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New York State Adopts Extensive Rule Changes Affecting Investment Community

On Behalf of | Feb 11, 2021 | Articles, Blog, Publications

By Mauro Viskovic, Esq. Email Mauro

New York State Attorney General Letitia James recently announced major changes to rules affecting a broad range of investment professionals and the investment industry in general.  The new rules will change the regulatory process for offering investment securities to New York residents and will implement registration requirements for business brokers or “finders” who are in the business of connecting prospective investors to companies seeking investment capital.  In addition, investment adviser representatives (including representatives of private equity fund managers and hedge fund managers) will be subject to state registration and examination requirements.

Notice of Investment Offerings:

One of the key changes will harmonize the New York and the federal notice filing requirements for private investment offerings that are exempt from registration under federal law.  The state notice requirements for such offerings will now be complied with by filing the federal Form D through the electronic filing depository system of the North American Securities Administrators Association. This amendment will aim to streamline the securities offering filing process in New York, which had still been using an antiquated paper filing system.

Finder Registration:

Conversely, the state imposed additional regulatory burdens that will affect finders who connect businesses to sources of investment capital in exchange for compensation.  Such finders will be subject to all of the registration requirements that New York demands of brokers, broker-dealers, and salespersons.  The new requirements include the following: (i) finders not associated with a registered broker-dealer must file Form M-1; (ii) finders associated with a non-Financial Industry Regulatory Authority, Inc. (“FINRA”) member broker-dealer must file Form M-2; and (iii) finders associated with a FINRA member broker-dealer must file Form U4.  Finder registration periods for non-FINRA members are four years, while FINRA members must follow applicable FINRA registration rules.

This adds another layer of regulation for those not registered as well as expense because these newly registered finders will have to pay fees to the State of New York as part of the registration process. Further, these new regulations are in stark contrast to the recent proposed federal registration exemption applicable to finders.  See SEC Proposes Eliminating a Significant Burden on Raising Capital in Private Markets.

Investment Adviser Registration and Examination:

New York will require “investment adviser representatives” – a very broad statutory term that includes individual professionals managing hedge funds and private equity funds – to register with the state and meet certain examination requirements.  Such individuals must register by filing Form U-4 with the web-based Investment Advisor Registration Depository (IARD) or Central Registration Depository (CRD) operated by FINRA.  Within two years prior to the registration date, registrants must take and pass either (1) the Series 65, Uniform Investment Adviser Law Examination or (2) the Securities Industry Essentials Examination, combined with the Series 7, General Securities Representative Examination, and the Series 66, Uniform Combined State Law Examination.  Individuals who have been serving as investment adviser representatives for at least two years will be eligible to apply for a waiver of the examination requirement.

Other Changes:

The new rules will add a new bookkeeping requirement for investment advisers.  The revision requires that New York State registered investment advisers take reasonable steps to verify the “accredited investor” and “qualified client” status of any client so designated, including making and maintaining documents used in the course of such verification.  The terms “accredited investor” and “qualified client” are defined under applicable SEC regulations and generally refer to high net-worth investors who are financially sophisticated and have a reduced need for the protection provided by heightened disclosure requirements.

Weiss Zarett represents a broad range of professionals in the New York investment community. If you have any questions regarding these new regulations, please email Mauro Viskovic, Esq. at  [email protected] or call us at 516-627-7000.

About the Author:

Mauro Viskovic is a Partner in the Firm’s corporate and transactions practice group, where he focuses on providing high quality and cost-effective solutions to clients’ legal matters.  He represents entrepreneurs through all stages of their ventures’ development, including advice on structure, initial company formation and organization, private financings, commercial transactions, mergers and acquisitions and liquidity events.  In addition, Mauro represents investors in all aspects of corporate finance transactions and also focuses his practice on the representation of private investment fund advisers and portfolio managers.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care and financial services industries, including corporate and transactional matters, employment, civil and administrative litigation, regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.