There is a long history of splitting financial regulatory oversight between state regulators and federal regulators. For investment advisers the split is based on Assets Under Management and Dodd-Frank raised the AUM level from $25 million to $100 million. Above that level you register with the SEC and below that level you register with the state regulator.
The exception is the state of Wyoming. Wyoming is the only U.S. state that does not regulate investment advisers. So if you are an adviser in that state, you register with the SEC regardless of assets under management.
The Securities and Exchange Commission published a trio of cases in involving Wyoming last week. In each of the three cases, the firm improperly claimed Wyoming as its principal office and principal place of business.
David Nagler organized New Line Capital in Santa Fe, New Mexico in 2007. In March 2012, just before Dodd-Frank’s change in registration, New Line re-organized as a Wyoming company and amended its Form ADV to reflect its new place of business.
Just changing the state of organization and renting an office in the new state does not make the new state a firm’s principal place of business.
Nagler did not direct, control, or coordinate the activities of New Line from Wyoming. During all relevant times, Nagler resided in New Mexico and used his residence there as a base of operations. Nagler never met clients in Wyoming and rarely used the small office space that New Line rented in Wyoming.
SEC Rule 222-1 For purposes of section 222 of the Act:
(a) Place of business. “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.
(b) Principal office and place of business. “Principal office and place of business” of an investment adviser means the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.
Arete Ltd. d/b/a Sky Peak Capital Management initially registered with the SEC in November of 2012 claiming Cheyenne, Wyoming as its principal place of business. But all of its operations were California.
The most extraordinary of the three is Wyoming Investment Services, organized as a Wyoming limited liability company and filed with the SEC in February 2013. But its actual place of business was at the home of its president in Ft. Collins, Colorado.
All three were lured to Wyoming to gain registration with SEC and to avoid registration with state regulators.
Sources:
- CCOs named in three cases involving Form ADV misrepresentations in IA Watch
- SEC censures two advisers for claiming to be based in Wyoming by Jed Horowitz for Reuters
- False Wyoming Registration Gets 3 Advisors in Hot Water With SEC by Danielle Andrus in ThinkAdvisor
- Settlement With Wyoming Investment Services
- Settlement with New Line Capital
- Settlement with Arete