These Frequently Asked Questions are part of a series of frequently asked questions that address four primary areas of interest to investment advisers:
- Compliance Program Components;
- Daily Operations;
- Client Protection; and
- Registration and Disclosure.
Q: What is an investment adviser?
A: Subject to certain limited exclusions discussed below, Section 202(a)(11) of the Investment Advisers Act generally defines an “investment adviser” as any person or firm that: (1) for compensation; (2) is engaged in the business of; (3) providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications. A person or firm must satisfy all three elements to be regulated under the Advisers Act.
Q: Are there any exclusions from the definition of investment adviser?
A: Yes. Section 202(a)(11)(A)-(G) of the Advisers Act expressly excludes certain persons or firms from the definition of an investment adviser. These persons or firms need not register under, and generally are not regulated by, the Advisers Act. Excluded are:
- a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956, which is not an investment company, except that the term ‘‘investment adviser’’ includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser;
- any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession;
- any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor;
- the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation;
- any person whose advice, analyses, or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall have been designated by the Secretary of the Treasury, pursuant to section 3(a)(12) of the Securities Exchange Act of 1934, as exempted securities for the purposes of that Act;
- any nationally recognized statistical rating organization, as that term is defined in section 3(a)(62) of the Securities Exchange Act of 1934, unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others;
- any family office, as defined by rule, regulation, or order of the Commission, in accordance with the purposes of this title; or
- such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.
Q: What determines whether an investment adviser should register with the SEC or with one or more state securities regulators?
A: If an advisory firm meets the definition of investment adviser, whether it will be required to register with the SEC or one or more states will most likely be a function of the amount regulatory assets under its management. In order for an advisory firm to register with the SEC as an investment adviser, the firm must have at least $100 million of regulatory assets under management at the time of registration (or within 120 days of the effective date of the investment adviser’s registration). If an advisory firm has less than $100 million of regulatory assets under management and doesn’t anticipate having $100 million or more within 120 days of the effective date of the adviser’s registration, then it must register with one or more states.
Q: When is an advisory firm required to register with the SEC?
A: An advisory firm is required to register with the SEC once it has $110 million in regulatory assets under management. In addition, if the advisory firm has $25 million or more, but less than $100 million, in regulatory assets under management, and it satisfies one of the following requirements, it must register with the SEC (this is the so-called “mid-size adviser” requirement):
- The advisory firm is not required to be registered as an investment adviser with the state securities authority of the state where it maintains its principal office and place of business pursuant to that state’s investment adviser laws; or
- The advisory firm is not subject to examination by the state securities authority of the state where it maintains its principal office and place of business.
Q: Even if an investment adviser does not have the requisite assets under management can it still register with the SEC?
A: Maybe. Rule 203A-2 under the Advisers Act provides for the following exemptions from the prohibition on SEC registration:
Adviser to an Investment Company
An advisory firm is eligible for this exemption if it currently provides advisory services under an investment advisory contract to an investment company registered under the Investment Company Act of 1940 and the investment company is operational (i.e., has assets and shareholders, other than just the organizing shareholders).
Adviser to a Business Development Company
An advisory firm is eligible for this exemption if it currently has $25 million or more of regulatory assets under management, and it currently provides advisory services under an investment advisory contract to a company that has elected to be a business development company pursuant to section 54 of the Investment Company Act of 1940, that has not withdrawn the election, and that is operational (i.e., has assets and shareholders, other than just the organizing shareholders).
An advisory firm is eligible for this exemption if it has provided investment advice to employee benefit plans, governmental plans, or church plans with respect to assets having an aggregate value of $200 million or more during the 12-month period that ended within 90 days of filing Form ADV.
An advisory firm is eligible for this exemption if it controls, is controlled by, or is under common control with an investment adviser that is registered with the SEC, and has the same principal office and place of business as that other investment adviser.
An advisory firm is eligible for this exemption if (i) immediately before immediately before it files its application for registration with the SEC, it was not registered or required to be registered with the SEC or a state securities authority and (ii) at the time of its formation, it has a reasonable expectation that within 120 days of registration it will be eligible for SEC registration.
An advisory firm is eligible for this exemption if it is required to register as an investment adviser with the state securities authorities of 15 or more states.
An advisory firm is eligible for this exemption if it:
- Provides investment advice to its clients through an interactive website. An interactive website means a website in which computer software-based models or applications provide investment advice based on personal information each client submits through the website. Other forms of online or Internet investment advice do not qualify for this exemption;
- Provides investment advice to all of its clients exclusively through the interactive website, except that it may provide investment advice to fewer than 15 clients through other means during the previous 12 months; and
- Maintains a record demonstrating that it provides investment advice to its clients exclusively through an interactive website in accordance with these limits.
Q: What happens if an adviser filing under the newly-registered adviser exemption fails to reach $100 million in regulatory assets under management within the allotted 120 day time period?
A: The advisory firm must deregister as an investment adviser with the SEC and transfer its investment adviser registration to one or more states.
Q: Under what circumstances is an investment adviser required to withdraw from SEC registration?
A: An investment adviser currently registered with the SEC must withdraw its registration when it has less than $90 million of regulatory assets under management. In addition, an investment adviser relying on an exemption from the prohibition on SEC registration would be required to withdraw its registration if it no longer qualified for the exemption (e.g., an adviser relying on the multi-state adviser exemption is no longer required to register in 15 states or an adviser relying on the pension consultant exemption no longer provides advice plans assets having an aggregate value of at least $200 million).
Q: How often is an investment adviser required to update their regulatory assets under management?
A: An investment adviser must annually assess the value of the assets it manages in accordance with the Form ADV instructions to determine whether it may remain registered with the SEC and must report such amount in its annual updating amendments to its Form ADV.
Q: How long does SEC-registered investment adviser have to transition to state registration if it is no longer eligible for SEC registration?
A: If an SEC-registered investment adviser no longer qualifies for registration with the SEC due to a decrease in its regulatory assets under management, the adviser must apply for registration with one or more states within 180 days of the advisory firm’s fiscal year end.
Regulatory Assets Under Management
Q: What is the definition of regulatory assets under management?
The SEC’s definition of regulatory assets under management is outlined in the instructions to Part 1 of Form ADV. Advisers must include in their regulatory assets under management securities portfolios for which they provide continuous and regular supervisory or management services. An adviser must include the following types of securities portfolios when calculating its regulatory assets under management:
- Family or proprietary accounts;
- Accounts for which the adviser receives no compensation for its services; and
- Accounts of clients who are not United States persons.
Advisers must include the entire value of each securities portfolio for which it provides continuous and regular supervisory or management services. If an adviser provides continuous and regular supervisory or management services for only a portion of a securities portfolio, it should include as regulatory assets under management only that portion of the securities portfolio for which it provides such services. In addition, an adviser must calculate its regulatory assets under management on a gross basis (e.g., without deduction of any outstanding indebtedness or other accrued but unpaid liabilities).
Q: Are there any special rules for calculating regulatory assets under management when an advisory firm is an adviser to a private fund?
A: Yes. When calculating its regulatory assets under management, an adviser must include the value of any private fund over which it exercises continuous and regular supervisory or management services, regardless of the nature of the assets held by the fund. A sub-adviser to a private fund would include only that portion of the value of the portfolio for which it provides continuous and regular supervisory or management services. An adviser must also include the amount of any uncalled capital commitments made to a private fund managed by the adviser. Finally, advisers must use the market value of private fund assets or the fair value of private fund assets where market value is unavailable.
SEC Registration Process
Q: How does a firm begin the SEC registration process?
A: The first step in applying for investment adviser registration is to apply for access to the Investment Adviser Registration Depository (IARD) system by completing the Super Account Administrator Form in the SEC Registration IARD Entitlement Packet. This information is available at www.iard.com. The IARD Entitlement Group will send the advisory firm a Confirmation Packet containing a log-on name and initial password which it will use to sign onto the IARD.
Once the advisory firm has set up its IARD account, it can access Part 1 of Form ADV on IARD, complete this part of Form ADV, and submit it electronically through IARD to the SEC. Part 2A of Form ADV is also required to be filed electronically through IARD by advisers registering or registered with the SEC. An advisory firm must have established an IARD account and have the necessary funds on deposit with the IARD before it can file Parts 1 and 2A of Form ADV, or the filing will not be accepted.
Q: What documents are typically filed as part of the SEC registration process?
Registering with the SEC is fairly straightforward and much less involved than registering with a state. Registrants only need to file Parts 1A and 2A of Form ADV. Unlike applicants for state registration, they are not required to file advisory agreements, financial statements, compliance material or any other documentation.
Q: If an advisory firm registers with the SEC, does it also have to register with any states?
A: An SEC-registered investment adviser is not required to “register” with state securities authorities. However, an SEC registered investment adviser is required to “notice file” with each state securities regulator where it maintains a place of business or if the investment advisory firm has more than five advisory clients. Certain states – Texas, Louisiana and New Hampshire – do not adhere to the national five client notice filing de minimis and require SEC-registered advisers to notice file even if they have just a single client in that state. SEC-registered advisers can notice file with a state by electronically submitting Part 1A of Form ADV via the IARD system.
Q: What are the fees for registering a firm as an investment adviser with the SEC?
A: There are two types of fees associated with initial SEC registration. The first is an initial set-up fee for the advisory firm’s use of the IARD system. These fees are based on the amount of assets under the advisory firm’s management and are assessed when the firm submits its first electronic Form ADV. The second is the fee paid to each state in which he advisory firm notice files. These fees vary from state to state and can be found in the Fees and Accounting section of the IARD web site (www.iard.com).
Q: How long does the SEC registration process take?
A: The SEC has a regulatory requirement to approve or deny an applicant for investment adviser registration within 45 days of the firm’s initial filing. The SEC will mail an Effective Order to an adviser once an adviser’s registration is declared effective. An adviser can also check on IARD under the heading “Registration/Reporting Status” to see if its registration has been declared effective by the SEC.
Q: If an advisory firm is registering as an investment adviser with the SEC, does anyone associated with the firm need to register as an investment adviser representative?
A: While there is no federal requirement for the registration of individuals, each state in which an advisory firm has notice filed might require certain individuals to register as investment adviser representatives. Since these requirements vary from state to state, an adviser must always check the rules and regulations applicable to the registration of individuals in each state in which the advisory firm has notice filed.