Registering as a State Investment Advisor

In addition to our webpage with frequently asked questions about the investment advisor registration process, the following are some specific tips and background information for registering a firm as an investment advisor with a state securities regulator.

While there is a certain level of similarity between the various states with respect to the regulation of investment advisors, there are significant differences. These differences are often manifested in the investment advisor regulatory regime imposed by each state. One state securities regulator may impose a rule that another state securities regulator does not. For example, some state securities regulators require registered investment advisors to adopt written compliance policies and procedures designed to supervise investment advisory personnel, while other state securities regulators do not have such a requirement.

The differences in a state securities regulator’s rules and organizational structure will trickle itself down to the investment advisor registration approval process. While all state securities regulators require investment advisor applicants to submit various forms for review, the only real constant among all the state securities regulators is the Form ADV. Each state securities regulator will review and scrutinize an investment advisor applicant’s Form ADV. The other documents required for investment advisor registration will vary by state.

The topics listed below are presented with the goal of providing important information regarding the state investment advisor registration process and avoiding common mistakes; however, the information below does not address all of the variances among state securities regulators. The information presented here is general in nature and not a substitute for consulting with a compliance consultant and/or attorney regarding your firm’s unique circumstances and the requirements of the securities regulator(s) with jurisdiction over your firm. If you have specific questions about a particular state or number of states, please give us a call to discuss further. The various topics discussed include:

• Length of the Investment Advisor Registration Review and Approval Process
• Documents Required as Part of the Investment Advisor Registration Process
• Required Submission of Written Investment Advisory Client Agreement 
• Fingerprint Card for Investment Advisor Representative
• Financial Statement and Requirements of Investment Advisor Applicant 
• Supplemental Investment Advisor Registration Forms
• Designation of a Chief Compliance Officer
• Licensing Owners of an Investment Advisor as Investment Advisor Reps
• Submission of Investment Advisor Registration Documents

Length of the Investment Advisor Registration Review and Approval Process

Once the investment advisor registration documents are submitted to the appropriate state securities regulators, applicants can expect to wait 30 to 45 days to hear back from the state. However, depending on the state securities regulator’s work load, amount of staff, and time of year, the response time can vary. Applicants submitting investment advisor registrations from November through January should expect longer delays because state securities regulators are handling renewals and the IARD system shuts down during the last two weeks of December each year. Some state securities regulators will have several staff members working on investment advisor registration reviews while other state securities regulators have only one staff member.

A statement of approval is almost never included in the initial response from a state securities regulator. Investment advisor applicants should always expect additional questions and comments from the state securities regulator. These questions are typically in regard to inaccurate completion of the Form ADV or other supplement document. State securities regulators will also point out inconsistencies between documents and/or request investment advisor applicants provide further information about the firm’s business structure, services and fees.

Most state securities regulators will provide investment advisor registration applicants 30 days to respond to their questions and comments; however, an applicant’s goal should be to respond to the regulator and provide a full and accurate response as soon as possible. This is because a response from the state securities regulator is a good sign because the firm’s registration is in-line to be approved. The sooner the investment advisor applicant can respond, the quicker that the approval of the registration can occur.

Under certain circumstances, an investment advisor applicant can respond to a state securities regulator and not have to take any further action. However, it is often the case that a question from a state securities regulator can require additional, unforeseen steps that the investment advisor applicant must take. These additional steps may delay the investment advisor registration process even further. For example, if the investment advisor applicant was not aware of a net worth requirement or the requirement to submit financial statements, additional time will be required to generate such documents. From our experience, it’s not uncommon for many state securities regulators to take sixty (60) to ninety (90) days from the date of initially submitting the registration documents.

The best way to improve an investment advisor registration applicant’s chances for a quick approval is to have a well-written Form ADV. The Form ADV should also be consistent among parts 1A, 1B and Part 2. Please refer to our webpage regarding Form ADV Drafting Tips. Another time-saving tip is to make sure you have completed all supplemental forms required by the state securities regulator. Forgetting just one miscellaneous form can cause delays in the investment advisor registration process.

Documents Required as Part of the Investment Advisor Registration Process

The investment advisor registration documents and forms required by state securities regulators vary from state to state. The following are some of the typical documents and forms an investment advisor applicant can expect to submit to a state securities regulator.

• Form ADV Part 1A, 1B and Schedules A-D (filed through Web CRD/IARD);
• Form U4 for at least one investment advisor representative (file through Web CRD/IARD);
• Payment of appropriate licensing and registration fees (paid through Web CRD/IARD);
• Sample client agreements to be used by the registered investment advisor;
• Fingerprint cards for each investment advisor representative;
• Financial statements for the registered investment advisor; and
• Supplemental forms specific to the particular state.

One of the most common mistakes a state investment advisor registration applicant will make is not supplying the correct forms and documents to the securities regulator. Many investment advisor applicants correctly submit the Form ADV Part 1, but fail to provide the additional investment advisor registration documents. When registering directly with the state, it is imperative to submit all required documents. Incomplete investment advisor registration applications will cause unnecessary delays. A firm should make sure it has completed and submitted all required forms.

Required Submission of Written Investment Advisory Client Agreement

In the majority of states, a sample investment advisory client agreement is required to be submitted by the investment advisor registration applicant to the state securities regulator. Consequently, the failure to submit such a written agreement is another common mistake during the investment advisor registration process. If your state securities regulator requires a written investment advisory client agreement, make sure one is prepared and a sample agreement is provided to the securities regulator. Even if a state does not require a written investment advisory client agreement as part of the approval process, it’s likely that the use of such an agreement is in the best interests of both the registered investment advisor and clients.

Typically, a state securities regulator will not provide an opinion or ask questions about the various contractual provisions in a client agreement unless the securities regulator believes the agreement is too one-sided in favor of the registered investment advisor. Regulators will review an agreement to make sure it complies with any rules regarding written agreements. For example, most state securities regulators will not allow contractual language that attempts to hedge an investment advisor’s fiduciary duty to clients, hedges an investment advisor’s responsibility under federal and state securities laws, or does not allow a client to seek reasonable legal action against the investment advisor. Finally, state securities regulators will review an agreement to determine adequate consistency between the agreement and the Form ADV.

Fingerprint Card for Investment Advisor Representative

If an investment advisor representative was previously licensed as a securities agent with a broker/dealer through the Web CRD system, the state securities regulator should be able to access fingerprint information already on file. Also, if an investment advisor representative was previously licensed with another investment advisor, the state securities regulator will generally not require a new fingerprint card. It should be noted that many states do not even require a fingerprint card, so it is important you check with the state securities regulator prior to completing a fingerprint card.

Financial Statement and Requirements of Investment Advisor Applicant

As part of the investment advisor registration process, most state securities regulators conduct a minimum review of the applicant’s financial condition. This review is primarily done by reviewing the investment advisor registration applicant’s financial statements. Most commonly, a balance sheet will be required, and any additional financial statements a firm prepares can also be submitted. It should be noted that a common mistake is the completion of inaccurate or incomplete financial statements. This is especially true when a state securities regulator has set specific requirements for financial statements. Most state securities regulators do not require audited financial statements of an investment advisor registration applicant, but do require the financial statement be verified and signed by the firm and then notarized.

A state registered investment advisor firm will likely be subject to a net worth/net capital and/or bonding requirement. Typically, the level of net worth, net capital or amount of bond is based on the procedures of the investment advisor firm. A common approach many states have adopted is to require registered investment advisor firms with custody of client funds and/or securities to maintain a net worth in the amount of $35,000. Investment advisor firms maintaining discretionary authority, but not custody, over client funds and/or securities must maintain a net worth in the amount of $10,000. Investment advisor firms not meeting the net worth requirement often must then attain a surety bond in the amount of the net worth deficiency rounded plus $5,000.

Because the state rules vary widely on this requirement, it is important that you check with your home state’s securities regulator to see if it has such requirements and how the requirements affect your investment advisor firm.

Supplemental Investment Advisor Registration Forms

The requirement to complete and submit these supplemental investment advisor registration forms is, in our opinion, the number one overlooked item by applicants during the registration process. Supplemental forms refer to forms required by a state securities regulator that are in addition to the Form ADV, client agreement, and financial statements. While states may have similar forms, each state securities regulator will prepare and generate a form unique to the state. When you hire RIA Compliance Consultants for its investment advisor registration service, we will help make sure you are fully aware of and complete all necessary supplemental forms.

The following are some of the more common supplemental investment advisor registration forms that a state investment advisor registration applicant can expect to complete. Again, it is important that an investment advisor registration applicant check with the securities regulators of its home state and those other states that it intends to register in order to determine the specific forms required.

• Articles of incorporation, membership agreement or other legal documents for the investment advisor applicant;
• A signed affidavit disclosing the investment advisor registration applicant’s investment advisory activities prior to registration;
• An investment advisor supplemental applicant form or similar document which requires the applicant to list supervisory personnel, office locations, investment advisory personnel and other pertinent information;
• A signed (and often notarized) statement that the investment advisor registration applicant is in compliance with the state’s investment advisor regulations;
• Financial condition worksheets;
• A copy of the investment advisor registration applicant’s customer privacy policy notice;
• Proof of errors and omissions insurance coverage;
• A copy of any written compliance policies and procedures designed to supervise the activities of investment advisory personnel;
• Copies of any promotional literature such as business cards and letterhead;
• In the event an investment advisor registration applicant will have any solicitors, a state securities regulator will often require a copy of the solicitor’s agreement; and
• In the event any investment advisory personnel will be affiliated with a broker/dealer, a signed form from the broker/dealer stating the broker/dealer is aware of the securities agent’s proposed investment advisory activities and will supervised such activities.

Designation of a Chief Compliance Officer

Unlike the SEC’s requirement for federally registered investment advisors, most state securities regulators do not require an investment advisor firm to designate a Chief Compliance Officer. However, most state securities regulators do require the designation of a designated supervisor, designated principal, person responsible for compliance and supervision, or some other similar term. In fact, Form ADV Part 1B requires the designation of a person responsible for supervision and compliance. In some states, this person will need to attain qualifications in addition to those required of an investment advisor representative. For example, some states require the designated supervisor to attain a passing score of at least 80% on the Series 65 examination and have at least two years of supervision experience.

Licensing Owners of an Investment Advisor as Investment Advisor Reps

Based on our experience and observations, another common mistake is the failure of an owner of the investment advisor registration applicant to properly license as an investment advisor representative. It is important to understand the investment advisor representative licensing requirements of each state prior to seeking registration. Owners that will provide advice to clients clearly need to be licensed as investment advisor representatives. However, a more uncertain scenario is when the owner of the registered investment advisor firm will not provide investment advice, but will refer clients to the firm. In many states, this referral activity will require licensing as an investment advisor representative even if the owner does not receive a fee per referral. Receiving a portion of the firm’s profits is deemed compensation for client referrals and thus necessitates licensing as an investment advisor representative. In some states, all owners with a 25% or greater ownership interest in the registered investment advisor firm will be required to license as an investment advisor representative even if the owner does not refer clients.

Submission of Investment Advisor Registration Documents

The timely submission of all investment advisor registration documents is another common mistake made during the registration process. All investment advisor documents should be submitted to the state securities regulator at approximately the same time. In other words, investment advisor documents submitted directly to the state should be sent the same day as the documents filed via Web CRD/IARD. Often state securities regulators will not begin their review until all investment advisor registration documents have been received. Therefore, some investment advisor registration applicants incorrectly believe that their firm is in line for review after filing the IARD documents but failing to mail the non-IARD documents.

Website During Registration Process

While reviewing an initial application submitted by a firm which is not currently registered as an investment adviser in another state, it is common for a state securities regulator to review the website(s) and social media page(s) listed on the Schedule D of the applicant’s Form ADV. Depending upon the specific content and disclosures on the website(s) and social media page(s), there is a risk that the state securities regulator will consider the applicant as holding itself out as an investment adviser without being properly registered. Additionally, the securities regulator will likely scrutinize these websites and social media pages for content which is misleading or otherwise a violation of the advertising/marketing rule for an investment adviser. Addressing and resolving any issues raised by the securities regulator can complicate and/or slow the regulatory review process. it’s often advisable (depending upon the circumstances) for a first-time registration applicant to (i) refrain from publishing any websites or social media accounts to the public until the registration is approved by the regulator, and (ii) retain a compliance consultant to review the applicable websites/social media pages for compliance with the advertising/marketing rule so the applicant can make any necessary modifications prior to publication.

Disclosure

The information contained in this Frequently Asked Questions webpage is general in nature and intended for educational purposes only and is not intended to be a comprehensive analysis of the securities regulations applicable to registered investment advisers. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures.