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State Investment Adviser Registration & Licensing
Private Fund  Exempt Reporting Adviser (ERA)
NASAA Model Rule Exempt Reporting Advisers (ERA) The model rule is an exemption framework created by the North American Securities Adminstrator’s Association (NASAA). Many states adopt the NASAA model rule in full or a modified version. Under teh NASAA Model Rule, advisers (i.e., hedge fund managers) exclusively to private funds can be exempt from the requiremenhht to state register as investment advisers if under $150 AUM subject to conditiions. Two notable requirements are: (1) Investors in the private fund must be  be qualified clients ($2.2m+ net worth) which is a higher threshold than accredited investors. (2) An annual audit is required for th private fund

TTherefore, when (1) and (2) satisfied above and there is less than $150 million AUM, m at play across the fund(s) in question, a private fund adviser can be exempt under the NASAA model rule and states that follow its framework.

Thus, assuming (1) and (2) above can be met, and there is less than $150m at play across the fund(s) in question, a private fund adviser can be exempt under the NASAA model rule and states that follow its framework.


Investment Advisers The Investment Advisers Act of 1940 (Investment Advisers Act) governs anyone who is paid for providing compensated investment advice services to another and makes it illegal for registered and unregistered investment advisers to commit fraud. Hedge fund manager are investment advisers (i.e., not advisors).  An "Investment adviser” is any juridical person person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities (with exceptions).

Investment Adviser versus Investment Advisor There is a difference between the term “investment adviser” and “investment advisor”.  The term “investment advisor” is inaccurately used by the "lay person" side of the securities industry, whiule the NASAA, the U.S. SEC, lawyers, the U.S. Congress, the states that have their house in order (i.e., New York, New Jersey, California, etc.) and all other countries use the term “investment adviser”. The word is spelled as "advisers" and this is important when providing services to clients in other countries or in legal briefs should you be defending yourself in court or an examination. Other countries, such as Canada,
wh

Investment Advisers with at least $150 million AUM are eligible to register with the SEC. If the investment adviser has less than $150 million AUM, it must register with the state where it maintains its principal office and place of business.

Registration Costs With respect to state-registered investment advisers, our legal services cost  between $2,500 and $3,500 for the registration.  For SEC-registered investment advisers, tur legal services cost  between cost between $4,000 and $8,000.  Costs paid to the state include:

  • IA firm registration fee (State registered IAs only)
  • IA representative fee
  • Form U-4 fee
  • Notice filing fee (SEC registered IAs only)
  • Other miscellaneous fees

An investment adviser qualifies for registration by passing the Series 65 exam within the two years prior to its registration application. An applicant also qualifies with active Series 7 & 65 exams.  Many states allow qualification when the applicant has one of the following designations

  • Chartered Financial Planner (CFP);
  • Chartered Financial Consultant (ChFC);
  • Personal Financial Specialist (PFS);
  • Chartered Financial Analyst (CFA); or
  • Chartered Investment Counselor (CIC)

Series 65 Exam  The Series 65, Uniform Investment Adviser Law Examination, is for investment adviser representatives. The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline. Applicants are allowed 180 minutes to complete the examination. At least 92 of the questions must be answered correctly for an individual to pass the Series 65 exam. The examination is conducted as a closed book test. Candidates will be notified of their result immediately upon completion of the examination. The examination is administered by FINRA. To schedule a candidate for the examination, an individual’s firm should file an electronic Form U4 or the individual should open an enrollment window via FINRA.org and pay the $187 examination fee to FINRA. Once registered, FINRA will open a 120-day window within which an individual may schedule the exam.  More information on sites to take the exams can be found on the FINRA website. Refer to the examination study outline and guide.

Successful completion of the examination satisfies a portion of the requirements of the states and the score aloone does not convey the right to transact business prior to being granted a license by that state.

olicitors for Registered Investment Advisory Firms

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A common question for investment advisory firms is how they can pay persons for referring them separately managed account clients.  For SEC-registered investment advisors, any such fee would need to be paid pursuant to the requirements of Rule 206(4)-3 – the rule regarding cash payments for client solicitations.

Rule 206(4)-3 defines the term “solicitor” broadly to include any person who, directly or indirectly, solicits any client for, or refers any client to, an investment adviser.  The rule also requires that fees paid to solicitors pursuant to the following guidelines:

– the solicitor is not disqualified by the rule;
– there is a written agreement between the solicitor and the IA firm;
– the solicitor provides the client with a statement which details certain parts of the arrangement; and
– the client signs an acknowledgment of the relationship

The above bullet points are generally what is required and if you have questions on your specific situation you should discuss with your attorney or compliance person.  I have also posted the complete rule below.  Additional information was provided by the SEC at the time of the rule’s release which can be found here: Investment Advisers Act Release No. 688.  Please contact us if you have any questions.

Rule 206(4)-3 – Cash Payments for Client Solicitations

(a) It shall be unlawful for any investment adviser required to be registered pursuant to section 203 of the Act to pay a cash fee, directly or indirectly, to a solicitor with respect to solicitation activities unless:

(1)

(i)The investment adviser is registered under the Act;

(ii) The solicitor is not a person (A) subject to a Commission order issued under section 203(f) of the Act, or (B) convicted within the previous ten years of any felony or misdemeanor involving conduct described in section 203(e)(2)(A) through (D) of the Act, or (C) who has been found by the Commission to have engaged, or has been convicted of engaging, in any of the conduct specified in paragraphs (1), (5) or (6) of section 203(e) of the Act, or (D) is subject to an order, judgment or decree described in section 203(e)(4) of the Act; and

(iii) Such cash fee is paid pursuant to a written agreement to which the adviser is a party; and

(2) Such cash fee is paid to a solicitor:

(i) With respect to solicitation activities for the provision of impersonal advisory services only; or

(ii) Who is (A) a partner, officer, director or employee of such investment adviser or (B) a partner, officer, director or employee of a person which controls, is controlled by, or is under common control with such investment adviser: Provided, That the status of such solicitor as a partner, officer, director or employee of such investment adviser or other person, and any affiliation between the investment adviser and such other person, is disclosed to the client at the time of the solicitation or referral; or

(iii) Other than a solicitor specified in paragraph (a)(2) (i) or (ii) of this section if all of the following conditions are met:

(A) The written agreement required by paragraph (a)(1)(iii) of this section: (1) Describes the solicitation activities to be engaged in by the solicitor on behalf of the investment adviser and the compensation to be received therefor; (2) contains an undertaking by the solicitor to perform his duties under the agreement in a manner consistent with the instructions of the investment adviser and the provisions of the Act and the rules thereunder; (3) requires that the solicitor, at the time of any solicitation activities for which compensation is paid or to be paid by the investment adviser, provide the client with a current copy of the investment adviser’s written disclosure statement required by Rule 204-3 (“brochure rule”) and a separate written disclosure document described in paragraph (b) of this rule.

(B) The investment adviser receives from the client, prior to, or at the time of, entering into any written or oral investment advisory contract with such client, a signed and dated acknowledgment of receipt of the investment adviser’s written disclosure statement and the solicitor’s written disclosure document.

(C) The investment adviser makes a bona fide effort to ascertain whether the solicitor has complied with the agreement, and has a reasonable basis for believing that the solicitor has so complied.

(b) The separate written disclosure document required to be furnished by the solicitor to the client pursuant to this section shall contain the following information:

(1) The name of the solicitor;

(2) The name of the investment adviser;

(3) The nature of the relationship, including any affiliation, between the solicitor and the investment adviser;

(4) A statement that the solicitor will be compensated for his solicitation services by the investment adviser;

(5) The terms of such compensation arrangement, including a description of the compensation paid or to be paid to the solicitor; and

(6) The amount, if any, for the cost of obtaining his account the client will be charged in addition to the advisory fee, and the differential, if any, among clients with respect to the amount or level of advisory fees charged by the investment adviser if such differential is attributable to the existence of any arrangement pursuant to which the investment adviser has agreed to compensate the solicitor for soliciting clients for, or referring clients to, the investment adviser.

(c) Nothing in this section shall be deemed to relieve any person of any fiduciary or other obligation to which such person may be subject under any law.

(d) For purposes of this section,

(1) Solicitor means any person who, directly or indirectly, solicits any client for, or refers any client to, an investment adviser.

(2) Client includes any prospective client.

(3) Impersonal advisory services means investment advisory services provided solely by means of (i) written materials or oral statements which do not purport to meet the objectives or needs of the specific client, (ii) statistical information containing no expressions of opinions as to the investment merits of particular securities, or (iii) any combination of the foregoing services.


SEC registration will be quicker than state registration and many times registration can be completed within 2 to 4 weeks.

State registration is more difficult to determine and will depend on the state of registration.  A state like California may take 6 to 8 weeks.  A state like South Carolina will take about 2 weeks, it just depends and you should discuss this issue with your compliance provider if the registration is time sensitive.



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