If a current hedge fund manager obtains his Registered Investment Advisor license, would that open him up to more or potentail future liability? Any comments or suggestions appreciated Thanks
do you mean registering as an Investment Advisor with the SEC, or getting NASD license 66 (RIA) or whatever it is? I believe these are 2 different things..
Yes, they are different things. In short: I think the 66 (or 65) is to allow you to take a fee, basically. RIA, I think, allows you to open separately managed accounts and/or collect money in a pool (in your company name). Not sure though. I will be finding out soon enough.
How does one then obtain a RIA license in order to manage PMA accounts? So the 66/65 is different than a RIA license? Thanks Yes, they are different things. In short: I think the 66 (or 65) is to allow you to take a fee, basically. RIA, I think, allows you to open separately managed accounts and/or collect money in a pool (in your company name). Not sure though. I will be finding out soon enough. ny
Sounds like the blind leading the blind on this thread. Registering your fund with the SEC and being a registered investment advisor (actually investment advisor representative as the investment advisor is actually the title of the establishment that you are representing) are completely different. For a while there it looked like the trend was toward the idea that all hedge fund managers were going to have to get series 65 certified. The courts gave the SEC a nice slap on the wrists last year though and told them that they were overstepping their bounds by requiring a hedge fund (a private entity) to register. In any case, getting series 65 allows you to give investment advice for a fee. You can decide how you want to collect those fees. You could charge flat rates or hourly or whatever, but not performance based (AKA carry). Investment advisor representatives aren't allowed to charge carry for advice. Series 7 allows you to deal securities and collect commissions, but still no carry. As a hedge fund you aren't doing either of these. You actually have discretionary authority over a pretty much unregulated company account. The "clients" of the fund aren't clients, they are partners. You aren't holding yourself out to them as an RIA or IAR. Can you be series 65 certified? Sure.... but you aren't holding yourself out to your clients as and investment advisor. You are an account manager with a bunch of your own capital in the fund. Given the above you should be cautious of a few things as an RIA who manages a hedge fund. RIA (series 65 certified) isn't a title like PhD or CFP. All it means is that you've passed a test that shows that you are familiar with the technicalities of trading securities. Hedge funds have advertisement regulations that require that they not present themselves as a public company. If you are advertising your personal financial planning company to attract clients and then recommending that they invest in your hedge fund you are going to get into a lot of trouble. See, ideally anyone joining your hedge fund partnership should've already had a prior relationship with you before doing so. Now that isn't really followed of course, but partners aren't attracted to a hedge fund the same way that investors are drawn to mutual funds or financial planners. There can't be any public advertisement like commercials and newspaper ads. There are some restricted websites that post information on many HFs but you're not even allowed to create a website that would advertise your fund. Basically you are restricted to word of mouth, restricted access HF registries, or introduction via prime brokerage. This is why all established HFs have a prime broker. A couple more distinctions as an RIA/IAR...... 1) Commingling of funds is a no-no. You can't combine personal capital with that of clients'. Obviously this rule is broken by a HF manager, but he doesn't have clients, he has partners in which case the rules don't apply. 2) RIAs are required to vary the advice that they give depending on the individual needs of each client. If you give the same advice to all 100 clients then you're in trouble. An HF manager doesn't care because he isn't giving advice. He is trading company funds, over which he has full discretion. I think you get the point by now. You can take the series 65 but as a HF manager you must separate the two because not doing so will jeopardize both your advising practice, and the fund.
So it seems that there could be potential liability if I become an RIA and also at the same time remain as a current HF manager? Our fund is currently not registered with the SEC (under $10mm AUM). I was thinking about becoming an RIA and selling a subscription/signal service to potential new clients along with opening privately managed accounts. Do you know if I need to become an RIA if I'm currently a HF manager and want to open privately managed accounts? Seems that I would be opening myself to more potential liability by becoming an RIA compared to your average HF manager. Of course all action would be passed by a securities attorney for further clarification. I do appreciate your advise. Dominic
More... criminal and civil. The passing of SarbOx in 2002 increased the white-collar penalties dramatically for the sentencing guidelines.
You don't need the 65 to do some of what you want to do. Newsletters and internet advisories are exempt from the rules regarding personalized advice that I spoke of above. Most advisories include a disclaimer that states they are not holding themsleves out as investment advisors. This is how they get around the rules. It doesn't matter how convinced you are that a certain stock is a great buy, it still isn't right for all you clients if you're an RIA. I'm not sure what you're getting at with the privately managed accounts. Creating a FF account with IB or having all your clients sign over to you custodial and discretionary authority and running individual trading accounts?