Accounting & Compliance International (ACI): Overview Of Investment Advisor Registration Requirements

An investment advisor is any entity that provides fee-based advice regarding the buying and selling of securities. Under the Investment Advisers Act of 1940, investment advisors are required to register with either the SEC or the state – which one would depend upon the firm’s assets under management (AUM). Investment advisor registration requirements have changed under the Dodd-Frank Wall Street Reform Act. The SEC is currently working to implement the provisions of Act so all details are not yet known and certain aspects remain unclear; however, it seems that in regards to investment advisor registration requirements there will be two major changes to prior regulations.

The first change is a shift in the assets under management thresholds that determine SEC vs. state registration. The new requirements will have IAs with under $100 million AUM register with the state and those above $100 million AUM register with the SEC. There is an exception for private fund managers which will not have to register with the SEC until they reach the $150 million AUM threshold. The Private Fund Managers Exemption from registration for private funds with fewer than 15 clients has been removed completely, so unless the private fund manager is eligible for an alternative exemption, this asset threshold will determine registration.

Additional exemptions are outlined below, along with a summary of the investment advisor registration process. The deadline by which to adhere to these changes will be July 21, 2011 and advisors should be mindful to factor into their timeline at least 45 days for their application to be reviewed. For more information on new regulations or assistance with state or SEC registration contact Accounting & Compliance International (ACI).

Investment Advisor Registration Requirements In More Detail

Investment Advisor Registration (The Old Way)
Previously, IAs with $25 million AUM or less were required to register with the state and those with $30 million or more to register with the SEC. Many hedge funds, private equity funds, and venture capital funds that would meet the definition of an investment under the Advisers Act avoided registration through the Private Fund Manager Exemption Section 203(b)(3) which exempted firms with fewer than 15 clients from having to register with the SEC so long as they did not hold themselves out as an investment advisor. The definition of a client allowed a fund to be counted as only one client, so this exemption protected many private fund advisors from registration.

AUM                                                        Registration Status
< $25                                                       Million State RIA
$25 Million – $30 Million                              May register with either SEC or state at firm’s discretion
$30 Million+                                              SEC RIA

Investment Advisor Registration (The New Way)
Under new regulations, the AUM thresholds for state vs. SEC registrations have been altered. State registration will be required of any investment advisor with less than $100 Million AUM. Those with $100 Million – $150 Million in assets under management will be registered with either the state or the SEC at the discretion of the SEC. Those advisors with $150 Million in assets under management or more will register with the SEC.

AUM                                                     Registration Status by January 21, 2011
< $100 Million                                  State RIA
$100 Million – $150 Million                 Private Fund Manager SEC Exemption
$150 Million+                                   SEC RIA

These changes to the AUM thresholds are particularly important for investment advisors with $25 million – $100 million AUM. Previously, these firms were under the jurisdiction of the SEC. Under the new thresholds, the regulatory authority for these advisors would be the state(s). Thus, SEC registered investment advisors with between $25-100 million AUM may have to change their registration status by applying for State Registration and upon approval withdraw their SEC registration.

Additionally, the Private Fund Act removes the Private Fund Manager Exemption, so that all Private Fund Advisors with $150 Million or more in AUM will now have to register with the SEC unless they fall under another exemption. For Private Fund Advisors with less than $150 Million AUM, it still remains to be seen if the States will maintain the Private Fund Manager Exemption on the state level – or follow the example of federal regulators and remove the exemption .

The Investment Advisor Registration Process
Whether registering an Investment Advisor with the SEC or the state, the process is going to be similar.

The Entitlement Process
First, the firm will need to download and fill out the entitlement package to be assigned a username and password for Web IARD (Investment Advisor Registration Depository) where all online forms for the registration can be completed.

Registration of the firm’s IARs
All investment advisor representatives (IARs) will need to be registered. IARs are the individuals that recommend securities at an investment advisor. In most states the IAR is required to pass the Series 65 exam and undergo a background check. As part of filing registration for the investment advisor (the firm), the IA must make sure that all IARs are properly registered and licensed. Generally, this will entail filing a U-4 for the IAR on the IARD system. New York does not currently require individuals to register as IARs, though they must demonstrate to the Attorney General’s Investor Protection and Securities Bureau that they are qualified.

Development of the Compliance Program
The firm will also have to develop certain compliance documents to show that an adequate compliance program is in place at the company as part of the registration process. The firm should:

  • Appoint and train a Chief Compliance Officer (CCO) who understands his/her responsibilities and those of the firm’s managers as outlined in the firm’s policies and procedures.
  • Develop and customize a compliance manual outlining and assigning responsibility for firm policies and procedures developed to mitigate firm risks. Regulatory requirements and best practices for Investment Advisors include creation of:

o Business Continuity Plan / Disaster Recovery Plan
o Code of Ethics
o Policies and Procedures (including Insider Trading Policy and AML Procedures)
o Privacy Policy

  • Develop a compliance calendar to track responsibilities and deadlines (Recommended)
  • Update the Form ADV – Annual amendments are required within 90 days of the fiscal year end and would include updated information such as revised assets under management. Ongoing amendments should be made by the firm for any substantial changes on an ongoing basis within 30 days of the substantive change occurrence.
  • Conduct at least an annual review of the firm’s compliance program with a report of findings

Completion of Application Forms

  • Form ADV Part I – Includes business information, identification of owners, and sanction history
  • Form ADV Part II – (The Brochure) Disclosure document to be given to clients and investors that includes client information on business practices, fees, and any potential conflicts of interest.
  • Applicable Schedules (eg. Schedule F)
  • Notice Filing – For SEC registration, the firm will generally have to “notice file” in a state in which they have clients by providing a copy of the Form ADV and paying a filing fee to the state(s) in which the business operates. Even the case of SEC registered firms, the state retains anti-fraud jurisdiction.

Application Timeline
The implementation deadline for previously exempt firms to become RIAs is July 21, 2011, so firms that must complete this process should be mindful that the application will be reviewed for 45 days post-submission and factor that time into their timeline for investment advisor registration in addition to the time it will take to develop the application itself. Consequentially, the RIA Application should be submitted at least 45 days prior to the date that the investment advisor intends to be registered.

For more information on new regulations or assistance with state or SEC registration contact Accounting & Compliance International (ACI) – 212-668-8700 or info@acisecure.com.

Footnotes:

[1] Converting from SEC Registration to State Registration
· Submit the filing type “Apply for registration as an investment Advisor with the state”

· WAIT FOR THE STATE TO APPROVE YOUR REGISTRATION.

· File the Partial ADV-W to withdraw your SEC Registration – ONLY IF THE STATE REGISTRATION IS APPROVED. If the Partial ADV-W is filed before your State Registration is approved, during the time your application is being reviewed, your firm will be unregistered and unable to conduct business.

[1] SEC Registration Exemptions

The following exemptions from SEC Registration are currently available:

· SEC 408.1 – Private Fund Managers with less than $150 Million AUM – but again it remains to be seen whether the States will mimic federal regulations and remove the exemption for those within the threshold jurisdiction of the State(s)

· SEC.409 – Family Offices are exempt from SEC registration. This would include private fund advisors that provide investment advice to family offices only.

· SEC.408(2) – Small to mid-sized Private Fund Advisors which would likely refer to some subset of the private advisors under $150 Million AUM.

· SEC.403(B) – Commodity Trading Advisors registered with the CFTC are not required to register with the SEC, so long as they do not provide investment advice regarding securities.

· SEC 407 – Venture Capital Fund Advisors do not have to register with the SEC, but they must maintain books and records and submit reports to the SEC for investor protection as deemed necessary

· SEC 403(7)(A) – Advisors to Small Business Investment Companies – These advisors are exempt from registration if they are advisors only to small business investment companies licensed by the Small Business Administration

· SEC 403(A) – Foreign Private Advisors who have no place of business in the US, fewer than 15 clients, with less than $25 million AUM attributed to US clients, and does not hold itself out as an investment advisor

About Alex Akesson

Alex has been specializing in hedge fund and alternative investment news since April 2006. Working mainly in research and manager interviews, she has published breaking news on the hedge fund industry on her blog, as well as several industry publications. Her access to hedge fund managers gives her insight into news stories as well, and the ability to track press releases and other breaking news in real time.
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