Most individuals that have been in the financial services industry for any amount of time are aware that there is a requirement to register with a regulatory body in order to provide financial advice for compensation. However, those that are new to the industry, or those who just have never paid any attention to compliance concerns, may not be aware of this requirement. With that being said, any person wanting to provide financial advice, and be compensated for these services, must register with either the state, or states, or the SEC.
In this blog we will discuss the registration requirements and obstacles for those individuals wishing to act in the capacity of an investment adviser. To do so it is important to take a step back and define what constitutes acting in the capacity of an investment adviser. The Investment Advisors Act of 1940 defines an investment adviser “as any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications. ” The Texas Securities Act defines an investment adviser as “a person who, for compensation, engages in the business of advising another, either directly or through publications or writings, with respect to the value of securities or to the advisability of investing in, purchasing, or selling securities or a person who, for compensation and as part of a regular business, issues or adopts analyses or a report concerning securities…” the other 49 states and the District of Columbia have adopted similar or some variation of the Investment Advisers Act of 1940’s definition of investment adviser.
Oddly enough the one, key detail missing from most of the varying State’s definitions that I have reviewed is HOW an investment adviser is compensated. What differentiates an investment adviser from a broker dealer is the compensation structure; an adviser can only receive compensation in the form of a fee. So, if someone wants to provide financial services to the general public, and charge an hourly, fixed or a fee based on the amount of assets being managed, then that person will need to register as an investment adviser with either the state, or states, or the SEC.
The registration process can be quite an undertaking. The first step is to determine how the investment adviser will be structured; sole proprietor, Limited Liability Company; etc. Operating as a sole proprietor, in some cases, may affect the registration process. The second step is to determine with whom the investment adviser must register. As of sometime on or about July 21, 2010, the Obama administration signed the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) into law. Dodd-Frank changed the assets under management threshold for state and SEC registration requirements. Dodd-Frank mandates that anyone managing assets of $100,000,000 or more register with the SEC and notice file with the state of residence. All of those managing under $100,000,000 are required to register with the state in which they are domiciled and any states in which they exceed the state’s de Minimis exemption.
There are several factors to take into consideration when determining with which regulatory body you will need to register. For instance, if you are new to the industry and are just starting out, odds are you are going to need to register with the state in which you reside. If you are a registered representative of a broker dealer wanting to branch out and start your own investment adviser, plan on bringing a book of business upon becoming registered and know you will be transferring in excess of $100,000,000, you will want to register with the SEC and notice file with the state of residence and any other applicable states. Finally, if you are new to the industry, or are a registered representative of a broker dealer wanting to start your own investment adviser, but anticipate having $100,000,000 or more in assets under management within a short period of time after becoming registered, you can request a temporary, 120-day registration with the SEC and notice file with the state of residence and any other applicable states. If you meet the $100,000,000 minimum within 120 days of registration, then you can submit an application to request to permanently register with the SEC. If you do not reach the minimum, you will have to request a withdrawal from registration with the SEC and submit an application to register with the home state and any other applicable states.
State registration varies from state to state. For example, some states require fingerprinting, while most do not. And of those few, the fingerprint process can be quite an undertaking. Kentucky for instance, requires that you submit fingerprints for all individuals that will be registering as representatives of the investment adviser to the FBI for a background check. The FBI’s background check process can take fourteen to sixteen weeks. So in addition to the time it will take the state to review the ADV Parts 1 and 2 and other required filings, it will take an additional fourteen to sixteen weeks before the background check will be completed and submitted to the state for review. Most states require the submission of financial statements, some of which also require that they be certified and/or audited. And finally, there are some states that will require out of state investment advisers to file foreign entity filings with their state’s secretary of state and engage the services of a designated agent of record.
The bottom line is that the registration process, and compliance in general can be a confusing, time consuming process. Before you decide to tackle this undertaking on your own, take into consideration how much your time is worth. Compare that to the cost of engaging the services of a third party compliance consulting firm to navigate the process for you.
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Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.