Compliance FAQ: Investment Adviser Registration

Q: What kinds of adviser registration are there?

A: Most states and the U.S. Securities Exchange Commission(“SEC”) register investment advisers.   For the SEC, registrants must select a basis for registration on Form ADV. If it does not meet any of those criteria, then it will normally register with a state. Though not technically a registration, the SEC and many states have an Exempt Reporting Adviser (“ERA”) regime, which requires a filing on a shorter form of the ADV.  It is only available to firms that exclusively manage private funds and there are usually other requirements. We recommend discussing all of your options with legal counsel or a compliance consultant.

Q: You mentioned private funds.  What is that?

A: The Investment Company Act of 1940 (“Company Act”) requires registration of pooled investment funds, with some exceptions. Mutual funds are usually registered under the Company Act and are also known as registered investment companies, RICs, registered funds, or sometimes just registered products. Funds that meet the criteria for one of the exemptions (usually the ones at Section 3(c)(1) or 3(c)(7) of the Company Act) are, by definition “private funds.” In addition to the Company Act exemptions, private funds will also normally rely on exemptions from registration under the Securities Act of 1933 (“Securities Act”), either Section 4(2) of the Securities Act itself, or, more commonly, the safe harbors found in Regulation D, specifically Rule 506. Regulation D offerings require a filing with the SEC on Form D and most states will also require submitting a copy of Form D along with a filing fee to their securities regulator(these are known as “blue sky” filings).

Q: Do individual employees have to register?

A: It depends on whether the firm is registered with the SEC or a state and the kinds of clients you have.  Registered individuals are referred to as Investment Adviser Representatives or IARs. SEC registrants whose direct clients include individual natural persons may need to register their client representatives in the states where they have more than a de minimis number of clients.  For state-registered firms, you will nearly always have one or more persons registered as IARs.  Who has to register may vary by state. Note that “client” means a direct client of a firm, not an investor in a fund. In the latter case, the fund is the firm’s client and because it is an entity, not a person, it would not require IAR registration (this is the case for SEC registrants; state registrants should confer with their legal counsel and/or compliance consultant on any variances).

Q: Are there examination requirements for IARs?

A: Yes and no. IARs of SEC registrants are not required to pass an exam. IARs of state registrants must have passed the Series 65 within a certain period of time before registering. There are alternative and waiver requirements, which can vary but typically include individuals who already have the 7 and 66 or who have professional charters such as the CFA.

Q: How do I register my firm as an investment adviser?

A: Both full registrants and ERAs submit their initial and amended filings on the Investment Adviser Registration Depository (“IARD”). Brand new firms must open an account on IARD before preparing their initial filing on Form ADV. The process is completely electronic, include the Part 1A and 1B, which are online, fill-in-the-blank forms, and the narrative Part 2A, which is converted to a PDF and uploaded to your filings. State registrants must also file Part 2B, which contains biographical, disciplinary and other information about the individuals at the firm who perform investment advisory functions. SEC registrants complete Part 2B as well, but they do not file it on IARD.

Q: Are there filing fees?

A: Yes. Initial and annual amendment filings have a fee, as do IAR registrations (initial and annual).  These vary depending on the jurisdiction(s) you are filing in. Fee information is available here. So-called “other than annual” amendments do not have filing fees.

Q: Do I need a law firm or compliance consultant to help me with registration?

A: Not necessarily. Regulators believe the forms can be completed by someone at the registering firm.  However, we recommend that brand new firms work with legal counsel or a compliance consulting firm in some capacity to complete their initial registrations. There are a number of ways to work with a service provider on registration, including having them review forms completed by the firm, or to handle the entire process from beginning to end.  We have worked with clients who complete the fill-in-the-blank Part 1 on their own (with a few questions to us), and tasked us with drafting Part 2 for them. Depending on your budget, familiarity with the registration forms and process and amount of time you can allocate, you will likely find one option that suits you best.

Having an experienced service provider manage the entire process has a number of efficiencies, particularly for state registrants. State regulators tend to ask a lot of questions and request additional documents and information before they will approve new registrations. You may wish to have legal counsel or a consultant assist with these requests. Keep in mind that state registration includes IARs and exam requirements, which add a lot of time and effort to the process.

Q: Should I also use legal counsel or a consultant for amendments?

A: Oftentimes, routine amendments are easily handled directly by the firm. See our article on commonly amended ADV items. Significant or complex amendments, particularly for the Part 2A should probably go through your legal counsel or compliance consultant.

Q: I have a choice of either fully registering in my home state or being an ERA. What should I think about?

A: If you plan on managing only private funds for the foreseeable future and there is no investor demand for state registration, you may prefer to file as an ERA. This saves a lot of time in terms of your initial and amended filings as well as professional fees in preparing them (filing fees are usually about the same as for full registration). The compliance obligations are also less onerous and more flexible than for full registration, though we do still recommend some core policies and procedures. Sansome’s typical compliance manual for an ERA is simple enough to manage in-house at minimal cost and time spent. In sum, ERA status can save a lot of time and money that can be allocated to starting and growing your business.

If there is some likelihood of having clients in separately managed accounts (“SMA”), you may wish to proactively register in your state, rather than scramble to get it done before you sign your first SMA.  Keep in mind that some state registration processes are lengthy and/or complicated. Full state registrants are subject to “post-effective requirements” that include rules around advertising, recordkeeping, custodial arrangements and other areas. State registrants are also subject to periodic examination by their regulator. Though the rules are not as extensive as for SEC registrants, firms should be prepared to establish a compliance program and manage it either in-house or with the assistance of a compliance consulting firm.

ERA status will usually require having the funds audited and a clean regulatory record (including principals of the firm). Depending on your state’s custody requirements, full registrants may not have an alternative to having their funds audited in any case. It is worth remembering that many investors and other service providers expect an annual audit. Firms wishing to avoid audit requirements or whose predecessor firms or principals have a disciplinary history should consult their legal counsel before reaching a decision on this issue.