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

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The SEC does not currently have a specific net worth/net capital or bonding requirement for an investment advisor. 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 investment advisor firm. A common approach many state securities regulators have adopted is to require an investment advisor firm with custody of client funds and/or securities to maintain a net worth in the amount of $35,000; an investment advisor firm maintaining discretionary authority, but not custody, over client funds and/or securities must maintain a net worth in the amount of $10,000; and an investment advisor firm 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 the rules of state securities regulators vary widely on this requirement, it is important that your investment advisor firm check with its home state securities regulator to see if it has such requirements and how the requirements affect your investment advisor firm.

Click here to view a recording of our compliance consultant explain the net worth requirements to register as an investment advisor with a state securities regulator and the SEC.

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