Wisconsin Based Hedge Funds – Wisconsin Investment Advisory Rules

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.

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From the Wisconsin Department of Financial Institutions, the article below can be found here.

Investment Adviser Representatives
Updated 5/06/2003

Changes in the Wisconsin Uniform Securities Law effective July 9, 1998 now require certain persons representing state-licensed investment advisers or federal covered advisers to be licensed as investment adviser representatives and to meet certain minimum qualifications. The definition in § 551.02(7m), Wis. Stats., states in general that an investment adviser representative is anyone who is a supervised person of an investment adviser or a federal covered adviser. A supervised person is further defined in § DFI-Sec 1.02(14)(a), Wis. Adm. Code, as a partner, officer or director, or a person having a similar status of performing similar functions for an investment adviser or a federal covered adviser. It also includes anyone else who is subject to the supervision and control of the adviser and who provides investment advice on behalf of the adviser. This does not include a clerical or ministerial employee.

If a supervised person does not meet with, solicit or communicate with clients of the adviser on a regular basis or if the supervised person only provides impersonal investment advice, that person is excluded from the definition of investment adviser representative. [See § DFI-Sec 1.02(14)(c), Wis. Adm. Code].

There is also an exclusion from the definition of investment adviser representative if the supervised person does not have a place of business in Wisconsin and has no more than a specified number of clients. The client de minimis test is based on the number of natural persons a supervised person can have before being required to be licensed. The supervised person does not need to be licensed if the number of his or her natural person clients does not exceed the greater of (a) five, or (b) 10% of the supervised person’s total clients. (For example, the representative has 5 clients who are natural persons and 65 business or institutional clients, for a total of 70 clients. The representative can have 7 clients who are natural persons before being required to be licensed [70 clients x 10% = 7 clients].)

The administrator may also exclude a person from the definition by rule or order.

FOR FEDERAL ADVISERS ONLY: Investment adviser representatives of federal covered advisers who have no place of business in Wisconsin do not need to be licensed, regardless of the number of clients.
If you use a solicitor to refer clients to you, that person may also fit the definition of investment adviser representative if the person is a supervised employee of your firm. The solicitor would be required to pass the same examinations as any other investment adviser representative.

A third party solicitor is a person who is neither a partner, officer, director or employee of the adviser nor is a supervised person of the adviser. An example would be an independent contractor who solicits or refers potential clients to a number of different, unaffiliated investment advisers and receives a fee for those referrals. The advisers pay the third party solicitor a fee for each referral but exercise no supervision of the solicitor’s activities. The solicitor has the option of arranging with each investment adviser to become licensed as an investment adviser representative or becoming a separately licensed investment adviser.

§ DFI-Sec 1.02(5)(c)2, Wis. Adm. Code provides that anyone who complies with rule 206(4)-3 of the Act is not considered to be soliciting if the person: a) is licensed as an investment adviser or investment adviser representative; b) the person is licensed as a securities agent for a licensed broker-dealer which is approved to provide investment advisory services; or c) the person solicits or refers fewer than 10 Wisconsin residents to any one investment adviser within a calendar year.

Generally, the staff considers any person providing advice on a specific client’s portfolio, whether directly or indirectly, or who discusses the performance of the portfolio or the investment adviser’s recommendations, to be acting in the role of an investment adviser representative. For example, a person who reviews a particular client’s account, makes recommendations to another investment adviser but never actually speaks with the client, will still be required to be licensed as an investment adviser representative. The advice was specific to that particular client’s needs and portfolio and therefore, the adviser is providing advice to a Wisconsin client.

However, the staff has usually determined that a member of an investment committee which makes generic decisions on an investment adviser’s recommendations, with no consideration given as to which clients hold or should hold such securities, is not transacting business or providing advice for Wisconsin clients and therefore would not need to be licensed as an investment adviser representative.

Every individual seeking to become licensed as an investment adviser or an investment adviser representative must pass the examinations prescribed in § DFI-Sec 5.01(3), Wis. Adm. Code. These examinations are the post-January 1, 2000 versions of the NASAA Series 65 Uniform Investment Adviser law Examination or the combination of the post-January 1, 2000 version of the NASAA Series 66 Uniform Combined State Law Examination in conjunction with the Series 7 General Securities Representative examination.

The Series 65 is the full exam covering not only investment adviser regulation topics but also product and economic theory knowledge. The Series 66 exam can only be utilized in conjunction with the Series 7 as an alternative to the Series 65. The Series 66 covers investment adviser regulation topics but does not cover the product knowledge and economic issues as those were already covered in the Series 7 exam. You do not need both a Series 65 and Series 66. You only need one or the other, remembering the Series 66 alone is not sufficient; the Series 66 must always be accompanied by the Series 7.

There are waivers from the examination requirement available if the applicant was licensed as an investment adviser or an investment adviser representative on January 1, 2000 in any jurisdiction in the United States. FOR WISCONSIN ONLY, anyone who has passed the Series 7 and 63 or received a waiver from the need to pass those exams, no matter when they were taken, is eligible for a waiver from the Series 65 and 66 exams.

Also, anyone who meets any of the criteria set forth in § DFI-Sec 5.01(4), Wis. Adm. Code can claim a waiver if the person holds any of the following designations and is in good standing with the sponsoring organization:

•    CFP–Certified Financial Planner
•    ChFC–Chartered Financial Consultant
•    PFS–Personal Financial Specialist
•    CFA–Chartered Financial Analyst
•    CIC–Chartered Investment Counselor

All examinations are administered by the NASD at their computer testing sites and reservations to take the exams are made by filing Form U-10 with the NASD along with the appropriate fee. The Division of Securities does not have forms nor does it have any information or scheduling ability with regard to these examinations. All inquiries should be directed to the NASD at 301-590-6500. Study guides for the Series 65 and 66 exams are available on the NASAA website at www.nasaa.org under Exams or you can contact NASAA at 10 G Street N.E., Suite 710, Washington, DC 20002 or call (202) 737-0900. There are a number of private organizations which offer classroom or self-study courses for the exams. You can find a list of vendors at : www.nasaa.org/industry___regulatory_resources/exams/887.cfm. Note that the Division does not endorse or otherwise recommend any vendors.

Applications for licensing as an investment adviser representative are accomplished by the investment adviser completing a copy of    Form U-4 (PDF: external link) and submitting that application electronically to the Division via the Investment Adviser Registration Depository (“IARD”) along with the $30 licensing fee. Individuals who will be sole-owner investment advisers do not need to fill out a Form U-4 inasmuch as the Form ADV will constitute the application and that person is not an investment adviser representative for licensing purposes.

When the application has been received via the IARD, any applicant who does not have a disciplinary history will automatically be approved. Applicants with disciplinary items on their application will be manually reviewed by the Division. More information regarding the reported disclosure may be requested prior to an approval. Investment adviser representatives must keep their applications current by updating via the IARD whenever the information in the application becomes outdated. Failure to maintain an accurate application may result in action against the investment adviser representative license.

Investment adviser representative licenses expire concurrently with the investment adviser’s license on December 31st. Renewal of investment adviser representative licenses is accomplished as part of the annual renewal sent to investment advisers by the IARD system in October. (See Renewal section). Withdrawals for investment adviser representatives who terminate their employment for any reason must be filed within 15 calendar days of termination. See § DFI-Sec 5.08(2), Wis. Adm. Code.

Broker-dealer Investment Advisers

Because a broker-dealer may provide investment advisory services under its broker-dealer license, employees of the broker-dealer actually providing advisory services to clients cannot be licensed as investment adviser representatives. Rather, such employees would be licensed as securities agents of the broker-dealer, whether they actually sell securities or merely provide advisory services with no sales component. § DFI-Sec 4.01(9), Wis. Adm. Code,, requires that a securities agent seeking to provide advisory services on behalf of his or her employing broker-dealer must pass the investment adviser representative examinations prescribed in § DFI-Sec 5.01(3), Wis. Adm. Code or be eligible for a waiver in § DFI-Sec 5.01(4), Wis. Adm. Code. For instance, agents who have passed the Series 7 and 63 exams can claim a waiver from the Series 65 in order to provide advisory service on behalf of the broker-dealer.
Broker-dealer investment advisers SHOULD NOT make any filings in Wisconsin via IARD for agents who will also provide advisory services. Only persons who are not licensed as securities agents in Wisconsin but who will provide only advisory services here should file as an investment adviser representative (NASD’s RA registration type).

The Division has taken the position that qualified agents of a broker-dealer investment adviser may use the term “investment adviser representative” in advertising if that term does not mislead readers concerning the services rendered. However, investment adviser representatives can never call themselves “investment advisers” or “RIA” because they do not hold an investment adviser license.

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