On October 1, 2009, Michigan’s new Uniform Securities Act (2002) (the “Act”) will become effective, and Michigan’s securities laws and regulations will transition into the modern world. The new act will enhance the enforcement powers of the Office of Financial and Insurance Regulation (“OFIR”) and bring Michigan’s system of securities regulations closer to conformance with existing federal securities laws and the laws of other Midwestern states. Michigan’s new act is substantially the Uniform Securities Act developed in 2002 by the NCCUSL, with limited modifications, which has been adopted in 17 states to date and proposed in several others.
The new Act eliminates the current prohibition against an adviser having custody of a client’s funds or securities and also does away with the prohibition or limitation on performance-based compensation for investment advisory services. There is a new investment adviser exemption from registration for firms that do not hold themselves out to the public as an investment adviser and who have not, during the past 12 months, had more than five Michigan residents who are “accredited investors”; this allows for an indefinite number of corporate and institutional clients without triggering the registration requirements. These changes should facilitate the formation and operation of private equity, venture capital and hedge funds in Michigan.
Michigan will now join almost all other states in requiring registration of “investment adviser representatives” (“IARs”). Individuals employed by or associated with a state-registered or a “federal covered” investment adviser will be required to register with the Michigan OFIR unless excluded from the definition or exempted from the registration requirement. Those individuals who are excluded from the IAR definition are persons employed by or associated with a federal covered investment adviser that has no place of business in Michigan and those persons who do not meet the federal definition of an “investment adviser representative” contained in SEC Rule 203A-3 under the Advisers Act. Those individuals who are exempted from registering as an IAR are those persons who are employed by or associated with an investment adviser that is exempt from registration in Michigan or a federal covered investment adviser that is exempt from Michigan’s notice filing requirements. A person may register as an IAR with more than one firm, where appropriate.
The Michigan OFIR is in the process of finalizing a set of exhaustive administrative rules under the new Act, including many new and comprehensive rules relating to such things as:
- minimum financial (i.e., net worth) requirements for investment advisers;
- record-keeping requirements;
- conditions under which an investment adviser may have custody of client funds and securities;
- prohibited conduct, including restrictions on advertising and maintenance of an insider trading policy; and
- requirements and prohibitions regarding the contents of investment advisory contracts (including what sort of performance-based compensation will be acceptable and permitted).
For example, proposed Rule 451.8423 will require that a person seeking to be registered as an IAR must within a two-year period prior to filing the application, successfully complete and pass either the FINRA Series 65 exam or both FINRA Series 66 and Series 7 exams. It also provides that the examination requirement is waived if the applicant has been awarded and currently holds in good standing a CFP award; a CFC or MSFS award from American College in Bryn Mawr, PA; a CFA award; a Personal Financial Specialist award from the AICPA; or a CIC award from the Investment Adviser Association. At the time of this newsletter, these OFIR rules are still being developed. Each investment adviser in Michigan should consult with counsel prior to October 1, 2009, to determine precisely how it will be affected by the new Act and the accompanying OFIR rules.