Registration for Advisors to Private Funds
By now, you are probably aware that advisors to private funds (a/k/a hedge funds or pooled investments) need to register as investment advisors if they provide advice on securities to private funds. (To learn more, please read the SEC's rule release.) The SEC is requiring these advisors to become registered by February 1, 2006. While we recommend submitting your filing with the SEC as soon as possible (preferably before December 1, 2005), an applicant needs to have all its ducks in a row before filing.
The rumor on the street is that the SEC is seeking opportunities to audit newly registered advisors to private funds. In fact, we have heard of at least one firm being audited within weeks of SEC approval. The key to surviving an SEC audit is to understand the Investment Advisers Act of 1940 and then prepare in detail your documents and procedures in accordance with these requirements.
In order to register, the SEC merely requires the submission of the Form ADV Part I, which is probably the simplest form to complete and file. Nonetheless, when the SEC conducts an examination, it will be focused upon ensuring that the advisor firm has properly completed the Form ADV Part II with sufficient details regarding advisory services, fees, conflicts of interests, and outside business activities. The SEC will also conduct a thorough review of the firm's supervisory and procedures manual, client agreements, and required books and records.
As an advisor to a hedge fund, you may be anxious about the SEC's looming registration deadline; however we strongly recommend that you refrain from submitting the ADV Part I at this relatively early juncture (in late August) if your firm hasn't completed the entire ADV, established a written compliance program, and started to follow the SEC books and records requirements.
The rumor on the street is that the SEC is seeking opportunities to audit newly registered advisors to private funds. In fact, we have heard of at least one firm being audited within weeks of SEC approval. The key to surviving an SEC audit is to understand the Investment Advisers Act of 1940 and then prepare in detail your documents and procedures in accordance with these requirements.
In order to register, the SEC merely requires the submission of the Form ADV Part I, which is probably the simplest form to complete and file. Nonetheless, when the SEC conducts an examination, it will be focused upon ensuring that the advisor firm has properly completed the Form ADV Part II with sufficient details regarding advisory services, fees, conflicts of interests, and outside business activities. The SEC will also conduct a thorough review of the firm's supervisory and procedures manual, client agreements, and required books and records.
As an advisor to a hedge fund, you may be anxious about the SEC's looming registration deadline; however we strongly recommend that you refrain from submitting the ADV Part I at this relatively early juncture (in late August) if your firm hasn't completed the entire ADV, established a written compliance program, and started to follow the SEC books and records requirements.
Labels: Hedge Funds, Registration
posted by bhill at 9:25 PM
Licensing Maze - Investment Advisor Representative Registrations
Where do investment advisor representatives (IARs) need to be licensed?
According to Section 203A(b)(1)(a) of the Investment Advisers Act of 1940, SEC registered investment advisor firms are only required to license their investment advisor representatives in states where the investment advisor representatives have a place of business.
(For purposes of this section, the SEC has defined the term "place of business" to mean "an office at which the investment adviser regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients; and any other location that is held out to the general public as a location at which the investment adviser provides investment advisory services, solicits, meets with, or otherwise communicates with clients.")
In other words, an investment advisor representative (affiliated with an SEC registered investment advisor firm) may have more than 5 investment advisory clients in a state and not need to worry about being licensed in that state unless the investment advisor representative actually has a place of business or is actively holding himself out (i.e. advertising) in the state as an investment advisor. Of course, a firm may choose to still license the investment advisor representative. Also, the investment advisor firm must provide a notice filing in states where its investment advisor representatives exceed the de minimis exemption.
Despite the clarity of the Section 203A(b)(1)(a) of the Investment Adviers Act of 1940, the Texas Securities Board (among a handful of states) has taken a contrary position and requires all investment advisor representatives to provide a notice filing and pay a fee at just one client regardless of the representative's place of business and affiliation with an SEC registered firm.
Although the Investment Advisers Act of 1940 reduces the IAR licensing burden for SEC registered advisor firms, it does not apply to firms registered at the state level. State registered firms need to refer to the specific rules of each in state in which its representatives have clients. You can then determine if your representatives must be licensed or if only the firm will need to be registered.
If you have any questions on a state's licensing requirements, de minimis rules, exemptions, or just have a general concern about whether or not your firm is adhering to the registration rules, please give us a call.
According to Section 203A(b)(1)(a) of the Investment Advisers Act of 1940, SEC registered investment advisor firms are only required to license their investment advisor representatives in states where the investment advisor representatives have a place of business.
(For purposes of this section, the SEC has defined the term "place of business" to mean "an office at which the investment adviser regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients; and any other location that is held out to the general public as a location at which the investment adviser provides investment advisory services, solicits, meets with, or otherwise communicates with clients.")
In other words, an investment advisor representative (affiliated with an SEC registered investment advisor firm) may have more than 5 investment advisory clients in a state and not need to worry about being licensed in that state unless the investment advisor representative actually has a place of business or is actively holding himself out (i.e. advertising) in the state as an investment advisor. Of course, a firm may choose to still license the investment advisor representative. Also, the investment advisor firm must provide a notice filing in states where its investment advisor representatives exceed the de minimis exemption.
Despite the clarity of the Section 203A(b)(1)(a) of the Investment Adviers Act of 1940, the Texas Securities Board (among a handful of states) has taken a contrary position and requires all investment advisor representatives to provide a notice filing and pay a fee at just one client regardless of the representative's place of business and affiliation with an SEC registered firm.
Although the Investment Advisers Act of 1940 reduces the IAR licensing burden for SEC registered advisor firms, it does not apply to firms registered at the state level. State registered firms need to refer to the specific rules of each in state in which its representatives have clients. You can then determine if your representatives must be licensed or if only the firm will need to be registered.
If you have any questions on a state's licensing requirements, de minimis rules, exemptions, or just have a general concern about whether or not your firm is adhering to the registration rules, please give us a call.
Labels: IAR Licensing
posted by bhill at 9:48 PM
