Speak To A Live Person: 888.302.4594 Request A Demo

Investment Advisers and Registration Requirements

Monday, June 24, 2019

The definition of investment adviser is a person or entity who engages in the business of advising others for compensation, either directly or through publications with respect to the value of securities or to the advisability of investing, purchasing, or selling securities or a as part of regular business issues or adopts analyses or a report concerning securities. And the definition of investment adviser representative is a person or company who, for compensation, is employed, appointed, or authorized by an investment adviser to solicit clients for the investment adviser or who, on behalf of an investment adviser, provides investment advice, directly or through subagents, to the investment adviser’s clients. These definitions are generally universal, with both the SEC and the states. In most cases, all persons or entities meeting the above definitions have to register with one or more jurisdictions.

Most know that providing investment advice for compensation requires registration. Some, however, are under the impression that they meet some type of exemption. It is true that all that meet the definition of investment adviser or investment adviser representative are required to register. However, most of the exemption rules of both the states and the SEC include many And’s, Or’s and If’s. It is very important to conduct thorough due diligence before assuming that registration is not required before conducting business in any state. Even if there is guidance from an attorney, investment advisory services should not be provided for a fee until the securities regulator of the adviser’s state of residence, and the states in which the adviser intends to conduct business, have been contacted to verify an exemption is met; not all states follow the 5 or fewer client exemption.

Most advisers are aware that if its AUM is under $100 million the adviser must register with the state and if it is over $100 million it must register with the SEC. This is somewhat true. There are other circumstances in which an adviser may register with the SEC even if it does not have $100 million in AUM. One such exemption is if the Adviser is required to register with 15 or more states at the time of registration. There are other exemptions that can be found at Cornell.edu. Additionally, there are exemptions for advisers to private funds, which can also be found at Cornell.edu.

If an adviser is at $100 in AUM as of its fiscal year end, the adviser must register with the SEC within 90 days of filing an annual updating amendment. If an adviser reaches $110 million in AUM during the calendar year, it must submit an application to register with the SEC. If an SEC registered investment adviser falls below $90 million in AUM during the calendar year or are below $90 million in AUM as of your fiscal year end, the adviser must file the Form ADV-W to withdraw its SEC registration within 180 days of its fiscal year end and submit an application to register with its home state and any other states in which it meets the registration requirements. However, if the adviser becomes eligible for SEC registration within that 180-day window, the adviser may stay registered with the SEC.

Another area in which many are confused is in regard to solicitation and the need for solicitors to be registered. An SEC registered adviser can make payments to a non-employee as long as the adviser has entered into a solicitation agreement (which is required to contain specific language and requirements) with the solicitor and has provided the solicitor with a disclosure document that is required to be provided to prospects along with the adviser’s ADV Part 2. However, all states have different requirements regarding solicitors. Most require a full registration, solicitor registration, or some sort of filing before they can accept compensation for making referrals. With that said, if an SEC registered adviser makes referral payments to an unregistered solicitor, the adviser will not be in violation of federal statute, but the entity or individual receiving the payments will be if they have not registered or filed with the appropriate jurisdiction.
It is important to note that unregistered activity is a rule violation, with both the SEC and all 50 states. It is a violation they take seriously and is an easy violation to prove. If an adviser operates in an unregistered manner, the regulators will find out, and they will take action. This action will result in a publicly disclosable event, a fine, and many times a disgorgement order. A disgorgement order would mean the adviser would have to pay back all or part of the compensation received during the period of unregistered activity. Bottom line, don’t provide investment advise for a fee until registered or notice filed.

— Written by Steven Horn, Red Oak Compliance Senior Consultant

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

  • Categories

  • Get Started