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New York State Pushes Investment Advisers to Regis

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NEW YORK (–New investment adviser regulations for New York State are expected to catch many hedge fund managers that were previously unaffected.

Under the regulations, advisers with more than five clients are now required to register, whereas the previous threshold was 40. In this context, “client” is defined as an entire entity that receives investment advice and operates or is formed in New York State. So each hedge fund counts as one client. But so does each separately managed account.

“Between managed accounts and hedge funds, a firm can easily have three or four clients,” explained David Plutzer of the New York office of law firm Bryan Cave. “If it then starts another fund, it has to register.”

The requirement can be met by either registering with the state or registering at the federal level and sending the notice to the state. The same ADV form has to be completed in either case. There are exemptions. “Managers have to be more mindful now of how many clients they have,” Mr. Plutzer suggests. “It may affect how they structure their business.”

Federal vs. State

Registering with the Securities and Exchange Commission has advantages. In particular, it frees the adviser from dealing with state differences and makes it more attractive to institutional investors. In Mr. Plutzer’s experience, many people in this situation prefer to register at the federal level. This does subject the advisor to other SEC rules and audits, however.

Under the federal Investment Advisers Act of 1940, there are two major exemptions, namely having fewer than 15 clients in the United States or less than US$30 million under management. Under the new state law in New York, an adviser that has more than five clients still has to register even if assets are less than US$30 million, Mr. Plutzer pointed out.

“They’re trying to go after the smaller advisers because they know that the larger advisers will be covered by federal rules,” he said. “So these new rules are geared to pulling you in if you have under US$30 million.”

California, another major state jurisdiction for hedge funds, has a similar statute, he added. New Jersey also requires registration at more than five clients but exempts those with less than US$30 million. The SEC does not allow registration unless the adviser has at least US$25 million. But according to recent reports, the SEC is considering a new requirement for hedge funds to register.

New regulations promulgated under amendments to the New York Investment Advisory Act were finalized and became effective as of Jan. 29. Advisers must be in compliance with the registration and filing requirements by March 31 of this year and with the examination requirements by June 30.

As part of the registration, principals of an investment advisory business have to take a test, either Series 7 or Series 65, after filing Form ADV. The exams are administered by NASD. Having registered with New York state authorities, a manager can be audited by the Investment Protection Bureau, a division of the Attorney General’s office.

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