere from $4,000 to $8,000 depending on the complexity of the investment advisory firm.
The above costs are service provider fees and do not include the fees an investment advisor firm will pay to the state of residence of the investment advisor.  Such fees will generally include the following:

  • IA firm registration fee (State registered IAs only)
  • IA representative fee
  • Form U-4 fee
  • Notice filing fee (SEC registered IAs only)
  • Other miscellaneous fees

Tests

The manager who is registering to be an investment advisor will typically need to have taken and passed the Series 65 exam within the two years prior to registration.  Most all states will also allow managers to register if they have the Series 7 exam and the Series 66 exam.  Since most managers who have the Series 7 will not have the Series 66, the managers will need to take this exam.

Additionally, most states will not require a manager to have any of the above exams if they have one of the following designations

  • Chartered Financial Planner (CFP);
  • Chartered Financial Consultant (ChFC);
  • Personal Financial Specialist (PFS);
  • Chartered Financial Analyst (CFA); or
  • Chartered Investment Counselor (CIC).

Forms

The investment advisor will need to complete a wide variety of forms during the registration process.  These forms include:

IARD entitlement Forms – “IARD” stands for the Investment Adviser Registration Depository which is sponsored by the SEC and the NASAA (the association of state securities regulations, www.nasaa.org) but which is operated by FINRA.  As the IARD system is an online system, these forms need to be manually completed and processed by FINRA before you can begin the registration process.  The forms can be found here: IARD Entitlement Forms

Form ADV – this is the form which all investment advisors complete.  When a firm is registered with the SEC or the state, then the filings can be seen here by typing in the advisor’s name.  Please see Form ADV.  (HFLB note: we will have a detailed guide on Form ADV coming out soon.)

Form ADV Part II – this is the part of Form ADV which provides more information on the advisor’s activities.  It is sometimes refered to as the investment advisory “brochure.”  Please see Form ADV Part II.  (HFLB note: we will have a detailed guide on Form ADV Part II coming out soon.)

Form U4 – this form will need to be completed for all members of the firm which will be investment advisor representatives.  If such members have been in the securities industry for a while, they will likely already have a U4 on file with FINRA.  (HFLB note: we will have a detailed guide on Form ADV Part II coming out soon.)

Registration Timeline

Your compliance provider will be able to help you determine how long it will take to become registered as an investment advisor.  Generally SEC registration will be quicker than state registration and many times registration can be completed within 2 to 4 weeks.

State registration is more difficult to determine and will depend on the state of registration.  A state like California may take 6 to 8 weeks.  A state like South Carolina will take about 2 weeks, it just depends and you should discuss this issue with your compliance provider if the registration is time sensitive.

Other helpful articles include:

Please contact us if you would like to register your firm as an investment advisor or if you have any questions on the above.

Hedge funds and ERISA

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Hedge fund managers have to be especially aware of the ERISA rules with regard to their hedge fund and the investors in the fund. ERISA stands for the Employee Retirement Income Security Act of 1974 and it governs, among other things, pension investments into hedge funds.  The Department of Labor is the governmental agency which is in charge of promulgating regulations regarding ERISA.

There are many items to be aware of with regard to ERISA. The most important item for a hedge fund manager is the 25% ERISA threshold limitation for “benefit plans.” If investments into a hedge fund by “benefit plans” exceed the 25% threshold then the manager will become subject to certain ERISA rules. For these purposes the term “benefit plan” means both traditional pension plans and also Individual Retirement Accounts (IRAs).

Requirements for hedge fund managers subject to ERISA

The hedge fund manager who is subject to the ERISA rules will, most importantly, need to (i) be registered as an investment adviser with either the SEC or the state securities commission and (ii) maintain a fidelity bond (which usually costs a few thousand dollars a year).

Additionally, there are many other issues the hedge fund manager will need to be aware of and which he should discuss with his attorney including:

  • Performance Fees
  • Soft dollars and brokerage
  • Dealing with “Parties in interest”
  • Use of Affiliated Brokers
  • Cross Trades
  • Principal Transactions
  • Expenses
  • Information reporting and side-letters
  • Record retention

The 25% threshold

There are many intricacies to the 25% threshold and if you have any questions you should speak further with an attorney regarding the specific facts of you situation.  A couple of items to note about the 25% rule:

1. Investments by the manager and affiliates do not count toward determining the 25% threshold.

For example, if a hedge fund has shares outstanding with a total net asset value of $100M and the fund manager and its affiliates (e.g., portfolio managers, employees, etc.) hold a $20M investment in the fund, the 25% threshold would be 25% of $80M (i.e., $20M), rather than 25% of $100M (i.e., $25M).

2. You will need to test on a class basis.

For example if a hedge fund has two classes of interests, you will need to determine the 25% threshold for each class of interests. If Class A has $90M in assets and no “benefit plan” investments and Class B has $10M in assets and has a $5M investment by benefit plans, then the whole fund, not just the Class B, will be subject to ERISA because of the Class B investment.

Additionally, with the advent of new structures such as the Delaware Series LLC and the offshore Segregated Portfolio Company, the application of the test is likely to be at the series of segregated portfolio level, and not simply at the fund level. The last time we researched this question the issue was not definitively decided, but there may have been some definitive guidance since that time. If you are contemplating one of these structures you should discuss this issue with legal counsel. Also, the calculations may get a little get a little difficult with an offshore master-feeder structure.

3. Continuously monitor the 25% threshold.

Because hedge funds typically will allow additional capital contributions as well as withdrawals at regular intervals, the percentage of fund’s investments by benefit plans will change. If, because of a redemption of another investor, the 25% threshold is reached, the hedge fund manager will be subject to ERISA.

Only IRA investments – still subject to ERISA?

One items that always comes up is what happens if the fund exceeds the 25% threshold but only has IRA investments.  Although a fund which exceeds the 25% threshold will generally be subject to the ERISA rules, those rules only will apply to the pension plans and not the IRAs (although the manager will need to make sure to conform all actions to certain IRS requirements).  In this way a hedge fund manager which exceeds the 25% threshold and only has IRA money will not be subject to the registration and bonding requirements.  Many of our clients fall within this category.

Conclusion

ERISA is one of the more specialized parts of hedge fund law. If a manager is thinking of potentially being subject to ERISA the manager should thouroughly discuss the possibility with his hedge fund counsel. The manager should always make sure that the law firm he works with has an attorney which specializes in ERISA or works with an outside ERISA counsel on all ERISA issues.

While many managers will make sure that their fund is never subject to ERISA, I have seen many managers who have become subject to ERISA because of a significant investment by certain pension plans. Indeed in many situations it will make a lot of sense to become subject to ERISA and start up hedge fund managers should not automatically reject potential investments because they may become subject to ERISA. Our firm has worked with many managers who becomes subject to ERISA and it has worked out well – one suggestion I would make is to start the process early because investment advisor registration will be necessary.