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- 24 August, 2008 -
- Hedge Fund Questions and Answers -
- Tags : blue sky laws, broker-dealer, FINRA, Investment Advisers Act of 1940, NFA, Series 3, Series 63, series 65, Series 66, Series 7
- 17 Comments
Question: What licenses do you need to start or manage a hedge fund?
Answer: This is a question that comes up quite often. Many people wonder whether they need a series 7 license or the series 65 license or the series 3 to manage a hedge fund. First, a potential hedge fund manager does not need to have a series 7 license in order to manager a hedge fund. The series 7 license is the general securities representative licese which allows an individual to be a representative (broker) of a FINRA registered member firm (brokerage firm or broker-dealer). The series 7 allows a representative to take and place trades for a customer. It is also a prerequisite for many of the other FINRA exams (such as the series 24). Because the hedge fund in not regulated as a broker, a hedge fund manager does not need to have a series 7 license (assuming that the manager is also concurrently acting as a broker-dealer representative).
Second, a start up hedge fund manager may need to have a series 65 license in order to become registered as an investment adviser. There are two potential ways a hedge fund manager would be required to register as an investment adviser – under the federal rules (the Investment Advisers Act of 1940) or under the various state rules (commonly referred to as the state blue sky laws). If a manager is required to register with the SEC under the Advisers Act* then, for federal purposes, the manager will not need to have taken the Series 65. However, the Advisers Act allows states to impose certain requirements on all federally registered investment advisers with a place of business in their state. Generally the states will require all federally registered investment advisers to “notice file” in their state which entails paying a fee to the state. The state can also require that all investment adviser representatives have the series 65 license. This means that anyone who talks to clients/investors or makes any trading decisions or analysis will need to have this license. The definition of investment adviser representative basically encompasses every employee or owner of the investment adviser other than secretary type employees. If you are a federally registered investment adviser you should discuss whether members of your team need to be licensed as representatives at the state level.
If you are not a federally registered investment adviser (generally all managers with less than 30 million of assets under management) then you will need to determine whether your management firm needs to be registered as an investment adviser at the state level. Many states require investment advisers with a place of business** in the state to register. Some popular states that require investment adviser registration are California, Texas, Washington and Colorado. However, there are many states which have exemptions from the registration requirements. Some popular states that have exemptions (through regulation or special order) from investment adviser registration for hedge fund managers are New York, Connecticut, Florida and Georgia. Again, you should speak with your legal counsel or compliance professional to determine whether your hedge fund management firm will need to be licensed as an investment adviser in the state.
Finally, if the hedge fund trades futures or commodities then the manager may need to be registered as a commodity pool operator with the National Futures Association. In order to register as a commodity pool operator at least one person at the management company will need to take the Series 3 exam. For more information on the Series 3 exam and this part of the registration process please read how to register as a CPO or CTA.
* Many potential hedge fund managers are confused with whether a management company will need to be registered as an investment adviser with the SEC. The answer is that in most cases a hedge fund manager will not have to be registered as an investment adviser with the SEC because of an exemption provision within the investment advisers act. Section 203(b)(3) of the Advisers Act specifically exempts from the registration provisions “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 acts as an investment adviser …” The term “client” in the hedge fund context means a “corporation, general partnership, limited partnership, limited liability company, trust …, or other legal organization … to which you provide investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries…”
This means that as long as a hedge fund manager will not need to count the investors in the hedge fund as his “client” and that the hedge fund itself is the only “client.” You will probably recall that a couple of years ago the SEC proposed a change to the rules under the Advisers Act that required a manager to count all of the investors in the hedge fund as clients. Under the proposed rule hedge fund managers would have been required register with the SEC (if they had at least $30 million under management), but Phillip Goldstein successfully challenged the SEC in court. His successful challenge to the rule change allows hedge fund managers to escape SEC regulation.
** “Place of business” of an investment adviser means: (1) An office at which the investment adviser regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients; and (2) 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.
I currently hold a series 7 agent license as well as a series 65. I am employed with a broker dealer and soon will make a job change to a hedge fund as a marketer. Can the hedge fund maintain my licenses even though they are not a broker dealer and given the fact that I do not need to have a series 7 license to market the hedge fund? I do not want my license to lapse while in the employ of the hedge fund. I do know that FINRA will hold my license for 24 months before expiring. I would like to maintain my licenses and keep them current by fufilling my continuing education responsibilities. Pleas advise.
[...] What Licenses do you need to Start A Hedge Fund? [...]
Depends on the state. I am starting a HF and for the clients peace of mind I have decided to get my series 65 right away. Some states do not require this, but others do. Talking to a lawyer my understanding is that I will need a series 65 in California after breaking $30MM.
Good Luck 09 should be a great year.
[...] What licenses do you need to start a hedge fund? [...]
That didnt really answer D Smith’s question. Can a hedge fund keep an individual’s series 7 license active?
David and Marc – a hedge fund will (generally) not be able to “hold” a series 7 license. Only a licensed broker dealer can “hold” a series 7 license. Sometimes a related entity to a hedge fund will be licensed as a BD and can thus hold the series 7 (or potentially the new series 79 license); however, this is more uncommon than not.
D Smith – if you are running a hedge fund in California the management company will generally need to be licensed as an investment advisor with the state if the fund’s AUM are under $30MM. You should talk with an attorney immediately if the management company is not licensed as an IA in CA and you have investors.
Note: all comments are provided as general information and does not constitute legal advice. Please see our disclaimer.
I am in the process of starting my LLC., I do not have any license or anything of that matter. The nature of the LLC. will be to construct a “fund” a pool of money which will be held in an online broker’s account under the LLC’s name. The pool of money will consist of many individuals , however they will have no ownership of the actual company or any input as far as what the money would be invested in.
Will the LLC be efficient enough , or do I have to go through the sec. or obtain any licenses? I live in the state of Massachusetts.
LS and PP –
How can I get in touch with you personally? I have a number of questions for you both.
Thanks a million!
Nic
You will need an LLC to be set up as a General Partner for an LP, which is the fund itself. The LP will bring in all “clients” as limited partners and pass through taxation directly to each individual. The LLC is you, the general partner. Y0u don’t have to set it up this way, but this is the safest way to do it.
Can you tell me where I can find live instruction courses on the west coast? I would Prefer S.F. or Seattle but even Las Vegas, Phoenix, Salt Lake City or even Dallas/Ft. Worth would be better than traveling to NY or DC. Alternatively an on-line, “live” interactive instructor led course may suffice.
Thank you
Can you tell me where I can find live instruction courses on the west coast? I would Prefer S.F. or Seattle but even Las Vegas, Phoenix, Salt Lake City or even Dallas/Ft. Worth would be better than traveling to NY or DC. Alternatively an on-line, “live” interactive instructor led course may suffice.
Thank you
Do you have to be with a broker in order to take the series 65
KK,
You do not have to be registered with a broker or an investment adviser to take the Series 65. In order to sign up to take the exam, you can submit an Form U-10 online.
Hope this helps.
Regards,
Bart
Where can I find a list of the commodities which, if traded by an investment fund, would require the fund to register with the National Futures Association? I’m wondering if gold and silver are considered commodities. Thanks.
Tim,
Gold and silver are considered commodities and generally would require registration. There may be applicable exemptions and you should discuss these with an attorney.
Regards,
Bart
I have my Series 3. If I set up a commodity pool “hedge fund” that only trades futures and allocates to other managers who trade futures, and AUM is under $30M, do I need a Series 65?
Chris,
If the commodity pool does not invest in any securities, then the management company will not be an investment adviser in general and you will not need a Series 65 exam license. It is important to note what are securities. Some states take the positions that CDs are securities. Also, if you are allocating to other managed futures managers, you should make sure it is through a separate account structure and not through a fund structure. If it is through a fund structure, then the commodity pool would be investing in securities.
Hope this helps.
Best,
Bart