Tag Archives: series 65

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].


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.

The Series 65 Exam

If you are a hedge fund manager in certain states (California and Texas are two prominent examples) then your management firm will need to be registered as an investment adviser with your state’s Securities Commission. In all states, the prerequisite for such registration is that the firm have at least one investment adviser representative who has passed certain qualifying exams (the Series 65 exam or the Series 7 and Series 66) or have certain designations (CFA, CFP, etc).

This post intends to give you an overview of the Series 65 exam and some thoughts on taking and passing this exam.

The Series 65 basics

What: a three-hour (maximum) 140 question computer based exam which focuses on the following topic areas: economics and analysis; investment vehicles; investment recommendations and strategies; and legal and regulatory guidelines, including prohibition on unethical business practices. The exam features 10 ungraded questions (which can appear anywhere within the test) and an examinee needs to correctly answer 89 of 130 graded questions (70%).

Where: you will take the exam at either a Pearson-Vue or Prometric testing station.

When: you will sign up to take the exam at a time of your choosing on either the Pearson or Prometric website. It is recommended you schedule the exam at least a week prior to the date you plan to take it.

Why: it is required for a person to become registered as an investment adviser representative.

How to sign up

You will typically register for the Series 65 by submitting a Form U-4 through the IARD system or by submitting a Form U-10 online. Your law firm or your compliance consultant can help steer you through this process. Also feel free to contact us if you have any questions.

The cost to take the exam is $120. There may also be some state and IARD fees if you are signing up for the exam through the Form U-4 process.

How to study for the exam

I recommend to all of my clients that they put a pretty good effort into studying. I have seen a good portion of very smart hedge fund managers fail the exam on the first try. The central reason, in my opinion, is lack of a diligent study program. While the Series 65 is not a college chemistry exam, it still covers a lot of information which is probably new to the manager. Accordingly, I recommend that a manager set aside at least 40 hours to prepare for the exam. During the preparation phase, I recommend the following:

Get a study guide and read the guide from front to back. I read my study guide from front to back while I actively created notecards as I read each chapter. Doing so takes much longer, but afterward I was able to keep the notecards in my pocket and review them whenever I had free time, which kept the material fresh in my mind.

I used the Kaplan study guide. I am partial to the Kaplan study guides and have exclusively used these guide when studying for the various securities exams I have taken – I have passed the Series 3, Series 7, Series 24, Series 65 and Series 66 exams. The major frustration with the Kaplan guide is that it contained many errors. However, I think that Kaplan does the best job of preparing practice questions which will be very similar (if not exactly the same) to what you are likely to see on the exam. There are some other study guides out there like the “Pass the 65,” however, I have not found a guide which presents the information in a simple, matter-of-fact way like the Kaplan materials.

Other study options include various multi-media and internet applications. Kaplan also has a full-day class you can take from an instructor.

Take two to three practice exams. I took two Kaplan practice exams. After taking each exam, I examined the answer to every question, including the ones I correctly answered. This review process really helped me to solidify my understanding of the material. [Note: you may need to take more than two practice exams to feel comfortable with your knowledge base. If this is the case, I highly recommend taking more practice exams.]

Get a good night of rest the night before the exam. I always scheduled my exams in the morning. This way I can get the exam out of the way early and I do not need to be anxious during the day. I try to get a good night’s sleep the night before. At this point, it is not going to help your exam performance to stay up into the morning trying to cram.

Day of exam

Make sure you wake up early enough to be awake and alert. You should eat a proper breakfast. Allow extra time to get to the testing site. Pearson and Prometric have different rules about when you are supposed to show up at the testing site. A good rule of thumb is 45 minutes prior to your testing time. When you get to the testing site, you will sign in and the proctor will give you the rules of the testing site. Be ready to take everything out of your pockets and to take your jacket off (it is advisable to dress in layers as the testing rooms are often kept at very cool temperatures). You will likely be nervous before the test – I took the opportunity after signing in and before the test time to review a few of the more important note cards before I put them in my provided locker. This kept my mind busy, calmed my nerves, and gave me a little extra bit of confidence that I could answer the questions on the exam.

The exam

The exam is a computer-based exam so the first five minutes or so you’ll be given an on-line demonstration of the manner in which to answer questions and mark them for review. After this demonstration, the exam will start. The first ten to fifteen questions will generally be easier than the questions which come in the middle of the exam – don’t get too complacent. The middle of the exam will drag on and during this time there were many questions which I was not sure about and there were a lot of questions where I had to give a best guess. At about 2/3 of the way through the exam, I thought that I was going to fail for sure. Be aware of this, it happened to me in almost every single FINRA exam which I took.

Because the exam is so long – 180 minutes – you may need to use the restroom during the middle. If this is the case don’t hesitate to take some time for a break. During these breaks I would take some time to grab a drink of water and take a few deep breaths. When you get back, complete the last half or third of the exam in a methodical manner. If you encounter a question which you do not have a clue about how to answer, either guess and move on or guess and mark the question for review. Do not spend an inordinate amount of time trying to come to the correct answer – there are enough questions which you will know the answers to and it is most important that you get to those questions without being flustered. Remember also that the final 15 to 20 questions are generally going to be easier.

When you have answered all of the questions you will have the option to go back over your answers and to change any of your previous answers. It is recommended that you do not make any changes unless you are positive that your new answer is correct. Once you have certified that you are satisfied with your present answers the computer will ask you to confirm that you wish to proceed. When you confirm, the computer will begin to process your answers. During this minute or so your heart will race as adrenaline pumps through you. The screen will then tell you if you have passed or not.

If you don’t pass

Some people will not pass this exam – I have spent plenty of time on the phone talking to managers who almost passed. If you don’t pass it is not the end of the world. The major drawback of not passing the exam is that you will have to wait 30 days to take the exam again. If time is of the essence, this drawback could be the difference between an on-time hedge fund launch and the dreaded delay. As such, I always stress to the client that it is much better to be overprepared than underprepared. You will thank yourself for those extra few hours when you have passed the exam. If you do not pass the exam on the second try, you will need to wait 60 days to take the exam again.

***UPDATE FOR MAY 2010***

As many of you know, the Series 65 exam changed in 2010 and it is now much more difficult to pass.  I have heard more stories from people this year about not passing than I did last year.  Also a concern is that the study guides are not spending enough time on the new emphasis in the exam.  For instance, one person I just spoke with mentioned that there were many more questions on trusts and pensions than were covered in the study guides.  As always I recommend you get an up to date study guide and take at least two practice exams before taking the actual exam.