Starting a hedge fund in Virginia
Those hedge fund managers who are starting a hedge fund in Virginia can potentially fit within an exemption from the Virginia investment advisor registration rules. Like many states which follow the Uniform Securities Act, investment advisors with a place of business in Virginia must register with the securities division (see FAQs below on Virginia investment advisor registration).
However, managers who have funds which start out with more than $5 million in assets, and which are exempt from investment advisor registration with the SEC, may be able to fit within an exclusion from the definition of the term investment advisor and thus not required to be registered with Virginia. We provide the statute and analysis below.
The Virginia Hedge Fund Regulation
The following regulation can be found here.
21VAC5-80-210. Exclusions from definition of “investment advisor” and “federal covered advisor.”
(A) The terms “investment advisor” and “federal covered advisor” do not include any person engaged in the investment advisory business whose only client is one (or more) of the following:
(7) A corporation, general partnership, limited partnership, limited liability company, trust or other legal organization that (i) has assets of not less than $5,000,000 and (ii) receives investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members or beneficiaries, provided the investment advisor or federal covered advisor is exempt from registration pursuant to §203(b)(3) of the Investment Advisors Act of 1940 or by any rule or regulation promulgated by the SEC under that section.
203(b)(3) exempts advisers from the registration requirements of 203(a) to any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor …;
Rule 203(b)(3)-1(d) – counts each investor in a hedge fund as a “client” for the purposes of Section 203(b)(3)
Virginia Investment Advisor FAQs
These FAQs can be found here.
1. Are financial planners or investment advisors required to register in Virginia?
A. Virginia law requires that, with some exceptions, any person who is engaged in the business of, and compensated for, advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities, must register with us.
2. Is a solicitor required to register as an investment advisor?
A. Yes. If the firm solicits, offers or negotiates for the sale of or sells investment advisory services, then the firm is required to register.
3. Does Virginia have a deminimus limit on unregistered activity by investment advisors?
A. Yes. The deminimus is the same as prescribed at the federal level, it allows an investment advisor who does not maintain a place of business in Virginia, to have five (5) Virginia clients prior to the requirement of registration. The rule site is 21 VAC 5-80-210 B.
4. Can I be registered as an investment advisor representative with two registered investment advisor firms at the same time?
A. Generally, no. A registered investment advisor representative may be registered in Virginia with only one registered investment advisor firm at any time.
5. Is a sole proprietor investment advisor firm required to register the firm and him or herself as a representative of the firm?
A. Yes. Virginia requires investment representative registration for all investment firms regardless of the form of organization, so both the firm and representative must register separately.
6. Does the Commonwealth of Virginia sponsor individuals to take investment advisor or broker-dealer agent examinations?
A. No. An individual does not need sponsorship to take the Series 63, Series 65, or Series 66 examinations. All other examinations are regulated by the FINRA or some other self-regulatory authority.
7. Does the Commonwealth of Virginia allow investment advisor representatives to substitute professional designations for the Series 65, Series 66, and Series 7 examinations?
A. Yes. The investment advisor representative must hold currently and in good standing one of the following professional designations. The designations are CFP (Certified Financial Planner), ChFC (Chartered Financial Consultant), PFS (Personal Financial Specialist), CFA (Chartered Financial Analyst), and CIC (Chartered Investment Counselor). Add hyperlink for address and/or website.
8. Do I have to retake the series 66 and 7 or 65 examinations over as an investment advisor representative if the examination result is over 2 years old and I have been out of business for more than 2 years?
A. Yes. If you have not been registered as an investment advisor representative in Virginia or in another state in the last 2 years (from the date of the application) and have no professional designation, you must take either the Series 65 or the Series 66 and Series 7 and receive a passing score.
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