Attention State IA Firms – Are you in Compliance with the IAA of 1940?

February 20, 2007

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If your firm is registered with a state regulatory body, are you aware that some sections of the Investment Advisors Act of 1940 do apply to your firm? Many state registered firms believe because they are exempt from SEC registration, they are also exempt from all requirements and provisions of the Advisers Act. While it is true that the majority of rules under the Advisers Act apply only to federal firms, there is several provisions that apply to state firms. Therefore, in addition to becoming familar with your home state’s rules (and the rules of any state where your firm has clients), state registered firms must still pay close attention to the Advisers Act to identify those provisions the firm must comply with.

The SEC’s Division of Investment Management has created an informational page which outlines many of the requirements under the Advisers Act. One particular section regards the provisions applicable to state firms. The following has been quoted directly from the Division of Investment Management’s page.

Most provisions of the Advisers Act and Commission rules apply solely to SEC-registered advisers, and therefore are not applicable to state-registered advisers. Thus, state-registered advisers are not required to file and amend Form ADV with the Commission under Rule 204-1; comply with the SEC’s books and recodkeeping requirements under Rule 204-2; or deliver a brochure to clients under Rule 204-3. State investment adviser laws, however, may impose substantially the same requirements. For example, many state laws require advisers to register by filing Form ADV with the state.

State-registered advisers are subject to Section 206 of the Advisers Act, which prohibits fraudulent conduct. The Commission has authority to bring enforcement actions against state-registered advisers for fraud. Other provisions of the Advisers Act that apply to state-registered advisers include:

• Section 204A, which requires advisers to establish, maintain, and enforce written procedures reasonably designed to prevent the misuse of material nonpublic information;
• Section 205, which contains prohibitions on advisory contracts that (i) contain certain performance fee arrangements, (ii) permit an assignment of the advisory contract to be made without the consent of the client, and (iii) fail to require an adviser that is a partnership to notify clients of a change in the membership of the partnership. (The exemption provided in Rule 205-3 for certain performance fee arrangements, however, is available to all advisors, including state-registered advisers); and
• Section 206(3), which makes it unlawful for any investment adviser acting as principal for its own account to knowingly sell any security to, or purchase any security from, a client, without disclosing to the client in writing before the completion of the transaction the capacity in which the adviser is acting and obtaining the client’s consent. (The exemption provided in Rule 206(3)-2 from the prohibitions of Section 206(3), however, is available to all advisers, including state-registered advisers.)

We invite you to review the entire page authored by the Division of Investment Management click here. Regulatory websites such as the SEC and comparable cites created by states securities department provide a wealth of information and should be consulted on a regular basis. RIA Compliance Consultants has also created a Resource page on our website with links to pertinent websites designed for your convenience and information. We invite you to check our Resource pages at click here.

Posted by Bryan Hill
Labels: Compliance Program