Friday, January 23, 2009

Registration issues for investment advisers

An investment adviser either manages portfolios for a percentage of assets, or the adviser provides financial planning services that at least partly involve securities. If you are a financial planner with a place of business in Tennessee, you need to register with the "Administrator" of Tennessee. The "Administrator" is just a model term from the model Uniform Securities Act. In the actual state of Tennessee, the "Administrator" is called the "Tennessee Securities Division," and they enforce the "Tennessee Securities Act of 1980." The Tennessee Securities Act is probably very similar to the little pretend model called the "Uniform Securities Act," but if it weren't--so what? They're a sovereign state; they can pass whatever version of securities law that they see fit, more or less. In any case, the Tennessee securities regulator would require you to register as an investment adviser. If you had no place of business in any other state, you would not have to register in any other state, unless you had more than 5 clients there. On the other hand, if you had a place of business in any other state offering financial planning services, you would have to register in that state before setting up shop. Having a place of business in a state is the most important fact to a regulator requiring registration. And, we're not talking about an "actual office," as many students like to say. On the test, if somebody meets with prospects or clients at a diner in Rhode Island to discuss or deliver financial plans, that somebody does have a place of business in Rhode Island, regardless of the number of clients, and needs to register as an adviser in that state. See, the number of clients (the magic number 5) is only relevant when the adviser does not have a place of business in the state. Once they start doing business, or even holding themselves out as being available to provide advisory services, in a state, they must register there. Remember that we're talking about the test world here. We could never make a statement that holds true in all 50 states--Wyoming doesn't even require advisers to register, for example. So, please don't post comments about exceptions in the real world. Readers of this blog have too much information to deal with as it is without going there.
Speaking of Wyoming, though, if you set up shop as an adviser in, say, Cheyenne or Laramie, Wyoming, you would actually not have to take the Series 65 or Series 66 exam. Why not? Because these exams are only required by state regulators, what the exams call the "Administrator." As it turns out, the State of Wyoming sees no reason to make investment advisers register. But, as usual, there's a catch. Since the State of Wyoming has no adviser registration requirement, the SEC steps in and asserts their authority under the Investment Advisers Act of 1940 to make that adviser register with them.
But, luckily, the SEC couldn't care less about some silly exam called the "Series 65" or "Series 66." So, I guess if you really, really couldn't pass, or didn't want to take, the Series 65 or 66 exam but really, really did want to be an adviser, you could move to Wyoming, set up shop there, and register with the SEC, which does not require any license exam. You would be a "federal covered adviser" once you submitted Form ADV, paid your fees, and had your registration accepted by the Securities and Exchange Commission. If you kept all your activities in Wyoming, you would be done with the whole registration process. Just pay your renewal fees each year to the SEC, and you're good to go. If you set up shop in any other state, or if you pick up more than 5 clients in another state, you won't quite "register" in that state, but you will provide a "notice filing" and notice filing fees to that state. You actually have an "IARD" account that is funded, and the notice filing fees for, say, Tennessee would be deducted to cover it. A notice filing is a copy of the information you provided to the SEC. If you had any representatives with places of business or more than 5 clients in another state, you need to provide that state with a U-4 for each rep, the same form used for agents of broker-dealers.
It's a little frustrating to wade through this information, as it seems to be an extreme example of "splitting hairs." And, it is. I mean, if I have to provide paperwork to the State, and I have to pay a fee, in what sense am I as a federal covered adviser not registering with the State?
In the lawyerly sense that you are not subject to that state's "books & records or net capital requirements." You notify them of your presence, but you follow the SEC's books & records and net capital requirements under the Investment Advisers Act of 1940. Also, remember that the firm might be federal covered, but investment adviser representatives working for that firm still have to register with the state--not the SEC. The SEC does not register IARs. Investment Adviser Representatives register with the states where they have a place of business and/or more than 5 individual clients.
Unfortunately, we can only allow ourselves so much excitement per post, and if I drill down any further on this topic I'm afraid we may end up over-exciting the community. Please know that I would never write about something so boring and mind-numbingly detailed unless I was sure it's a likely topic for the Series 65 and Series 66.

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