Investment Adviser Compliance Webinars: How to Become a Registered Investment Advisor


During this previously recorded webinar we explains the process and documents necessary for registering a firm as an investment advisor, the criteria for determining whether a firm should register with the SEC or state securities regulators, and the common pitfalls or mistakes experienced by applicants. Additionally, our consultants give numerous best practices used by applicants when registering as an investment adviser. Finally, we will review some of the ongoing obligations of a newly registered investment advisor.

Click the following link to view a copy of this presentation’s slides How to Become a Registered Investment Advisor Slide Presentation 


Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio before quoting.


First we will define an Investment Adviser. We’ll explore who is required to register. Next we will talk about how to determine if you are required to register with the SEC or state securities regulators.  We’ll paint you a picture of the registration process looks like and what the requirements are during the process. We will give you best practice tips for drafting the form ADV. We’ll talk about common registration traps. We’ll also touch on the ongoing compliance duties for a newly registered investment adviser firm.


Let’s understand who is an investment adviser.  An investment adviser is an entity that (1) provides advice or analysis by making direct or indirect recommendations regarding securities or securities markets (2) for compensation in any form (3) engages in the regular business of providing advice regarding securities. Generally speaking, anyone meeting that definition is required to be registered.  Exemptions do exist from the registration requirement.


The most commonly relied upon exemption is the solely incidental exclusion. This typically encompasses Broker-Dealers, Accountants, Engineers, Teachers, Banks, and Bona Fide Publishers. As long as the investment advice that they’re providing is solely incidental to the other services they provide they are excluded from the definition of investment adviser representative.

However, it is important to understand that there is nothing in the rules or definitions that explains what is solely incidental. You need to assess that and determine if the advice you are providing is solely incidental. Take into consideration, are you holding yourself out as providing investment advice or investment advisory services? Do you charge separate fees for those services? Is the investment advice you’re giving reasonable with the other services you’re providing?  These are just some things to take into consideration for a solely incidental exclusion.

There are also exemptions based on a limited number of clients. Before the passing of the Dodd Frank act there used to be an SEC exemption that stated you were exempt if you had fewer than 15 clients in the past 12 months and did not advise Investment Company, and did not hold itself out to Public as an investment adviser.  That no longer exists. The SEC did away with the limited client exemption.

It was commonly referred to as the private fund adviser exemption because this was the exemption private fund advisers were relying on because most of them only managed a limited number of private funds and the private funds are their clients, not the individual investors in the funds.Because they had fewer than 15 clients a lot of private fund advisers were not required to register. Dodd Frank said the SEC had to come up with a way to capture some of those private fund advisers so they did away with that fewer than 15 client exemption and now have a private fund adviser exemption.

In a nut shell that exemption says that if you are an investment adviser that only manages private funds and do not have one client outside a private fund and you manage less than $150 million you do not have to register with the SEC. Keep in mind though that if you only manage private funds and you manage less than $100 million you may still have to register with the state.  Once you exceed $150 million you have to register with the SEC. Even if you are exempt from registration there is limited filing report you have to submit with the SEC to let them know that you are managing private fund assets.

When looking for exemptions you have to first make the determination of with whom you have to be registered. If you don’t qualify for SEC registration don’t look for an SEC exemption. If you’re a state registered firm you have to look at the state’s exemptions. Some states have an exemption based on a limited number of clients. This is referred to as a De Minimus exemption.

You must look where you have your principal office and place of business. That is primarily where you first need to register. For most states if you have a place of business there you are required to register regardless of the number of clients you have there.  There are states that say that if you have fewer than 6 clients you don’t have to register here. But most states say that if you don’t have a place of business here AND you have fewer than 6 clients here you don’t have to register here. Again, when looking for exemptions you have to understand which regulations are governing you and you are following them closely.

Who should Register as Investment Adviser?

We recommend establishing an entity and registering the entity as the investment adviser. This is commonly done. An LLC, a partnership, a corporation, whatever it is that entity registers as the Investment Adviser.  We recommend an entity, but I am not an attorney, I am not an accountant. They are going to be the best people to talk to about your specific facts and circumstances. From what we’ve seen, an entity allows you a limited amount of protection, but the biggest thing is for business continuity and transitions, down the road when you want to sell your practice., it is easier and more profitable to do if it is established as an entity vs a sole proprietorship.

So the entity is the Investment adviser.  Those individuals with the firm giving advice on behalf of the firm get licensed as Investment Adviser Representatives under the firm.

Investment Adviser Representative

The definition of an investment adviser representative varies based on whether you’re going to be an Investment Adviser Representative of a state or SEC registered firm. Then definitions vary from state to state.  Some states automatically include owners of the firm as individuals who need to register as Investment Adviser Representatives and some include solicitors as individuals who are Investment Adviser Representatives. You have to look at the state’s specific definition of an Investment Adviser Representatives to see who all they will require to be licensed.

General Definition of Investment Adviser Representative

For purposes of today’s presentation, we have general definitions of an Investment Adviser Representative. Generally speaking an Investment Adviser Representative is an individual who, for compensation (1) provides any advice or recommendations regarding securities (2) makes investment decisions regarding securities (3) solicits or sells investment advisory services (4) supervises employees who do any of the foregoing. Generally speaking, anyone meeting that definition is going to be required to license as an Investment Adviser Representative.

IA Rep Qualifications

To get licensed as an Investment Adviser Representative you typically will have to file the Form U4 to get the individual’s license. States may have certain qualifications and requirements you must meet to get licensed.

Having a Series 65 does no mean you are a licensed individual. It means you have met the qualification to get licensed with the appropriate regulatory authorities. Just passing the exam does not make you an Investment Adviser Representative.

The qualifications can vary from state to state but these are common across the board. Typically the series 65 exam, 66 and 7 if they are in good standing. Securities exams expire after 2 years of not being registered with somebody. As long as they are active most states will accept the Series 66 and Series 7.

In lieu of the exam qualifications, most states will accept certain designations. These include CFP, CFA, ChFC, CIC, but these also have to be active and in good standing. Licensing is required in most states. 1 state is a little different. NY does not license Investment Adviser Representatives. NY is tricky. They don’t license Investment Adviser Representatives, so you don’t submit a U4, but they want to know who is doing business as an Investment Adviser Representative in their state and they require those individuals to meet certain qualifications. If you are a state NY state registered Investment Adviser, you have to meet exam qualification requirements, but you don’t get licensed. You will submit a New York Qualification form, letting NY know you will be affiliated with an IA, you will act as an Investment Adviser Representative of the Investment Adviser in the state, and here is the qualification I have that allows me to be an Investment Adviser Representative.

SEC vs. State Registration of Investment Advisers

There are a variety of different factors to determine with whom you register but the most common one is the assets under management test. Typically, if you have over $100 million assets under management you register with the SEC. If you have less than $100 million in assets under management, you register with the state regulators.  AUM is not something you just come up with on your own. On the Form ADV there is a section with very specific instructions of what can and cannot be included as AUM for whom you can be registered with. It is not a guessing game. Regulatory actions have been taken against firms who have inaccurately listed their amount of Assets under management.  Regulators look at AUM very closely. Less than $100 you register with the state more than $100 million you register with SEC. An exception to that is the mid-size adviser. They have between $25 million and $100 million under management. If you are mid-size adviser and are not required to be registered with your state, you are required to register with the SEC. Mid-sized advisers have to be registered somewhere. If your state has a registration exemption you have to get SEC registered. The other thing is that for mid-sized advisers to be registered with the state the state has to have examination programs in place. They have to periodically go out and audit registered investment advisers.

SEC Exemptions to $100 AUM

There are some things that will qualify you for SEC registration.  The Asset Under Management Test is the most common determining factor but there are other ways you can qualify for SEC registration. The first is the 120 day exemption. If you will qualify for SEC registration within 120 days of being approved by the SEC, you can register directly with the SEC. Off the bat most newly registered investment adviser firms are not going to have any AUM.  Maybe previously exempt private fund managers will have AUM but MOST new investment advisers will not have any assets under management.

However, if you are an individual who has been licensed under another investment adviser and you’re breaking away and going off on your own you will have a book of business that you may be able to transfer over.  If that book of business is more than $100 million and you have reasonable belief that within 120 days you can get at least $100 million of that transferred over to your new Investment Adviser firm you can go ahead and register directly with the SEC. The 120 day exemption is not a guessing game. You have to certify that you have reasonable belief that you will qualify for registration and you have to certify that if you do not meet it with the 120 days you will withdraw your application for registration. You have to monitor to make sure you meet it by 120 days because if you don’t reach the $100 million point you have to withdraw your registration with the SEC and try to register with the state. You cannot do business until the state approves you. Bare minimum, you are looking at 30-45 days for a state to approve an application. You have to feel confident you’ll meet it within 120 days and you need to monitor it very closely.

This is not a way to hurry up and get yourself registered. SEC registration typically takes less time than state registration, so we’ve had people contact us and say they are going to go ahead and get registered with the SEC under the 120 day exemption to get up and running and then start the state registration process so they can begin doing business sooner. NOPE. That is not the intent of the 120 day rule. You will get yourself in trouble with the SEC and the state because you are technically acting as an unregistered investment adviser in the state because you knew you should have been registered there. We speak from experience. An adviser firm we are aware of had enforcement actions taken against them from the SEC and the state for doing this. You should be able to substantiate reasonable belief to the regulators. This is especially important if you did not meet the requirement and have to make the transition to the state.

The 120 exemption applies to all of these exemptions. So if within 120 days you will meet any of these qualifications for SEC registration you can register with the SEC. Some of the other qualification exemptions are if you are going to manage assets for an investment company. If you manage assets for an investment company then you are going to register directly with the SEC. This is not “I want to manage assets for an investment company” this is saying that if approved by the SEC I am going to have a signed contract in place and I have reasonable belief that that is going to exist to manage assets for an investment company. There is also the 15 state exemption that says if you are required to register your Investment Adviser in 15 or more states you can register directly with the SEC. You must be required to register in 15 or more states. You would have to exceed the number of clients in each state’s de minimus exemption.  Again, you must be required to register under the state regulations in order to qualify for the 15 state exemptions. You’ve got to research the rules of every state and you’ve got to make sure you can comply with that on an ongoing basis.

There is a Pension Consultant exemption that says if you advise client assets of $200 million or more you can register with the SEC. Most of your retirement plan pension consultants don’t actually manage assets. You look at the SEC’s instructions for what can be included in assets under management. Most pension consultants that are advising 401k plans or whatever the case may be are not technically managing assets on an ongoing basis so there is the pension consultant exemption that allows you to qualify for SEC registration. Then there is the internet adviser exemption.  Again, all of these exemptions, if you rely on them, I am giving you a high level snap shot of what the rule says. You have to read the rule very carefully to make sure you comply with it. But the internet adviser exemption is that if you are going to solely provide advice via the internet platform you can register with the SEC. I believe that under that exemption you are allowed to have a limited number of clients within the 12 month period that you provide advice to directly, but generally speaking the advice has to be provided solely via the platform. You cannot have one on one communication with the client providing them any advice.

SEC Registration Process

So once you’ve determined where you need to register either SEC or state we’ll compare the SEC registration process to the standard state registration process. They are similar but there are differences between the two. First, if you are an SEC firm you need to establish and fund your Investment Adviser Representative IARD account. That’s where you pay your registration and licensing fees, system administration fees, and where you electronically prepare and submit certain documents so you need to get that account set up. Then you go in through the IARD system and prepare your for ADV Part 1A, all applicable schedules, schedule A, schedule B, schedule D, whatever schedules apply.  You upload and submit them through the IARD system.  You have to prepare your form ADV Part 2 A, which is actually a brochure, not a form. So you prepare it outside of the IARD system then convert it to a word searchable PDF document and upload it to the IARD system.

From what we can tell the SEC does minimal review up front. We base this on the fact that we have never had the SEC come back with comments on an ADV Part 2 as part of the registration process.  It appears that they just look at the part one and if they don’t see any red flags in the part 1 they’ll approve you, typically with 30 days or fewer. They say they have up to 45 days to review applications but it usually takes fewer than 30. If you register with the SEC you have to notice file in applicable states. Even though you’re SEC registered the states want to know that you’re doing business there and they want to be able to collect their fees from you. You have to know what the state’s notice filing regulations are. Normally, if you don’t have a place of business within a state and have fewer than 5 clients they state will not require you to notice file there. By the sixth client you need to be notice filed there. There are 4 states that are exceptions to that and do not use the national standard de Minimus.  Texas, Louisiana, Nebraska and New Hampshire. For those 4 states, prior to having one client in the state you have to be notice filed in the state.  Again, that’s Texas, Louisiana, Nebraska and New Hampshire. Prior to one client in those states you have to notice file there regardless of whether you have a place of business there or not.

You have to license your Investment adviser representatives. Licensing is always handled at the state level. You look at the SEC’s definition an investment adviser representative. Anyone meeting that definition has to get licensed with the appropriate state. For SEC registered firms you only have to license your investment adviser representatives where they have a place of business.  Generally they have to get licensed where they have their office location. Again, there is an exception to that. Texas is an exception.  Texas requires notice filing for SEC registered Investment Adviser Representatives in Texas. Just know, prior to doing anything in Texas you need to be properly registered, licensed and notice filed.  Two states don’t license investment adviser reps, Wyoming and New York. For SEC registered firms there is no New York qualification for Investment Adviser Representative like there is for state registered firms. The SEC doesn’t look at things too closely up front but they audit a lot sooner. They did new adviser exams which were limited audits typically within 12-15 months. The whole audit and exam process has been changing and evolving with the implementation of Dodd Frank and the transition of more firms to the state level. The SEC does a lot more risk based analysis and risk based exams. You need to be in a state of preparedness for an examination at all times

When you file these documents with the regulators they are not just to get you registered.  They are your ongoing disclosure documents. The part 1A can be reviewed by anyone at any time through the IAPD system (the investment adviser public disclosure site). The part 2A has to be given to every single client. So you want these documents written in a manner that will not just get you registered, but will also provide full and fair disclosure to your clients and that will keep you out of trouble down the road.

State Registration Process

The state registration process looks a little different.  You still must establish and fund your IARD account. Then you have to file the Part 1A and 1B. Part 1B is completed and filed by state registered firms only. It has some additional questions the state registered firm has to answer.  State registered firms must prepare and upload the Part 2A and 2B. SEC registered firms have to prepare 2Bs and given them to their clients they just don’t submit them through the IARD system. State registered firms have to submit all of their part 2Bs. Some states require you to submit financial statements as part of the application process. This is usually tied into whether the firm will have discretionary authority or custody and the amount varies based on discretionary authority or custody but some states want financial statements even if you don’t have discretionary authority or custody.  They want to know if the firm is in a precarious financial position. Hint, don’t submit a financial statement that shows you have a negative net worth, chances of you being approved are not good. Most states will require you to submit sample client agreements as part of the application. For every fee and service you list in your ADV they are going to expect to see a sample agreement for those fees and services.

Then there can be a variety of miscellaneous state forms that need to be submitted.  The New York qualification form is a good example. You have to file form U-4s for all you investment adviser representatives to get them licensed.  The state registration process is much more intense up front. They go through everything with a fine tooth comb. They will come back with questions. They will come back wanting revisions.  A lot depends on who is looking at it on what day. We could send 10 identical applications on the same day and get different feedback on every single one of them. Expect it to take longer and don’t be surprised if they want you to make adjustments.  The average time frame for a state registration process is 30-45 days. However, there are some states that take longer.  The two states that we see that take the longest are NY (45-90 days), CA (45-90 days), and Florida (45-60-90). More populated states tend to be a little slower.  Again the average time-frame is 30-45 days but some states can take much longer.


Generally you are required to register or notice file in any state where you have an office location or exceed 5 clients. There are some states that don’t allow for the 5 client de Minimus. The states we are aware of for state registered investment adviser are Texas and Louisiana. Prior to 1 client in Texas or Louisiana a state registered investment adviser firm has to register there. For an SEC registered firm notice filing needs to be done prior to 1 client in Texas, New Hampshire, Nebraska, and Louisiana.


Investment Adviser Representative licensing requirements. Investment Adviser Representatives of SEC registered firms only must get licensed in the state where they have an office location. Texas is the exception to that. They don’t call it licensing they call it notice filing but for most firms the Investment Adviser Representatives of the firm only must get licensed where they have an office location. Investment Adviser Representatives of state firms must file in any state where they have an office location, where the firm exceeds the De Minimus exemption if they are going to conduct business there.  When you go to file with a state at least one individual will have to be licensed in the state.  Let’s say you have 3 Investment Adviser Representatives in your firm each of you has 2 investment advisory clients in the state, now that your firm has a sixth client in that state you are required to get registered there. At least one of those individuals is going to have to get licensed in that state when you submit your application with the state. Again, there are some states that don’t follow these rules. New York doesn’t license Investment Adviser Representatives.


When it comes to net worth requirements the SEC does not have net worth requirements.  They do require you to keep your minimum financial books and records, the books and records rule defines what you have to keep.  They require you to keep those documents current and accurate. You are required to disclose to clients if the firm is in a precarious financial situation. For state registered firms there are a lot of states that have a minimum net worth requirement which usually ties into whether the firm is going to have custody or discretionary authority of client assets. That’s not always the case but most commonly it is. It varies from state to state and it varies on whether you have custody or discretion. It may be that you must have $100,000 is you are going to have discretionary authority and $20,000 if you’re going to have custody.

The average range is anywhere from $10,000 to $35,000. Most states will allow you to purchase a surety bond to make up for any deficiency in net worth.  So if your net worth requirement is $10,000 and your firm only has a $5000 net worth you can purchase a surety bond for the additional $5000. There are some states that require you to have a surety bond that do not tie into any net worth requirement. It’s rare. The important thing to understand is that if you are going to have to get registered in a state you must understand that state’s regulations to fully comply with it. When it comes to the net worth requirements most states will allow you to default to your home state.  If your home state has a $10,000 net worth requirement and you’re getting registered in another state the new state may say that if you are in compliance with requirement of your home state, it will waive its net worth requirement. You typically just have to look at your home office and place of business’s requirement as far as the net worth requirement goes.


I’m going to give you an overview of the type of information you need to be prepared to provide. First there is the Part 1A. This is a check the box; fill in the blank type document.

It is where you are going to provide a variety of contact information. Contact information about the firm, the CCO. It’s where you are going to indicate your basis for registering with the SEC. I can register with the SEC because I have more than $100 million AUM; I’m an internet only adviser, whatever it is you are going to mark the box.

It’s where you are going to indicate which states you need to notice file in, the form of organization. On the form of organization section it asks you when your fiscal year end is. That is important because every year within 90 days of your firm’s fiscal year end you have to file an annual form ADV annual updating amendment and they are going to use the month you put in that section to determine when you’re filing is due.

Most firms have a December fiscal year end, so they need to submit that amendment by March. It asks you about your fees and compensation arrangements- this is a list. It says which of the following fees do you charge, and you must mark fixed fees, hourly fees, and percentage of assets under management, performance fees, whatever types of fees you charge you must mark and indicate on there.

Advisory activities- I do financial planning, I refer clients to money managers, whatever it is you do.  Advisory clients, you must give a breakdown of the clients you have, do you have individual clients, charitable organizations, corporations, and you must indicate what types of clients. But there are exceptions, most newly registered firms are not going to have any clients and it will be a straight zero.

You need to look over that chart closely, so you can make sure that you can break down your clients when it becomes time to file your ADV amendment. so that you can easily gather that information to fill it in on that chart. Immediately following the chart that asks you to break down the types of clients you have there is a chart where you have to break down for those types of clients how are the assets that you’re managing allocated. So what percent of the assets you are managing are for individual clients?

Again, it’s important that you understand what type of information you are going to need to provide in the adv so when the time comes you update you can easily gather that information. There are questions about other business activities, affiliated firms, questions about what level of discretionary authority, if any, you are going to have.

Will you have any proprietary transactions, whether the firm is going to have custody or not, and then there are certain disclosure reporting requirements regarding felonies, investment related misdemeanors, adverse regulatory actions, and court judgement in violation of statutes or regulations.

FORM ADV (cont.)

Schedule a & B. these are completed by all firms if applicable, both SEC and state just like the ADV Part 1A. Schedule A is where you list all direct owners and all officers of the firm. Schedule B is where you list all indirect owners of the firm. Schedule D is where you provide a variety of information.

If you look at the part one as you’re going through the part 1 it will ask a certain question and then say, “if this is the case fill this out on schedule D.” Example, do you have a website? If you mark that yes you have to list the website on the schedule D. Schedule D is where you mark if you are doing the 120 day filing.

It’s where you mark/certify that you have reasonable belief you will meet the requirement and if you don’t you will withdraw your registration within 120 days. As you complete the part 1 watch very closely to see what questions ask for additional information to insert on the Schedule D and make sure you’re putting that information on the Schedule D.

Part 1B is for state registered firms only. This is where you indicate what states you’re registered in, who is the supervisory principal. Now with SEC firms you must designate someone with the title of Chief Compliance Officer. Someone in the firm must be given that exact title. State registered firms typically don’t have a requirement for someone to have the exact title of Chief compliance Officer, but they must have someone acting in a similar capacity. The supervisory principal that you’re putting on your 1B is basically equal to whoever is your firm’s chief compliance officer.  If you must purchase a surety bond you have to submit information regarding the surety bond on the 1B. Then state registered firms have some additional disclosures they must include regarding unsatisfied liens and arbitration and civil judgement.


As I mentioned earlier, the part 2 is not technically a form, it is a set of instructions for how to prepare a part 2, which is your disclosure document you are going to give to clients. You need to be prepared to provide details about your advisory services and fees. This is not, “I do financial planning and charge an hourly fee for it.”

You must provide a description of those services and how you provide those services. When it comes to your fees, what is your fee (I charge $150 an hour). Your fee range, are fees negotiable, do you charge them in advance or arrears, If they’re due in advance, how does a client get a refund if they terminate the relationship before the services were provided.  You must be prepared to provide details regarding what your fees are going to be and how you bill for those fees.

You must disclose what types of clients you provide advice to, what types of investment you give advice on., your methods of analysis and sources of information and investment strategies. Any education and business standards required by the firm.

The education and a minimum of 5 years of business background for executives of the firm and anybody that is responsible for providing the investment advice.  Now some of this information is given in the part 2A, some of it is in the part 2B, but it’s all in there somewhere.  If there are any other business activities, you must provide disclosures regarding those.

What conflicts of interest may come to light because of those outside business activities?  If you have other financial industry activities or affiliations. If you have participation or an interest in client transactions. Any conditions you may have for managing the account. What type of reviews do you perform on the account. You must disclose if you prepare any reports for clients and how frequently you provide those reports. If you are going to have investment or brokerage discretion. Then any additional compensation agreements.


These are a few other forms that are not as common as Part 1 and Part 2 but they may be required. Part 2 item 18 requires you to keep a balance sheet to your form ADV part 2. This is generally required if you require pre-payment or solicit prepayment of fees of more than $1200 more than 6 months in advance.

That amount is for SEC registered firms. For state registered firms it used to be $500 or $600 but it does vary. It’s a two-part test. It must be prepaid more than 6 months in advance and exceed that dollar amount. It usually never applies because most firms are going to bill on a monthly or quarterly basis so they are not collecting fees that far in advance. Just know if you do collect them that far in advance and you exceed that threshold, you’re going to have to attach a balance sheet to your ADV part 2.

Then there’s the Form ADV Part 2-Appendix Wrap Fee brochure. This is required if you’re going to sponsor a wrap fee program. Generally, you provide a wrap fee program if you provide the investment advisory services and the custodial and brokerage fees are wrapped in with the advisory fee.  You charge one fee that includes the transaction fees or annual fees or whatever custodial fees there may be. If you charge one fee that wraps custodial brokerage and advisory fees together you’re sponsoring a wrap fee program and you have to prepare a Part 2 appendix 1 specific to that wrap fee program.


Some tips for completing the Form ADV. First, know who is completing the form and who is a related person.  What we mean by this is that most of the questions say, “Do you do this or does a related person do this?” If you read the instructions, “you” means the investment adviser. So you mean the firm. That is important because there are some questions for instance that say, “are you a registered rep of a broker-dealer? Are you an insurance agent?” A firm, an entity is never going to be a registered rep of a broker-dealer. The only people that should be marking that are those that are sole proprietorships. So read the question closely and make sure you understand that related person is defined as an advisory affiliate and any person under common control. Throughout the ADV there are italicized words. If you hover over those words a glossary definition will show up. Make sure you read those definitions. Who is an advisory affiliate? Now you must go to the glossary to see what “advisory affiliate” means.

Make sure you understand how to calculate assets under management. In the form ADV part 1 instructions, I believe its item 5B provides you instructions of what you can and can’t include in that calculation. It’s not a guessing game, it’s not a rough estimate. Regulators expect you to be accurate and there have been enforcement actions taken against firms for listing false numbers. They inflate their numbers so they can stay SEC registered. The SEC shows up to audit them and sees that they don’t have that much under management and they should have been registered with the state all along. You have to make sure you’re fully describing your advisor services and fees.  Make sure you’re describing all your outside business activities of the firm, its reps or its affiliates. Make sure you are disclosing all potential conflict of interest situations. Knowing what should be disclosed is not listed in the instructions of the Part 2. If you read those instructions closely it talks about there may be additional things that you need to disclose to your clients that were not included in here our instructions are meant to be a guide of the minimum things you need to disclose to your clients. Basically, if it is material to a client doing business with your firm, you must disclose it to clients.


Some of the most common mistakes we see are. Failing to send a client agreement or sending a client agreement that is inconsistent with the fees and services disclosed in the ADV. As I mentioned earlier, most state registered firms are going to have to submit a client agreement as part of their application. You have to submit a contract for every fee and service you list in the Form ADV.  We cringe when we hear someone say, “Oh, I have a buddy who is going to let me use his client contract and I’m going to use it for my firm.” Number 1, make sure you’re not infringing on any copy write laws. But, a lot of times your buddy’s business model, conflicts of interest, disclosures, whatever else, are not going to be the same as yours. You need to make sure you’re going through that with a fine-tooth comb making sure it has the appropriate disclosures in it for your firm. Also, you need to make sure it complies with state contract laws. Failure to submit fingerprint cards for Investment Adviser Representatives.

Some states require fingerprint cards, some don’t. You’ve got to look at your state regulations. Just because you submitted a card to get registered with a BD does not mean you will not have to submit one for the investment adviser firm. Usually they will not accept the previously submitted ones. The rare exception is that in some states if you have one entity that’s registered as both the BD and Investment Adviser firm sometimes, they’ll accept one set of fingerprint cards. Usually that’s not the case and you need to check if your state requires the fingerprint card. Failure to submit adequate financial statement or surety bonds. Failure to submit any miscellaneous forms that may be required. For SEC registered firms, failure to designate someone as the chief compliance officer. On the schedule A you must fill out that whole title. If you don’t do that the SEC will reject the application. Failure to license the owner of the firm. Some states require you to license all owners regardless of the role they will have in the company. You need to look at the state registration requirements and see if it applies in your state. Some states require every branch office location to be registered so you are going to have to look at those regulations and there may also be a branch registration fee and that’s done through the IARD system by filing a form BR.


Some of the challenges we see when people try to do this on their own are a deficient knowledge of Investment Adviser business models. Understanding the expectations of a regulator at registration and during exams. Just because you got registered does not mean regulators have approved your documents. It means they looked over your documents and based on what you put on paper they don’t see any reason for you not to do business as an investment adviser. It does not mean they have approved those documents. What they are going to do is when they show up and audit you to figure out what you’re actually doing and then review the ADV. It’s completely different than what they did when you got registered. Some people find it challenging to navigate through the IARD/CRD system especially since a lot of firms only get into it once a year.

Accurately and thoroughly answering the Form ADV questions and miscellaneous forms. Consistency between the ADV and other documents. There is similar information required on the part 1 and part 2 but the questions are not asked the exact same way.  This is one of the number 1 most common deficiencies in an audit is inconsistencies between the part 1 and part 2. But you also must have consistency on the wrap fee brochure if you have one. With client contracts, you written compliance policies and procedures. Make sure there is consistency across all your documents. Disclosing conflicts of interest & information that is not specifically requested but required.  Again, clients must be provided a full and fair disclosure of all material facts and circumstances if it is material to a client’s decision to do business with your firm you have to disclose it to them.

Then some people find it very challenging to communicate back and forth with regulators and understand what the regulators are asking of them. We have heard from so many people who have tried to go it alone and gone back and forth with the state 2-3 times each time thinking they are providing the information being asked of them but the regulator comes back wanting more. They contact us at that point saying I can’t do this anymore, I need help.


That concludes the presentation. But I want to show you a few slides here to drive home some of those facts that I’ve been talking about. While I’m doing that we’ll see if anyone has any questions they want to submit. This slide is from the North American Securities Administration Association (NASAA). They put out a report every few years of audits and exams and then they put out a coordinated investment adviser exam report. This is a slide from 2011. I haven’t updated it because it hasn’t changed a whole lot since then. One of the most common exam violations relates to the form ADV when they are talking about registration deficiencies and that’s inconsistencies between the part 1 and part 2, or updates not being made to the ADV in a timely manner.


NASAA has some information out on its website from 2009 but, like all information, it’s good information especially for a new adviser to read through. They outline some best practice tips for investment advisers. They include trouble spots in the consistency between the part 1 and part 2. Someone once came to us saying he didn’t understand why we charge what we charge because he’s looked over the ADV and said how difficult can this be to complete these documents. Well, if it’s that simple why are there so many deficiencies in this area?


This is from the SEC’s website. It’s information for newly registered investment advisers. Of course, it’s written for SEC registered IAs but state firms can also learn from it. In this it states you must employ reasonable care to avoid misleading clients and you must provide full and fair disclosure of all material facts to your clients and prospective clients. You must eliminate or at least disclose all conflicts of interest that might incline you – consciously or unconsciously – to render advice that is not disinterested. If you do not avoid a conflict of interest that could impact the impartiality of your advice you must make full and frank disclosure of the conflict. Disclosures provided in the ADV part 2.


The SEC does these outreach programs that used to be called the CCO outreach program, but it’s now called client outreach. When they first came out with these, they gave this chart as part of one of their presentations. One of the things you must put in place when you get registered is your written compliance supervisory policies and procedures. Those must be written to address all areas of risk for your firm. You first need to identify where you have areas of risk. They put this chart out there. It’s not all inclusive but it’s to give firms a jumpstart to make the firm think about where they have potential risk. I like to point out that one of the areas that they specifically list is inaccurate, omitted, and unclear ADV disclosures, out of date ADV disclosures, misrepresentation of services offered, and failure to disclose potential conflicts of interest.


That’s the actual conclusion of our presentation. Here is a little information about our services and contact information. We do work with a wide variety of business models from your simpler firms to complex firms like private fund managers.  We offer a Turn Key Registration Package. This list outlines what all we include in that turnkey registration package. In order to give you a price for our turn Key registration package we have to talk to you to gather some information about your firm. A variety of factors help us determine that pricing. How many states you need to register or notice file in, how many Investment Adviser Representatives you have, what kind of services are you providing, what fees you charge. We would be happy to speak with any and all of you. What you can do is schedule a time to meet with one of our senior compliance consultants, Tammy Emsick, by clicking on the link to her online calendar which I’ll bring up in a minute. You’ll also see in our turn key registration package we help you prepare a customized policies and procedures manual. This shows you the types of topics that manual covers.


If you choose to register on your own but would like our help with preparing a compliance manual, we do have services for just that. The highest level is what we include in our turn key registration package.


Once you’re registered, we can provide your ongoing compliance support. We can do things on a project by project basis or through one of our annual compliance packages.  This shows what one of our retainer packages looks like.


This slide shows things we can do on either standalone basis or we can customize as part of a package.

Here is where you can schedule that introductory call with Tammy Emsick.