Tag: Wyoming

The Wild West of Wyoming

I run across compliance stories that make me scratch my head when I find something odd.  I just came across another that made me remember one of the quirks of registration with the Securities and Exchange Commission as an investment adviser.

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The SEC was after Timothy Sexton and his advisory firm, Bantry Bay Capital. Examiners showed up at Bantry Bays offices and were surprised to find no office. The address was listed at 3465 N Pines Way in Jackson, Wyoming in its Form ADV filing as its principal place of business. The examiners found a UPS Store instead of an operating office.

One aspect of registration between state and SEC registration is that investment advisers in Wyoming register with the SEC, regardless of the amount of assets under management. Some advisers try to sneak into Wyoming. It looks like Bantry Bay had rented a post office box at that UPS Store. That is not enough for a principal place of business.

Wyoming does not have a state level regulator of investment advisers so all Wyoming investment advisers are under SEC jurisdiction.

That will change next year. Wyoming passed a securities law and is implement a regulatory regime for investment advisers. On June 1, 2017, those 21 investment advisers in Wyoming will be required to state registration.

Wyoming will no longer be the wild, wild west for investment advisory firms.

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Buildings in Jackson, Wyoming, located at the crossing of Deloney Avenue and Center Street
By DXR
CC BY SA

Dislocated in Wyoming Again

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At the fall NRS Conference, the presenter and the audience were both surprised to reveal that false addresses was a new enforcement initiative for the Securities and Exchange Commission when it came to registered investment advisers and fund managers. Two weeks ago, the SEC came out with three enforcement actions against advisers that had falsely claimed Wyoming as their primary business address. Last week, the SEC came out with a fourth.

Logical Wealth Management was operated out of Massachusetts in 2002 and registered with the SEC. In 2010, with the Dodd-Frank changes to registration, Logical Wealth converted to a Wyoming corporation. Because Wyoming does not regulate investment advisers, any investment adviser with a principal office and place of business in Wyoming, regardless of its assets under management, is required to register with the SEC.

The problem was that Logical Wealth never had the $25 million in assets under management to register with the SEC in the first place and never had its principal office and place of business in Wyoming to continue the registration.

The registration failure was not the only problem. Logical Wealth failed to adopt and maintain compliance policies and procedures and failed to maintain some required books and records. In particular, Logical Wealth could not produce the records relating to its calculation of its assets under management.

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The Lure of Wyoming

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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.

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What do Wyoming, New York, and Minnesota Have in Common?



They don’t examine investment advisers.

Wyoming has long been on this list because it does not have a law regulating investment advisers. In Item 2 of Form ADV there was a box to check if your principal office and place of business was Wyoming. That kept you in SEC registration.

The importance of whether a state does exams affects mid-sized advisors. Dodd-Frank allows mid-sized advisors to stay with SEC registration instead of state registration if their home state doesn’t do exams.

At last week’s SEC Open Meeting on the new investment adviser act rules, Bob Plaze, associate director of the SEC’s Division of Investment Management, revealed that New York did not respond in writing to the SEC’s question about investment adviser examinations. The SEC took the position that a non-response was a statement that the state doesn’t examine investment advisers.

Minnesota responded that they don’t conduct exams.

This means mid-sized advisers in Wyoming, New York, and Minnesota won’t have to switch to state supervision if they have between $25 million and $100 million in assets under management.