Hedge Fund Marketing and Marketers - Part 2

Now that you know what third party marketers are and how they get paid, let's talk about the rules surround third party marketing. First, all marketers who get paid a fee as a result of the amount of assets raised must be licensed as Series 7 salespeople with a FINRA registered broker/dealer. Not sure if you noticed there, but I said ALL marketers, not just third party marketers.  This means in house marketers as well.

Many in house hedge fund marketers do not believe they have to be licensed. They are right, if they get paid a salary to raise assets. If however, they get compensated based upon the amount of assets they have raised (performance), then they too must be FINRA licensed. The reason they must be licensed is that they are selling a security (the hedge fund) and they are being paid a commission on the sale.  In addition, all hedge fund marketers, including in house and third party, must be licensed in the states they are soliciting investors.  If the fund trades futures, and is registered with NFA, the marketer must not only be Series 7 licensed, but also Series 3 licensed in order to solicit the product.

Here is where it gets tricky, supervision of the hedge fund marketing industry. Who is supervising the in house marketers for hedge funds and determining whether they should be licensed? Additionally, if they are licensed, are they using email that follows FINRA's archiving rule? Is their supervisor reviewing their mail? Speaking of which, is the supervisor reviewing anything? The reality is, most of the in house hedge fund marketers that are licensed have a very high payout with a broker/dealer that basically allows them to be licensed there to pass through revenue from the hedge fund. In my humble opinion, there is very little oversight here.

There is another type of hedge fund marketer, the unlicensed one. This marketer thinks they are operating under some imaginary exemption. For years I have heard marketers rely on the 'Finders' exemption. They would claim that there is an exemption that allows unlicensed brokers to collect a 'finders fee' on any hedge fund investments made as a result of an introduction by the unlicensed marketer. This is not true, and if you are currently operating under this assumption I urge you to get registered with a FINRA member b/d immediately! There is an exemption related to investment advisers (IA's) that allows unlicensed sales people to introduce individuals to the IA for separate account management and receive compensation, provided the investor is aware of the relationship and exact payment to the sales person in advance.  The Finder's exemption is only available one time, for one entity.  If they are compensated more than once then theactivity is actually considered a business line, and therefore requires registration.

If you are looking for help with capital introduction, prime brokerage, or third party marketing for your fund feel free to email me for consideration at evan@hedgecosecurities.com.

Evan Rapoport is a registered principal and offers securities through HedgeCo Securities LLC. Member FINRA, NFA, SIPC.


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Hedge Fund Capital Introduction can be a crucial component to a hedge fund's growth. Most bulge bracket prime brokers offer some form of capital introduction for their larger clients but finding a solid capital introduction program for smaller clients presents a challenge. This site is designed to discuss recent events and updates within the hedge fund marketing/capital introduction space. All contributors with beneficial knowledge are urged to participate.

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