Regulation of Investment Advisors and Investment Advisor Representatives - The Federal and State Registration Process
Federal Registration Process
To register as an IA with the SEC, you are required to file Form ADV Part I and Part II.
Part I discloses basic information to regulators, such as contact and background information on the advisor and employees, number of accounts, compensation arrangements, etc.
- Part II serves as a disclosure document to clients and potential clients. It can be used to satisfy the "Brochure Rule" discussed in the Client Communications and Compensation Issues section.
The IA must amend Form ADV any time the information within it changes. The form must be resubmitted within 90 days of the end of each fiscal year. See Appendix A for Form ADV filing instructions, Part I and II examples, schedules and more from the NASAA.
Investment Advisor Registration Depository (IARD)
All federal covered advisors are now required to register with the SECand file notice with the states via the Investment Advisor Registration Depository (IARD).
The IARD is an electronic filing system for IAs, sponsored by the SECand the North American Securities Administrators Association (NASAA). This system collects and maintains data for both federally registered IAs and state IAs. See the IARD website.
State Registration Process
While the Investment Advisers Act of 1940 governs federal registration of IAs, state registration of IAs is regulated under the Uniform Securities Act. Registration of investment advisors and investment advisor representatives is now available using the IARD system referenced above.
Consent to Service of Process
Under the USA, state registered IAs must also file what's known as a "consent to service of process", which appoints the State Administrator as your agent to receive and process any legal complaints. Finally, while a state may not require IAs to file if they are registered with the SEC, they may require IAs to file with the state any documents filed with the SEC, to file a consent to service of process, and/or to pay state fees.
What is a consent to service of process? In essence, the Administrator has been given the power of attorney to receive non-criminal grievances.
Other State Requirements:
- A passing score on a competency examination for each person acting as an investment advisor or investment advisor representative
- Payment of a fee for processing investment advisor application
- Certain disclosures to the securities agency and/or the public
- Registration of branch offices of the advisor
- A bond or minimum net capital
Initial Financial Requirements
At any time, the Administrator has the power to demand minimum financial requirements for any/all investment advisors.
Specifically, the USA states:
An Administrator may require an authority bond or insurance (subject to the Investment Advisers Act of 1940) for an "investment adviser that has custody of or discretionary authority over funds or securities of a customer or client to obtain insurance or post a bond or other satisfactory form of security ... The administrator may determine the requirements of the insurance, bond, or other satisfactory form of security."
- If for any reason an investment advisor fails to meet the imposed requirements, it should immediately notify the Administrator.
Summary of Financial Requirements
Administrators have the ability to require investment advisors to carry bonds or insurance - if the aforementioned persons/entities have discretionary authorization or hold client funds. In short, if the Administrator thinks a situation is risky to the client, he or she may require bonds to protect against possible excessive losses.
- If a broker-dealer has any material change in vital information (e.g. address) at any time, it is to notify the Administrator immediately.
- Investment advisors must create and maintain all records (including books, marketing and correspondence) for a minimum of three years.
Investment advisors must pay annual dues and are subject to periodic examination by the Administrator. In addition, investment advisors must file annual financial statements.
Exam Tips and Tricks
On the exam, you will probably not see a question dealing with financial reporting as it applies to investment advisors and broker-dealers because such requirements can easily differ from state to state. If you do, it is wise to remember that a State cannot require an investment advisor or broker-dealer to report more frequently than quarterly and, in most cases, annual reporting is the norm.
Exam Tips and Tricks
The Series 66 exam is likely to have a number of questions about the State Registration Process, but most are straightforward. Here is a typical example:
A State Administrator can require all of the following of an investment advisor applicant EXCEPT:
- minimum surety bond coverage.
- minimum competency evidenced by passing an examination.
- minimum net capital.
- minimum number of years of investment advisory experience.
In this question, the correct answer is "d", since the Uniform Securities Act does not require a specific number of years of experience.
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