Frequently Asked Questions About Investment Advisor Registration

The following are some of the more common questions asked about the investment advisor registration process.

It's important to recognize that although there is a certain level of similarity between the various state securities regulators and the United States Securities and Exchange Commission ("SEC") with respect to the regulation of investment advisors, there are significant variances among state securities regulators and the SEC. The answers listed below will not address such differences. The information presented here is general in nature and not a substitute for consulting with an investment advisor compliance consultant and/or attorney regarding your unique circumstances and the requirements of the securities regulator(s) with jurisdiction over your firm.

What’s an investment advisor?

An investment advisor is an individual or entity that (1) provides advice or analysis by making direct or indirect recommendations regarding securities or securities markets; (2) for compensation in any form; and (3) engages in the regular business of providing advice regarding securities. (It should be noted that there are certain individuals that are excluded from the definition of investment advisor.)

Is there a substantive difference between the terms “investment adviser” and “investment advisor”?

No, the term “investment adviser” with the “er” ending has the same meaning as the term “investment advisor” with the “or” ending.  Under federal law, “investment adviser” with the “er” ending was utilized by Congress; however, “investment advisor” with the “or” appears to be a more popular form within the securities industry.

Should my firm register with the U.S. Securities and Exchange Commission (“SEC”) or with a state securities regulator?

Just because a firm meets the definition of providing investment advisory services, it does not automatically mean the firm must register as an investment advisor. The SEC has provided exclusions for several common professions that provide investment advisory services as long as such services are “solely incidental” to the firm or individual’s main business. This category includes broker-dealers, lawyers, accountants, engineers, teachers, banks, bona fide publishers, and advisers limited to U.S. government securities. Because “solely incidental” can be open for interpretation, firms falling under these exclusions should consider consulting with an outside professional to make sure their activities do not require investment advisor registration.

A common exemption from registration is that of a private investment advisor. An investment advisor is exempt from SEC registration if it (1) had fewer than fifteen clients during the preceding twelve months, (2) does not advise any registered investment companies or companies electing to be regulated as business development companies, and (3) does not hold itself out generally to the public as an investment advisor. Other common exemptions from SEC registration include charitable organizations, officials, and church plans. An investment advisor that is registered with the Commodity Futures Trading Commission and whose business does not consist primarily of acting as an investment advisor does not need to register with the SEC. While these exemptions allow firms to avoid registration with the SEC, firms must still be cognizant and comply with applicable state requirements for investment advisor registration. Again, we recommend that a firm retain a compliance professional or attorney that can consider all of the facts surrounding the firm’s situation in order to determine whether an investment advisor registration exemption applies to the firm.

Whether a firm should be registered as an investment advisor with the SEC or a state is typically determined by the amount of assets receiving continuous and regular supervisory or management services (known as "assets under management" or "AUM") . In order for a firm to register with the SEC, the firm must have over $25 million of AUM at the time of registration or within 120 days of the effective date of the investment advisor registration. If a firm has less than $25 million of AUM and doesn’t anticipate having $25 or more within 120 days of the effective date of the investment advisor registration, then it must register with the individual state(s) as an investment advisor. If a firm has $30 million or more of AUM, then it must register with the SEC. Firms with more than $25 million and less than $30 million of AUM can be registered with either the state securities regulator or SEC. The SEC’s definition of AUM is outlined in the Form ADV Part 1 and should be thoroughly reviewed and consulted prior to beginning the investment advisor registration process.

There are several exemptions that allow an investment advisor with less than $25 million of AUM to register with the SEC. For example, firms serving as an investment advisor to a mutual fund (also known as an "investment company") or providing services to clients in 30 or more states must register with the SEC. Another common exemption is a pension consultant that provides investment advice to plans with at least $50 million in assets. The investment advisor cannot include assets when it only provides advice to plan participants.

What happens if a new firm without any AUM registers as an investment advisor with the SEC and fails to acquire at least $25 million of AUM within 120 days of the effective date of the investment advisor registration?

If a firm registers with the SEC, but does not acquire $25 million in AUM within 120 days, the firm must deregister with the SEC and transfer its investment advisor registration to the state level.

Do I personally register as an investment advisor or should I establish a corporation or limited liability company?

Most individuals establishing an investment advisor do so by establishing an entity such as a corporation or limited liability company and then serving in their individual capacity as an investment advisor rep of their investment advisory firm; however, individuals can also establish an investment advisor as a sole proprietor. The protection offered to owners of an entity from general liability does not protect necessarily a securities principal from liability under the federal and state securities laws. You should consult with your legal counsel and tax professional regarding whether you should establish an entity and if so, the type of entity.

Can I start the investment advisor registration process if my entity isn’t established yet?

Yes, you can start preparing your firm’s investment advisor application for registration without yet establishing the entity that will serve as the investment advisor; however, the entity will need to be established before the investment advisor application is filed. It’s recommended that you conduct a search of your state’s corporate name database to determine the availability of the intended name for your new entity. Once you identify an available name, an application can be submitted on your firm’s behalf to the Entitlement Group of the NASD for an IARD /WebCRD account. You will need to have established the entity with the state corporation office and obtain an employer identification number prior to filing your investment advisor registration application. Many states require a firm to include a copy of its article of incorporation or limited liability company membership agreement as part of its investment advisor application.

Explain the investment advisor registration process?

Currently there is a significant difference between registering with the SEC and individual state securities regulators.

Firms registering with the SEC must prepare and file the Form ADV Part 1A and its applicable schedules through the IARD system. The SEC will then review the Part 1A and approve/deny the registration of the firm. While the SEC generally reviews only the Part 1A as part of the initial application process, a firm must have a Form ADV Part II, client agreements, written supervisory programs/code of ethics, and other regulatory documents up and running upon its approval with the SEC. The SEC will review such documents during a regulatory examination.

In addition to filing the Form ADV Part 1A, 1B and applicable schedules through the IARD system, state registered firms must also submit several documents directly to state securities regulators. These documents include the firm's Form ADV Part II and applicable schedules; required financial statements; client agreements; and other supplemental documents and forms particular to the individual state.

The SEC has a regulatory requirement to approve or deny investment advisor applicants within 45 days of the firm’s initial filing. Most state securities regulators have very similar time periods usually between 30 and 45 days. However, many times the approval process for investment advisory applicants can last longer than this time frame, depending on several factors. If a firm’s initial application packet is incomplete, delays usually occur. Many regulators will also require changes to an investment advisory document or request additional information regarding the firm’s background and/or services.

Once a securities regulator is satisfied with the information provided and the investment advisor applicant and its principal’s background, the firm will be approved.

How is an IARD/Web CRD account established?

In order for firms and individuals to register as investment advisors with the SEC and most states, an account with the Investment Adviser Registration Depository [www.iard.com] (“IARD”) and WebCRD must be established through the Entitlement Group of the NASD, the administrator of the IARD system on behalf of the SEC and states. Upon its approval, the NASD Entitlement Group will provide your account identification information and CRD number. The IARD/WebCRD account allows your firm and you to file the Form ADV Part 1 and Form U4 to become an investment advisor and investment advisor representative and pay the registration fees charged by the appropriate securities regulators.

What’s a Form ADV? What type of information is disclosed through the ADV?

The Form ADV serves two primary functions; (1) it is the official governmental application form for investment advisor registration and (2) it serves as a disclosure brochure provided to investment advisory clients. An investment advisor is obligated to disclose material information to a client, and the Form ADV is a primary vehicle for an investment advisor to disclose the following information to clients and securities regulators: investment advisory services available to clients; the fees and costs associated with such investment advisory services; indirect compensation received from third-parties; the background of the firm’s principals; affiliates of the firm and outside business activities of the firm, its principals, and supervised persons; potential conflicts of interest; and certain firm policies and procedures such as its Code of Ethics and proxy-voting policy.

The Form ADV consists of several sections. The Form ADV Part I is filed electronically with the applicable securities regulators via the IARD system. SEC firms must complete Form ADV Part 1A and state firms must complete Form ADV Part 1A and Part 1B. The Form ADV Part II and Schedule F is a narrative document that is shared with regulators and serves as the disclosure document provided to all clients. (In particular, the Form ADV Part II and Schedule F must be given to clients in advance or at the time an agreement for investment advisory services is executed. The Form ADV Part II and Schedule F must also be provided, or offered, on an annual basis to all current clients.) In lieu of using the Form ADV Part II and Schedule F as the disclosure document, many firms elect to provide clients with a separate disclosure brochure.

Investment advisor firms sponsoring a wrap-fee program must also complete Schedule H of Form ADV to provide specific information about the wrap-fee program. A single Schedule H brochure can be used to describe several wrap-fee programs.

Is the ADV Part II filed on-line?

Due to a recent change in the IARD system, the Form ADV Part II now can be posted for public viewing on the IARD system. Although the SEC has taken a position of neither encouraging nor discouraging the posting of the ADV Part II by federally registered investment advisor firms, several state securities regulators are requiring that state registered firms file the Form ADV Part II on the IARD system.

Does an SEC registered firm have to register with a state?

An SEC registered investment advisory firm does not have to register with state securities regulators. However, an SEC registered firm is required to notice file with each state where it maintains a place of business or if the firm has more than 5 investment advisory clients. (It should be noted that certain states, such as Texas, do not recognize this de minimus exemption and require notification upon the first client.) In most states, an SEC registered firm can notice file with a state securities regulator by electronically submitting the Form ADV Part I via the IARD system and paying the state its notice filing fee.

How does a state registered investment advisor firm determine in which states it should be registered?

Similar to an SEC registered firm, a state firm is required to register as an investment advisor with each state securities regulator where it maintains a place of business or where the firm has more than 5 investment advisory clients. (It should be noted that certain states, such as Texas, do not recognize this de minimus exemption and require investment advisor registration upon the first client.) State firms must go through the entire investment advisor registration process similar to the process required by their home state.

What’s an investment advisor representative?

An investment advisor representative (often referred to as an “IAR”) generally is defined by most states as a person who, for compensation (1) makes any recommendations regarding securities; (2) manages accounts of clients; (3) determines which recommendation or advice regarding securities should be given; (4) solicits or sells investment advisory services, or (5) supervises employees who perform any of the foregoing. Since the definition of an investment advisor representative, especially with respect to soliciting, can vary significantly from state to state, the rules of each particular state securities regulator should be consulted. If an individual meets the state’s definition of an investment advisor and maintains a place of business within a state or has a certain number of clients within the state, then most state securities regulators will require the individual to register as an investment advisor representative.

What are the qualifications to register as an IAR?

Most state securities regulators require that in order for an individual to become registered as an IAR, such individual must have successfully completed the Series 65 examination. In the event that an individual currently holds and maintains in good standing the Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Personal Financial Specialist (PFS) or Charter Financial Consultant (ChFC), most states will waive the successful completion of the Series 65. Similarly, as long as an individual maintains both a Series 7 and Series 66 with a broker-dealer, most states will not require such individuals to obtain the Series 65.

Will the state issue exceptions to the IAR qualifications?

Yes, many states will allow exceptions to the IAR qualifications based on the candidate's prior financial industry experiences. Some states also accept professional designations in addition to those listed in the previous question. State regulators will require a written request for a qualification waiver.

Does an individual have to be sponsored by an investment advisor in order to take the Series 65 examination?

No. Unlike an individual seeking to take the Series 7, a sponsoring firm is not required for an individual to open a Series 65 exam window and take the Series 65 exam.

If my firm is registered with the SEC, do I need to personally register as an IAR?

Yes, associated persons of an SEC registered firm that fall within the SEC and the applicable state’s definition of an IAR are required to register with the state as such.

Can my firm register as an investment advisor without an individual qualified to serve as an investment advisor representative?

Almost all state securities regulators require a firm registering as an investment advisor to also include at least one individual within such firm to serve as an IAR. In other words, a firm applying to become registered with its home state as an investment advisor must also have an IAR before it the firm’s application will be approved by the state securities regulator.

With respect to a firm registering with the SEC, there is no federal requirement that there be an IAR affiliated with the firm. However, when the firm notice files with the firm’s home state, the firm’s home state securities regulator will note that there are no individuals registered as an IAR and therefore require the firm to register individuals acting as an IAR.

What topics are tested on the Series 65 examination?

For information to the most current topics covered in the Series 65 examination, the North American Securities Administrators Association (NASAA) website is an excellent resource. The website contains an outline of the topics covered in the exam. Click the following link to be directed to the NASAA website – http://www.nasaa.org/content/Files/Series65ExamSpecs.pdf

How can an individual obtain a study guide to the Series 65 examination?

The Resources page on our website contains links to some of the better known study guide service providers.

How long does the registration process take?

It usually takes three to four weeks to prepare the investment advisor application and the associated documents. Once you submit the investment advisor application, it will take approximately three to four weeks for the SEC or state to review your application. However, this can vary significantly due to the particular volume and staffing associated with each securities regulator. In the event that you or your firm has a disciplinary history with securities regulators or is currently subject to a regulatory inquiry or investigation, the investment advisor registration process will be considerably longer or delayed.

When does the Form ADV have to be amended?

State and SEC registered investment advisory firms are required to file an annual amendment to the Form ADV via the IARD system within 90 days of the close of the investment advisor’s fiscal year. Additionally, an investment advisor should promptly update its Form ADV within 30 days of any material changes.

Will my firm need to implement written compliance programs?

For SEC registered firms, the answer is “yes”. The SEC, under Rule 206(4)-7, requires all federally registered investment adviser firms to develop and maintain written compliance programs. The policies and procedures should be designed to prevent violations from occurring, detect violations that have occurred, and promptly correct any violations that have occurred. While the SEC did not delineate all the procedures that must be made part of a written compliance program, the SEC does expect an investment adviser’s policies and procedures, at a minimum, to cover the following issues:

• Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients' investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
  
• Trading practices, including procedures by which the adviser satisfies its best execution obligation, uses client brokerage to obtain research and other services ("soft dollar arrangements"), and allocates aggregated trades among clients;
  
• Proprietary trading of the investment adviser and personal trading activities of supervised persons;
  
• The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
  
• Safeguarding of client assets from conversion or inappropriate use by investment advisory personnel;
  
• The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
  
• Marketing investment advisory services, including the use of solicitors;
  
• Processes to value client holdings and assess investment advisory fees based on those valuations;
  
• Safeguards for the privacy protection of investment advisory client records and information; and
  
• Business continuity plans.

For state registered investment advisor firms, the answer is that it’s “likely” your state securities regulator expects a compliance program in some form. Most state securities regulators require state registered firms to maintain and enforce written procedures which set forth the procedures adopted by the firm in order to comply with the state’s rules and regulations and properly supervise its associated persons.

How much are the registration fees to become registered as an investment advisor?

SEC and state registered advisor firms and their investment advisor representatives are subject to initial and annual state licensing fees. A listing of such fees can be found on the IARD’s public website at http://www.iard.com/fees.asp. In addition, the IARD system charges an initial and annual $30 fee for each investment advisor representative licensed through the IARD/Web CRD system.

How often are investment advisor registrations renewed?

State investment advisor registrations and notice filings expire every year on a calendar basis. All renewal fees are paid during the IARD renewal season which takes place during November and early December each year.

The SEC does not charge an initial or annual investment advisor registration renewal fee; however, SEC firms failing to file their Annual Form ADV Part 1 Amendment in a timely fashion may have their investment advisor registrations withdrawn.

Are investment advisors subject to any net worth/net capital or bonding requirements?

The SEC does not currently have a net worth/net capital or bonding requirement. However, the SEC will heavily focus on the financial condition of an investment advisor during a regulatory examination. The following are the specific financial records that must be kept as part of an investment advisor’s books and records. Most states require the same or similar records.

• A journal or journals, including cash receipts and disbursements, records, and any other records of original entry forming the basis of entries in any ledger.
• General and auxiliary ledgers (or other comparable records) reflecting asset, liability, reserve, capital, income and expense accounts.
• All check books, bank statements, cancelled checks and cash reconciliations of the investment adviser.
• All bills or statements (or copies thereof), paid or unpaid, relating to the business of the investment adviser as such.
• All trial balances, financial statements, and internal audit working papers relating to the business of such investment adviser.

Firms registering as an investment advisor directly with a state securities regulator will likely be subject to a net worth/net capital and/or bonding requirement. Typically, the level of net worth, net capital or amount of bond is based on the procedures of the firm. A common approach many states have adopted is to require firms with custody of client funds and/or securities to maintain a net worth in the amount of $35,000. Firms maintaining discretionary authority, but not custody, over client funds and/or securities must maintain a net worth in the amount of $10,000. Firms not meeting the net worth requirement often must then attain a surety bond in the amount of the net worth deficiency rounded plus $5,000.

Because state rules vary widely on this requirement, it is important that you check with your home state securities regulator to see if it has such requirements and how the requirements affect your firm.

How does a firm obtain a surety bond to meet the state’s net worth requirement?

It’s recommended that you contact your local commercial insurance agent as soon as possible since this can be a relatively slow process. Please refer to the particular requirements published by your firm’s home state securities regulator. Your state will likely have a surety bond form or affidavit that will need to be executed by the surety and/or its agent.

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