Tag Archives: state hedge fund registration

Survey of State Securities Divisions

Are States Equipped to Handle Increased IA Registrations?

Under the new financial reform bill, expected to be signed into law sometime in July 2010, the state securities divisions will play a larger role in the oversight of investment managers.  Under the current system, investment advisers (who generally provide financial planning services or investment advice to individuals) with $30 million of AUM are required to register with the SEC.  Under the new laws to take effect under the reform bill, investment advisers with up to $100 million of AUM will be required to register with the state of their principal place of business.  This means that thousands of managers who are currently subject to SEC jurisdiction and oversight will become subject to state jurisdiction and oversight.  We do not believe that the states have the desire, expertise or, most importantly, the budget to handle an increase in the jurisdiction and oversight.  Because we think the states securities divisions are cash strapped, we conducted our own mini-survey to find out the answer.  [Note: we also recommend the article The New Sheriffs in Town about this same issue.]

Survey of State Securities Divisions

Over the past couple of weeks, we called each state securities division and tried to speak with a person familiar with each division’s financial situation and other aspects of their operations.  While we were not always able to speak with the appropriate person, we were at times able to divine interesting information from our discussion.  For many states we have sent in record requests under the Freedom of Information Act and while our reports below are not complete, they do show us that a number of securities divisions are in fact having financial difficulties.  These questions focus on the issues we think are important.  [Please note: most of the answers below are not official but were instead taken from our informal phone conversations with people in the various divisions.]

Question: Is the securities division facing budget cuts?

  • Arizona – yes, there have been budget cuts over the last couple of years.
  • Delaware – no, but statewide salaries have been cut 2.5%
  • Kansas – there is a constrained budget
  • New Mexico – yes
  • Oregon – yes
  • Pennsylvania – budget restraints
  • Utah – yes
  • Vermont – yes, as of 2009
  • Washington – yes
  • Other: A number of divisions either stated no or that they could not provide that information.

Question: has the securities divisions faced staff reductions?

  • Utah – yes
  • Washington – operating under a hiring freeze
  • Other:  A number of states said there were vacant positions (Alaska, Arizona, Delaware, Kansas, New Mexico (3))

Question: are division staff forced to take furlough days?

  • California – yes, either 1 or 2 Fridays a month
  • Colorado – yes, 1 days per month instituted in Fall of 2009
  • Connecticut – yes, instituted in 2008
  • Delaware – yes, instituted in 2009
  • Hawaii – yes
  • Maine – yes
  • Michigan – yes
  • Minnesota – yes
  • Nevada – yes
  • New Mexico – in 2009 (5 days) but not in 2010
  • Oregon – yes
  • Vermont – yes – instituted in 2009
  • Virginia – yes
  • Washington – yes
  • Wisconsin – yes
[Note: we expect this number to rise as soon as we receive information back from our Freedom of Information Act requests.]

Question: how many staff members does the division employ?

  • Arkansas – 38
  • Delaware – 13 (2 examiners)
  • Indiana – 18-20 (1 examiner)
  • Louisiana – 11 (2 examiners)
  • Montana – 5 (2 examiners)
  • Nebraska – 10 (1 examiner)
  • New Hampshire – 10 (2 examiners)
  • New Mexico – 22 (1 examiner)
  • North Dakota – 9 (3 examiners)
  • Utah – 19 (5 examiners)
  • Washington – 38 (8 examiners)
  • West Virginia – 11 (5 examiners)
  • Wisconsin – 16 (10 examiners)
Question: how often does the division audit registrants?

  • Indiana – 3-4 year cycle
  • Louisiana – 2 year cycle
  • Montana – 3 year cycle
  • Nebraska – every 2-3 years
  • New Hampshire – risk-based cycle
  • New Mexico – 3 year cycle
  • Utah – 5 audits per month (3 routine, 2 for cause; mostly broker-dealer issues)
  • Virginia – 3.5 year cycle
  • Washington – high-risk firms audited 1-2 years; lower risk firms audited every several years
  • Wisconsin – 3 year cycle

We will periodically update this information as we receive it from the divisions.


Other related hedge fund law articles:

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

Massachusetts Hedge Fund Exemption

Exclusion From Definition of Investment Adviser

Generally Massachusetts will require hedge fund managers with a place of business in Massachusetts to register as an investment adviser with the Massachusetts Securities Division.  However, there is an exemption from registration for some hedge fund managers located in Massachusetts.  [Note: to be more accurate, the “exemption” really is an exclusion from the definition of investment adviser under the Massachusetts Securities Act.]

Definition of Investment Adviser

Under Section 401(m) of the Massachusetts Securities Act, the term investment adviser means:

any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. …“Investment adviser” shall not include: … a person whose only clients in this state are federal covered advisers, other investment advisers, broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, employee benefit plans with assets of not less than $5,000,000, governmental agencies or instrumentalities, or other financial institutions or institutional buyers, whether acting for themselves or as trustees with investment control; (emphasis added)

This definition is similar for most states and is based on the Uniform Securities Act which was designed to help standardize state securities laws.  Normally the definition of “other financial institutions or institutional buyers” is not defined under state law or division regulations and will normally be understood to mean large institutions.

Massachusetts has specifically defined “Institutional Buyer”.

Definition of “Institutional Buyer” for Section 401(m)

Under Massachusetts regulations,

Institutional Buyer shall include any of the following:

a. An organization described in Section 501(c)(3) of the Internal Revenue Code with a securities portfolio of more than $ 25 million.

b. An investing entity whose only investors are accredited investors as defined in Rule 501(a) under the Securities Act of 1933 (17 CFR 230.501(a)) each of whom has invested a minimum of $ 50,000.

c. An entity whose only investors are financial institutions and institutional buyers as set forth in M.G.L. c. 110A, § 401(m) and 950 CMR 12.205(1)(a)6.a. and b.

See 950 CMR Section 12.205(1)(a)(6)

For hedge fund managers, section (b) above is important.  A hedge fund would be considered to be an “institutional buyer” if (i) the fund only accepts accredited investors and if (ii) each investor has contributed at least $50,000 to the fund.  If the fund does not meet both parts of the test, the fund will not be an “institutional buyer” and the fund manager would not be excluded from the definition of investment adviser and would need to register as such with the Massachussetts Securities Division.

Consequences for Not Registering

If a fund manager does not meet the two tests above, the manager will need to be registered or face certain consequences.  These consequences may include:

  • An order to cease and desist conducting business
  • A requirement to register with the division
  • Administrative fines
  • Offer of rescission of fund interests to investors
  • Further division scrutiny

Some managers may be tempted to not register but as we can see from a previous Massachussetts Securities Division Complaint against an unregistered hedge fund manager, the consequences and the time/money/effort spent with a formal division complaint will be far more cumbersome than simply registering with the division in the first place.


Many states have intricate laws with respect to hedge fund manager registration.  These laws will become even more important to understand if/when the Wall Street Reform bill passes in which case many SEC registered advisers will need to switch to state registration.


Other related hedge fund law articles:

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