Operating a hedge fund entails significant legal exposure, with substantial liability for improper disclosure. Even inadvertent mistakes can lead to substantial personal liability. The SEC, the CFTC, the NFA and state securities regulators have developed complex regulatory frameworks with which a fund sponsor must comply to avoid liability.
New York is the world’s most popular jurisdiction for starting a hedge fund, as well as one of the top states for startup private equity funds, real estate funds and other alternative investment funds. Fund managers starting a hedge fund in New York avail themselves of a well-paved regulatory structure that is benefited by regulatory bodies with decades of experience with hedge funds and other investment funds.
Dodd-Frank exempts from registration two types of advisers: (i) advisers to qualifying venture capital funds; and (ii) advisers solely to private funds (including hedge funds and private equity funds) and having less than $150 million of assets under management. These two categories of investors are known as exempt reporting advisers. Certain exempt reporting advisers are required to file exempt reporting adviser registrations, as will be discussed below.
Filing the ADV and other registration documents is only the beginning of an RIA’s regulatory obligations. Following registration, RIAs and their representatives become subject to a network of complex compliance obligations. This article touches briefly on a few of the many components of RIA compliance, including: annual license renewals, detailed record keeping, investor disclosure, compliance/ethics manual issues, and preparing for audits. RIAs should work closely with an experienced investment management attorney to maintain compliance with its obligations.
Individuals and entities that provide securities investment advice for compensation are subject to state and federal investment advisor regulations. Anyone providing investment advice should consult an experienced investment management attorney to determine whether state or federal registration is required.
The central component of state or SEC investment advisor registration is Form ADV. Form ADV is divided into two parts, Part 1 and Part 2. Part 1 is a form requiring specific answers to questions asked, while Part 2 requires a written disclosure in narrative format covering certain required topics, which is ultimately delivered to existing and prospective clients. This article addresses Part 1 of ADV. For a discussion of the requirements of Part 2, see our article: Form ADV Part 2.
Part 2 of Form ADV is a written disclosure statement required for federal and state investment advisor registration. Form ADV is divided into Part 1 and Part 2. This article discusses Form ADV Part 2. See also our article discussing Form ADV Part 1.