Attention SEC Registered Investment Advisors: Are You in Compliance with Your Home State’s Rules?

July 13, 2007

If your firm is registered with the SEC, RIA Compliance Consultants wants you to be aware that the Investment Advisers Act of 1940 provides state regulators authority over federally registered investment advisors and their employees, albeit on a limited scope. Many SEC firms believe that because they are not registered with a state regulator, they are therefore exempt from all requirements and provisions states have mandated. While it is true that SEC firms should focus their attention on the Advisers Act and its rules, SEC firms need to be cognizant of the authority provided to state regulators under Section 203A of the Advisers Act. The following summarizes the actions state regulators may take under Section 203A.

Licensing fees. States can impose and collect filing, registration, or licensing fees.

Investment adviser representative licensing. States have the ability to license, register, or otherwise qualify an investment adviser representative who has a place of business in the state.

Enforcement actions for fraud and deceit. States may have the authority to investigate and bring enforcement actions with respect to fraud or deceit against an investment adviser or person associated with an investment adviser.

Notice filings. States have the authority to require the filing of any documents filed with the Commission pursuant to the securities laws solely for notice purposes, together with a consent to service of process, and any required fee.

SEC firms need to make sure they are in compliance with the applicable requirements in each state in which the firm conducts business. RIA Compliance Consultants wants to ensure SEC-registered firms are aware that a state can bring an enforcement action against the firm for actions of fraud and deceit. Many states have specific prohibited acts SEC firms and their advisor representatives must follow in order to avoid enforcement actions.

Some of the common fraudulent, dishonest or unethical practices we see listed state statutes include: placing an order for a client account without authority to do so; exercising discretionary trading authorization without written authority; inducing trading in a client’s account that is excessive in size and frequency in view of the client’s financial resources and investment objectives, and character of the account; charging excessive advisory fees; loaning money to a client or borrowing money from a client; failing to enter into written agreements; and failing to provide disclosure of material conflicts of interest, including the receipt of possible dual fees.

If you have questions about the rules of a state in which you conduct business, please give us a call to see how we can help your firm and its advisor representatives stay in compliance with all applicable laws and regulations.

Posted by Bryan Hill
Labels: Compliance Training, SEC