What Is a Federal Covered Advisor?
A federal covered advisor is an investment advisor in the United States that manages more than $30 million in assets for other investors or who provides services in 30 or more states. Federal covered advisors are required to be registered and file annually with the U.S. Securities and Exchange Commission (SEC). In addition, federal covered advisors must meet specific regulations set forth by individual states.
A federal covered advisor is also referred to as a federal covered investment advisor, a federal covered adviser, or an SEC-registered investment adviser.
- A federal covered advisor is one who manages investments for clients in 30+ states and/or who holds more than $30 million in AUM in the U.S.
- A federal covered advisor must register with the federal government via the SEC pursuant to the Investment Advisers Supervision Coordination Act of 1997.
- Since that date, regulation of investment advisers has been divided between the Securities and Exchange Commission and the states.
- For investment managers that do not meet federal thresholds, they would instead be a state covered advisor.
Understanding Federal Covered Advisors
Federal covered advisors are required to file a notice with the states in which they plan to conduct investment advisor business. A state covered investment advisor is an investment advisory firm that has assets under management below the federal threshold. States require federal covered advisors to file a notice if the firm has six or more clients who are residents of that state, or if the firm operates a place of business in that state.
The Investment Advisers Supervision Coordination Act, which became effective on July 8, 1997, was established to reallocate federal and state regulation of investment advisors. The act was designed to make states responsible for smaller advisors and the SEC responsible for larger advisors. Federal covered advisors must still file a Form ADV with the states they do business in and note that they are choosing to register with the SEC.
How Federal Covered Advisors Are Regulated
Under the Investment Advisers Supervision Coordination Act, the threshold for federal covered advisors was elevated from $25 million to $30 million for assets under management (AUM). When the law went into effect, advisors who had between $25 million and $30 million of assets under management and were registered or required to be registered in their home states were given the option to remain registered with the SEC.
The legislation required advisors who listed Colorado, Iowa, Ohio, or Wyoming as their home states to be registered with the SEC. This was because of a lack of statutes to regulate advisors in those states. The other states and territories of the U.S. already had policies in place to regulate advisors who were based in their jurisdictions.
Advisors to registered investment companies are required to register with the SEC regardless of the number of assets they individually have under management. Registered investment companies refer to companies that primarily engage in the business of investing or trading in securities. This includes mutual funds, for example.
A number of exceptions to the SEC registration requirement for investment advisors were included with the Investment Advisers Supervision Coordination Act. This included advisors who only had in-state clientele and did not give advice on securities traded on national exchanges