Licenses Required To Launch An Investment Fund

When starting an investment fund, it is important to understand the relevant licenses required to avoid any issues with the SEC. The licenses needed will depend on the type of fund, the state it is registered in, and the size of the fund and its assets. The two primary licenses for investment funds are the Series 65 and Series 7. A Series 7 license allows an individual to act as a broker and take trades for a customer, while a Series 65 license qualifies an individual to charge an advisory fee as a Registered Investment Advisor (RIA). A hedge fund manager, for example, may not need a specific license depending on the type of investments the fund makes, but they will likely need to pass the FINRA Series 7 and state regulatory exams and may need a Series 65 license depending on the state.

Licenses for Investment Funds

Series 7 vs Series 65 licenses

To start an investment fund, you will need to obtain the relevant licenses, which can vary depending on the type of fund, the investments made, and the location. In the US, the two primary licenses are the Series 65 and Series 7.

The Series 7 license is issued by the Financial Industry Regulatory Authority (FINRA) and allows individuals to become registered representatives or stockbrokers. It is the most common financial securities license and has the broadest reach, allowing licensees to sell various securities, including stocks, bonds, and options. This license is required for individuals who wish to act as brokers and take and place trades for customers. It is also a prerequisite for other FINRA exams.

On the other hand, the Series 65 license is offered by the North American Securities Administrators Association (NASAA) and is required for individuals who wish to provide financial advice on a non-commission basis or act as investment advisers. This license is necessary for professionals such as financial planners, advisors, and stockbrokers who offer investment advice for a fee. The Series 65 exam focuses heavily on understanding laws and regulations, particularly at the state level via the Uniform Securities Act (USA).

When deciding between the two licenses, it is important to consider the nature of your business activities. If you plan to act as a broker and facilitate trades, the Series 7 license is more appropriate. On the other hand, if you intend to provide investment advice and charge advisory fees, the Series 65 license is the better option.

Other Relevant Licenses:

In addition to the Series 65 and Series 7 licenses, there are other licenses that may be relevant depending on your specific circumstances:

• Series 6 License: This limited-investment securities license allows holders to sell "packaged" investment products like mutual funds and variable annuities.
• Series 3 License: This license authorizes representatives to sell commodity futures contracts and is required for those specializing in commodities.
• Series 63 License: Known as the Uniform Securities Agent license, this license is required by most states for individuals to sell securities within that state.

It is important to consult with legal professionals and review the specific requirements based on your business activities and location to ensure you obtain the necessary licenses for your investment fund.

State laws and Series 65

State laws determine the licensing requirements for investment advisors operating within their jurisdiction, and these laws vary. Some states require official registration as an investment advisor and the payment of a licensing fee, while most states require the Series 65 license. The Series 65 is a securities license and exam that qualifies an investment professional to function as an Investment Adviser Representative (IAR) in most states. The exam is designed and administered by the North American Securities Administrators Association (NASAA) and the Financial Industry Regulatory Authority (FINRA). It covers laws, regulations, ethics, and various topics important to the role of a financial advisor.

The Series 65 exam, formally known as the Uniform Investment Adviser Law Examination, consists of 130 multiple-choice questions. Candidates have 180 minutes to answer at least 92 questions correctly and achieve a passing score of 70%. The exam covers economic factors and business information, investment vehicle characteristics, client investment recommendations and strategies, and laws, regulations, and guidelines, including the prohibition on unethical business practices.

While the Series 65 license does not expire as long as the holder is actively working in the financial services industry, individuals who leave the industry for more than two years may be required to retake the exam. Obtaining the Series 65 license enables individuals to give financial advice but does not permit them to sell securities, execute trades on behalf of clients, or manage portfolios. For the latter activities, the Series 7 license is required.

Some states set a Series 7 license as a prerequisite for obtaining a Series 65 license. The Series 7 license is the general securities representative license that allows an individual to act as a representative (broker) of a FINRA-registered member firm (brokerage firm or broker-dealer) and take and place trades for a customer.

Additionally, if a hedge fund manager is considering investing in commodity futures, they may need to register as a Commodity Pool Operator or Commodity Trading Advisor with the National Futures Association (NFA), requiring the Series 3 license.

Investment Adviser Act of 1940

The Investment Advisers Act of 1940 is a US federal law that defines and regulates the role and responsibilities of investment advisors. It provides the legal framework for monitoring those who advise on investments, such as pension funds, individuals, and institutions. The Act specifies what constitutes investment advice and outlines the registration requirements for investment advisors with state and federal regulators.

The Investment Advisers Act of 1940 imposes a fiduciary duty on financial advisors, requiring them to act in their clients' best interests. This includes exercising "utmost good faith" and disclosing all material facts. Investment advisors are also required to pass a qualifying exam and register with a regulatory body. The Act sets out three criteria to determine who is considered an investment advisor: the type of advice offered, the method of compensation, and whether investment advice is the primary source of income.

The Act was prompted by the 1929 stock market crash and the subsequent Great Depression, which led to several landmark financial regulations in the 1930s and 1940s. It was also influenced by a 1935 report by the Securities and Exchange Commission (SEC) to Congress, warning of the risks associated with certain investment counsellors and recommending their regulation.

The Investment Advisers Act of 1940 has been amended over the years, with the most recent significant changes occurring in 1996 and 2010. Generally, only advisors with at least $100 million in assets under management or those advising a registered investment company are required to register with the SEC under this Act. Other investment advisors typically register with the state in which they operate.

The Act allows states to impose additional requirements on federally registered investment advisors, and many states mandate registration for investment advisors operating within their borders. The definition of "place of business" is crucial in determining whether an investment advisor must register with a particular state.

The Investment Advisers Act of 1940 is a crucial piece of legislation that ensures the ethical and transparent conduct of investment advisors, protecting the interests of investors and promoting fair practices in the financial industry.

Commodity Pool Operator license

A Commodity Pool Operator (CPO) is a money manager or investment fund that manages pooled funds that invest in commodities futures and related securities. A CPO may work for a hedge fund or investment fund that takes positions in commodities.

In the US, CPOs must register with the Commodities Futures Trading Commission (CFTC) and the National Futures Association (NFA). To register as a CPO, at least one person at the management company will need to take and pass the Series 3 exam. This must be completed more than two years before the application. The Series 3 exam covers the following topics:

• Regulatory fundamentals
• Market structure, contract specifications, and price behaviour
• Hedging
• Spreads
• Options
• Swaps
• Accounting, cash management, and reporting requirements

In addition to the Series 3 exam, the following requirements must be met to register as a CPO:

• Complete the online Form 7-R
• Submit an application fee of $200 (if the individual is not currently registered with the CFTC)
• Complete the Annual Questionnaire
• Pay the non-refundable membership dues (currently $750 annually, or $2,500 if trading Forex or Swaps)
• Register each principal and associated person by completing the online Form 8-R for each principal and AP
• Submit fingerprint cards for each AP and Principal
• Satisfy the proficiency requirements for each sole proprietor, AP, and forex AP
• Submit an $85 non-refundable application fee for each principal and AP
• File Disclosure Documents prior to accepting funds from any pool participants

Professional designations and credentials

Investment professionals may hold a variety of designations and credentials offered by a multitude of organisations. These credentials are represented by a duo or trio of letters that follow a financial professional's name. They indicate a degree of education, training, and specialisation.

Chartered Financial Analyst (CFA)

The CFA charter is regarded as the key certification for investment professionals, especially in the areas of research and portfolio management. It is offered by the CFA Institute, and candidates must pass a three-part exam and gain at least 4,000 hours of work experience over a minimum of three years, among other requirements.

Chartered Market Technician (CMT)

The CMT designation is granted by the CMT Association and is the highest level of training within the discipline of technical analysis. It is considered the gold standard in technical analysis globally.

Financial Risk Manager (FRM)

The FRM designation is issued by the Global Association of Risk Professionals (GARP) and is globally recognised as the premier certification for financial risk professionals.

Certified Financial Planner (CFP)

The CFP designation is one of the oldest and most prestigious in the profession. It requires years of experience, the successful completion of standardised exams in several areas, a demonstration of ethics, and a college degree, as well as ongoing education in the field.

Certified Investment Management Analyst (CIMA)

The CIMA designation is offered by the Investments & Wealth Institute and focuses on asset allocation, ethics, due diligence, risk measurement, investment policy, and performance measurement. Only individuals with at least three years of professional experience as investment consultants are eligible.

Certified Public Accountant (CPA) and Personal Financial Specialist (PFS)

The CPA designation is a state-issued license provided by the Board of Accountancy for each state. CPAs who want to gain expertise in financial planning to supplement their accounting careers can become certified as personal finance specialists (PFS) by taking additional training.

Chartered Life Underwriter (CLU)

The CLU designation is issued by the American College, and recipients work mostly as insurance agents. It is awarded to individuals who complete a five-course study program with exams covering life and health insurance, pension planning, insurance law, income taxation, investments, financial and estate planning, and group benefits.

Accredited Investment Fiduciary (AIF)

The AIF designation is offered by the Center for Fiduciary Studies and is designed for professionals who want to demonstrate their expertise in fiduciary responsibility and commitment to the standards of responsibility.

Chartered Alternative Investment Analyst (CAIA)

The CAIA designation is offered by the CAIA Association and is a specialised educational programme for alternative investment professionals. It covers topics such as hedge funds, private equity, real assets, and commodities.

Chartered Financial Consultant (ChFC)

The ChFC designation is administered by the American College of Financial Services. Candidates must complete an exam in financial planning, including income tax, insurance, investment, and estate planning, and are required to have a minimum of three years of experience in a financial industry position.

Certified Fund Specialist (CFS)

The CFS designation is offered by the Institute of Business and Finance (IBF) and demonstrates expertise in mutual funds and the mutual fund industry. Designees must also meet continuing education requirements to keep their knowledge current.

Chartered Investment Counselor (CIC)

The CIC designation is given by the Investment Adviser Association to CFA charter holders who are currently registered investment advisors. The program focuses on portfolio management, and candidates must also adhere to a strict code of ethics and provide character references.

Accredited Asset Management Specialist (AAMS)

The AAMS designation is offered by the College for Financial Planning and is designed for professionals who want to focus on asset allocation and portfolio management strategies. It covers topics such as investment strategies, tax planning, and retirement planning.

Certified Divorce Financial Analyst (CDFA)

The CDFA designation is offered by the Institute for Divorce Financial Analysts and is designed for professionals who want to specialise in divorce planning. It covers topics such as divorce law, tax issues, and financial analysis.

This list is by no means exhaustive, and there are many other professional designations and credentials that individuals in the investment fund industry may hold. When evaluating investment professionals, it is important to look beyond their credentials and designations and consider their experience, expertise, and ethical standards.

Frequently asked questions