Are you or your company considering providing investment advice to clients and receiving compensation in return? Then you are likely required to register as an investment adviser with your state, or depending on the size of your potential business, with the U.S. Securities and Exchange Commission (the SEC).
Investment Adviser Requirements
The primary federal law regulating investment advisers is the aptly named Investment Advisers Act of 1940 (the “Advisers Act”). According to the SEC and the North American Securities Administrators Association (“NASAA”), with a few exceptions, the Advisers Act requires firms or sole practitioners who are paid for advising others about securities investments to register at the federal level if they meet one of the following criteria:
- They have $100 million or more of assets under management.
- They are doing business in 15 or more states.
- They are advising a registered investment company.
- They are internet advisers acting almost exclusively through an interactive website.
If they do not meet these conditions, investment advisers are usually required to register in the states in which they are doing business. In other words, for most smaller firms—those managing less than $100 million—adhering to state-level requirements will be the first order of business.
What Do States Require?
As an example of the kind of requirements an investment adviser might face at the state level, let’s consider a few of the requirements in Virginia, where our law firm is headquartered.
Virginia state law requires “any person who is engaged in the business of, and compensated for, advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities, to register” with the Virginia State Corporation Commission (the “SCC”). This registration requirement applies to advisers that have more than five clients in the state of a place of business in the state.
As is typical in many states, advisers in Virginia must have passed the Financial Industry Regulation Authority’s (“FINRA”) Series 63, Series 65, or Series 66 examinations, or they must currently hold in good standing a CFP (Certified Financial Planner), ChFC (Chartered Financial Consultant), PFS (Personal Financial Specialist), CFA (Chartered Financial Analyst), or CIC (Chartered Investment Counselor) designation.
“Each applicant must submit relevant information to ensure that individuals and firms dealing with Virginia investors meet a high standard of conduct, have passed required securities examinations, and are financially solvent,” according to the SCC. “In addition to registration, registrants must continuously update their records as changes occur.”
Virginia reporting requirements include an annual updating amendment to be filed within 90 days of the end of the adviser’s fiscal year. In addition, an investment adviser must meet the requirements of the Investment Adviser Registration Depository (“IARD”), a national electronic filing system sponsored by the SEC, and NASAA and operated by FINRA. Virginia’s annual registration fees are billed through the IARD system.
As we noted, Virginia requires registration when an adviser has more than five clients in the state or a place of business in the state. This is a typical requirement at the state level, and one that firms should closely monitor. If they are doing business across state lines, they may be required to register in other states as well.
For example, a registered investment adviser working in the Virginia suburbs of Washington, D.C. may wish to advise clients across the Potomac River in the District of Columbia or in D.C.’s Maryland suburbs. In both Maryland and D.C., if the adviser has more than five clients there, then registration is required in each such jurisdiction.
Every U.S. state, the District of Columbia, and Puerto Rico has its own investment adviser registration law on the books. Most of them require investment advisers to act as fiduciaries on behalf of their clients, requiring them to put the client’s interest first in all matters.
At the federal level, investment advisers also have a fiduciary duty to their clients. The SEC requires an adviser to make reasonable investment recommendations independent of outside influences; select broker-dealers based on their ability to provide the best execution of trades; make recommendations based on a reasonable inquiry into a client’s investment objectives, financial situation, etc.; and always place client interests ahead of its own.
Navigating the variety of state and federal regulations around registration is best accomplished with assistance from experienced counsel. To learn more about how we assist registered investment advisers, contact us for a consultation.