Need to be registered Investment Adviser for LLC?
- Thread starter rogerwilcom
- Start date
This is not as cut and dry as many have posted thus far. As someone noted earlier, this falls under the jurisdiction of the NFA, not the SEC because the OP stated, they are trading strictly futures. Since it is a 2 member LLC you immediately fall under the 15 member requirement for registering, claiming the small pool exemption, under 4.13(a)(2).
Now...how much money is involved? If it is more than $400k you have to register.
Another question...are the profits being split pro-rata? If not there are fees being exchanged. Be sure to split profits pro-rata or you're opening up a can of worms.
Now here comes the rub...if you are under 400k and 15 people (yes, only 2) you are <u>required</u> to file your small pool exemption with the NFA. Funny how that works. You're exempt from registering but you still have to file your exemption from registering. Big Brother is always watching.
Here's a handy little guide. Scroll across the top to 4.13(a)(2) and go all the way to the bottom of that column and read what is at the bottom very carefully.
http://www.nfa.futures.org/nfa-comp...pool-operators/easy-reference-guide-part4.pdf
Yes! There's more. Are either of you "qualified" investors. You'll have to google that one. I don't have time to hunt down all the links but you can't collect fees from anyone who is NOT a qualified investor and if you are not splitting profits pro-rata then you are collecting fees.
There is A LOT of red tape involved in getting even a small entity off the ground like this.
Are either of you in California? If so the individual who is doing the trading may have to register as a RIA in that state. They are desparate for money out there. I don't think you can change lanes out there w/o paying a fee
BTW, I started and managed a hedge fund as a CPO and currently run as a CTA under an LLC so if you have more queations feel free to PM me. I may not get back to you right away but I'll get back to you.
Now...how much money is involved? If it is more than $400k you have to register.
Another question...are the profits being split pro-rata? If not there are fees being exchanged. Be sure to split profits pro-rata or you're opening up a can of worms.
Now here comes the rub...if you are under 400k and 15 people (yes, only 2) you are <u>required</u> to file your small pool exemption with the NFA. Funny how that works. You're exempt from registering but you still have to file your exemption from registering. Big Brother is always watching.
Here's a handy little guide. Scroll across the top to 4.13(a)(2) and go all the way to the bottom of that column and read what is at the bottom very carefully.
http://www.nfa.futures.org/nfa-comp...pool-operators/easy-reference-guide-part4.pdf
Yes! There's more. Are either of you "qualified" investors. You'll have to google that one. I don't have time to hunt down all the links but you can't collect fees from anyone who is NOT a qualified investor and if you are not splitting profits pro-rata then you are collecting fees.
There is A LOT of red tape involved in getting even a small entity off the ground like this.
Are either of you in California? If so the individual who is doing the trading may have to register as a RIA in that state. They are desparate for money out there. I don't think you can change lanes out there w/o paying a fee
BTW, I started and managed a hedge fund as a CPO and currently run as a CTA under an LLC so if you have more queations feel free to PM me. I may not get back to you right away but I'll get back to you.
This is where I'm confused. If we are trading futures only (which we are), we may not fall under the federal SEC (and therefore require an investment adv license), can we fall under the state's Securities act? Although it sounds like anything that has to do with Futures does not fall under a state's securities laws.
To answer your other questions. We are only trading $100k, so we are under the $400k threshold. I'm pretty sure that is pro-rata. Although, I am not positive. If it means anything, I'll have 80% of the Membership Interest.
Neither of us are qualified investors. But, again, I believe we are splitting profits pro-rata if I understand the definition properly.
Unfortunately, he is in California. I'll have to look into the RIA thing. Argh.
Thanks
First, I'm not a securities attorney. I just have a lot of experience in this area. If you're only trading futures then you deal with the NFA, not the SEC. It's that cut and dry.
If you decide at some point in the future you want to trade stocks then you have to pass the Series 63 exam and register as an RIA in each state you have an investor, according to their reguluations - i.e. some states will let you manage $'s for X people w/o registering while others will allow Y investors. I believe Cali req's you to register if you manage for only 1 investor.
You're under 400k so good but you still need to file your exemption. You can do it online but I don't have the link handy at the moment. If you need to call them they are customer service oriented, unlike the SEC.
Pro Rata. If you deposited 80k and you friend 20k be sure to keep your books in order so you are credited with 80% of the P/L, otherwise it could cause you a headache.
Quite honestly, the NFA isn't particularly bothered about enforcing the rules for a 100k pool but it's best to be safe rather than sorry.
Cali seems like your only issue aside from registering the exemption.
If you decide at some point in the future you want to trade stocks then you have to pass the Series 63 exam and register as an RIA in each state you have an investor, according to their reguluations - i.e. some states will let you manage $'s for X people w/o registering while others will allow Y investors. I believe Cali req's you to register if you manage for only 1 investor.
You're under 400k so good but you still need to file your exemption. You can do it online but I don't have the link handy at the moment. If you need to call them they are customer service oriented, unlike the SEC.
Pro Rata. If you deposited 80k and you friend 20k be sure to keep your books in order so you are credited with 80% of the P/L, otherwise it could cause you a headache.
Quite honestly, the NFA isn't particularly bothered about enforcing the rules for a 100k pool but it's best to be safe rather than sorry.
Cali seems like your only issue aside from registering the exemption.
You don't have to be an RIA under this scenario. Registration is a concern when you get paid for investment advice or managing money.
The key to your scenario is that your partner is active in the business and not a passive investor.
Are you getting paid a profit allocation for your trading services from your partner? If yes, some states may be aggressive and want to view that as investment management.
States like CA don't have a diminimus rule and require registration on securities if you have one advisory or investment management client.
If its futures, then it's not a state or SEC issue, but the NFA. The NFA also only considers it an advisory relationship if you get paid fees or profit allocation for advice.
Are you getting an extra allocation versus your partner, or sharing profits and losses based on your capital accounts?
Okay. So, I just checked with California's website.
Since we (1) the place of business is not in California and (2) during the preceding 12-month period has had fewer than six clients who are residents of this state. We do not have to be registered in California as a RIA.
However, now that I think about it. Why would we have to anyway if trading Futures? Unless there is something I'm not understanding about all of this. Futures isn't considered a security. I wonder if that is true in every state.
In any case. I have another phone call with my attorney in a few hours. I now have a bunch of questions to ask him. I'm starting to get the idea that (A) he didn't understand my question to begin with, or (B) he is not qualified to give me a competent answer.
Since we (1) the place of business is not in California and (2) during the preceding 12-month period has had fewer than six clients who are residents of this state. We do not have to be registered in California as a RIA.
However, now that I think about it. Why would we have to anyway if trading Futures? Unless there is something I'm not understanding about all of this. Futures isn't considered a security. I wonder if that is true in every state.
In any case. I have another phone call with my attorney in a few hours. I now have a bunch of questions to ask him. I'm starting to get the idea that (A) he didn't understand my question to begin with, or (B) he is not qualified to give me a competent answer.
Hi Robert.
Well, I am getting more than the other Member. Our Membership Interests are weighted 80% for me, 20% for him. However, I am not getting an extra allocation beyond that - like a performance or management fee.
You may or may not have to pay professional data fees. I'd check with whatever firm you plan to open your account with. See this link to the InteractiveBrokers definition:
http://www.interactivebrokers.com/en/accounts/fees/professionalDefinations.php?ib_entity=llc
Note the basic definition states a "natural person".
Jack
http://www.interactivebrokers.com/en/accounts/fees/professionalDefinations.php?ib_entity=llc
Note the basic definition states a "natural person".
Jack