Hedge Fund Disclaimer

How to write a hedge fund disclaimer
One of the more unusual requests (in my opinion) that we receive on this site is how to write a hedge fund disclaimer. I think that this is unusual because I would assume that most hedge fund managers would want to make sure that anything with a disclaimer has been reviewed and approved by a hedge fund attorney. If you are a manager who is looking for an “off the shelf” disclaimer, I recommend that you speak with a hedge fund attorney instead. Any hedge fund marketing or promotional materials (including hedge fund websites) should be reviewed by an attorney prior to publishing or dissemination.
Legal Background on Hedge Fund Disclaimers

Regulation D
There are a couple of important reasons why hedge fund offering documents, hedge fund marketing materials and hedge fund websites need to have certain disclaimers. The first set of laws deals with the fact that the interests in a hedge fund are securities and thus need to be registered at the federal level or fall within an exemption from registration. The Regulation D rules provide an exemption from registration and also require that the interests are not part of a public offering. Usually a hedge fund disclaimer will include references to certain parts of the Regulation D rules, specifically Rule 502.

Anti-Fraud Provisions
Another set of laws which influence hedge fund disclaimers are the anti-fraud provisions under the various federal securities laws. These provisions include: (i) Section 206 of the Investment Advisors Act and the rules promulgated thereunder (applicable to both registered and unregistered hedge fund managers); (ii) Rule 10b-5 promulgated under the Securities Exchange Act of 1934 (general anti-fraud provisions); and, Section 17(a) under the Securities Act of 1933.

These anti-fraud provisions provide the SEC with many ways to go after a well-intentioned hedge fund manager. Because these provisions are broadly worded a hedge fund manager should make sure that an attorney reviews all marketing material for compliance.

Creating the Hedge Fund Disclaimer
The hedge fund attorney will work with the hedge fund manager to understand both the words written in the marketing piece as well as the intent behind the words. Sometimes this can lead to longer discussions on the investment strategy and what the manager is attempting to show about the strategy. While at times this process can seem unnecessary or overly-protective, the hedge fund attorney needs to make sure that all of the representations in the marketing piece are accurate.
After a discussion the hedge fund attorney will be able to craft the disclaimer fairly quickly. The disclaimer may seem to contain a lot of “boilerplate” but the key is knowing which provisions should be included and how those provisions should be modified.

Conclusion
As mentioned above, the hedge fund disclaimer is not something that a manager should take lightly and it is definitely not something that the manager should try to draft himself. If you have any specific questions on the hedge fund disclaimer or would like help starting a hedge fund, please feel free to contact us directly.By Hedge Fund Lawyer

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What licenses do you need to start or manage a hedge fund?

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.

* 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.Hedge Fund Lawyer

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