Registered Investment Advisors (RIAs) play a critical role in the financial industry, providing investment advice and managing assets on behalf of clients. To ensure investor protection and regulatory oversight, RIAs must comply with registration and other regulatory requirements.
This article discusses when an RIA must register with the U.S. Securities and Exchange Commission (“SEC”) or one or more states and how they would go about completing the registration process. For an introduction to developing an RIA compliance program once you are registered as an RIA, please click here.
What does it mean to register with the SEC or a state?
As background, RIAs must fall within the definition of an “investment adviser” in order to be required to register with the SEC or one or more states. Although the definition can vary slightly based on SEC or state regulations, the term “investment adviser” generally means a firm that engages in the business of providing advice, analyses, or reports on securities to clients for compensation. This definition can be broad and include wealth managers, asset managers, financial planners, private fund managers, mutual fund managers, and roboadvisors and other entities that provide advice through technology solutions.
In the United States, responsibility for regulating investment advisers is allocated between the federal government (SEC) and the various states. A key determinant as to whether an RIA must register with the SEC or one or more states is the amount of regulatory assets under management maintained by the RIA. In general, RIAs with less than $100 million in regulatory assets under management are prohibited from registering with the SEC unless they provide investment advice directly to registered investment companies, such as mutual funds or exchange-traded funds, unless an exemption is available. For instance, RIAs that provide investment advice only through computer algorithms or the internet or RIAs that are required to register in fifteen or more states can register with the SEC although they have less than $100 million in regulatory assets under management.
In general, an investment adviser’s “regulatory assets under management” consists of any “securities portfolios” over which the RIA exercises “continuous and regular supervisory or management services.”
Other than RIAs eligible to register with the SEC as described above, an RIA must register with one or more states unless an exemption from state registration is available. The registration requirements for each state differ from state to state, and, depending on the circumstances, RIAs may need to register with one or more states depending on where they have a place of business and/or clients. Many states require an RIA to register in the state if they have a place of business in the state and/or have more than five clients in the state. However, many states have certain exemptions that an RIA can avail itself of to avoid registration, but the exemptions vary widely from state to state.
An RIA must register with the SEC once it has at least $110 million in assets under management unless an exemption is otherwise available. Exemptions are available for certain types of RIAs including those that only advise private funds or venture capital funds.
What is the process for an RIA to register with the SEC or one or more states?
Whether an RIA is registering with the SEC or one or more states, the process begins with the same basic registration document called the Form ADV. RIAs must complete the Form ADV and file it through the RIA Registration Depository in order to register with the SEC or any state. Advisers registering either with the SEC or any state must complete Part 1A of Form ADV which is comprised of a questionnaire requiring, among other things, information about the adviser’s contact information and corporate structure, its owners, officers, and employees; its eligibility to register with the SEC; its services and assets under management; its related businesses and affiliates; its custodial arrangements; its disciplinary history and that of its employees and affiliates. Advisers registering with any state must also complete information in Part 1B of Form ADV. Advisers registering with both the SEC and any state must also submit a narrative disclosure document on Form ADV Part 2A which requires additional information about, among other things, the adviser’s business and services; fees and expenses charged to clients; types of clients served; investment methods, strategies and related risks; disciplinary history; affiliates and their businesses; code of ethics; brokerage practices; account review process; solicitors; custodial practices; and proxy voting policies. Advisers that are registering with a state must also submit biographical information about the adviser’s principal executive officers and management persons including information about the individual’s education and work experience. Advisers who are applying for registration with the SEC and who serve retail clients must also submit Form ADV Part 3 (Form CRS) which is a short-form narrative disclosure document providing clients with information about the adviser’s services, fees, conflicts of interest, and disciplinary history.
In addition to submitting the Form ADV, RIAs registering with a state will typically need to submit additional documents and information which could include, depending on the state, client agreement templates, compliance policies and procedures, certain attestations, and the RIA’s financial statements.
Timing on when the regulator must act on the RIA’s application for registration varies depending on whether it is the SEC or state reviewing the application. When an RIA applies for registration with the SEC, the SEC must act on the application within 45 days of the application date, and, if the SEC does not do so, the application is automatically declared effective, and the RIA is automatically registered with the SEC. The registration process for RIAs registering with the states can be more drawn out as typically the states will provide feedback on the application and potentially request additional information or documents from the applicant before deciding whether or not to approve the application. Generally, an RIA applying for registration with a state should assume it will take at least two months for the state to act on the application and, depending on the state, the timeline could be much longer, which we have witnessed since the COVID-19 pandemic.
If you have any questions about RIA registration, please do not hesitate to contact us.
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