WHAT IS AN INVESTMENT ADVISER?
Investment advisers (“IAs”) give advice to clients about stock investments, bonds, mutual funds, and exchange traded funds. IAs that provide these services for the receipt of any economic benefit and who are engaged in the business of providing advice as an investment advisor may have to register under the U.S. Investment Advisors Act of 1940 (“Advisers Act”). On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, amending certain provisions of the Advisers Act by delegating generally to the states responsibility over certain small and mid-sized investment advisers.
WHICH INVESTMENT ADVISERS MUST REGISTER UNDER THE ADVISERS ACT?
The size of an investment adviser determines whether and where it is required to register if no exemption applies. Section 203A(a)(1) and 203A(a)(2) of the Adviser Act prohibits any adviser from registering with the SEC that is regulated or is required to be regulated in the state in which it maintains its principal office and place of business, unless the state in which the adviser has its principal office and place of business has not enacted a statute regulating advisers. This prohibition includes small advisors with less than $25 million of assets under management and mid-sized advisors between $25 million and $100 million of assets under management. Any asset management amount higher than $100 million must register with the SEC if no exemption applies.
Although many individuals who are employed by advisers fall within the definition of “investment adviser,” the SEC generally does not require those individuals to register as advisers with the SEC. Instead, the advisory firm must register with the SEC. The adviser’s registration covers its employees and other persons under its control, provided that their advisory activities are undertaken on the adviser’s behalf.
Advisers and their affiliates cannot circumvent the disclosure and other requirements of the Act by separately registering under the Act if they are operationally integrated, meaning that an adviser managing $200 million of private fund assets could not simply reorganize as two separate advisers each of which purported to rely on the private fund adviser exemption from registration
HOW DOES AN INVESTMENT ADVISER REGISTER UNDER THE ACT?
If an investment adviser exceeds $100 million asset management and is required to register under the SEC without exemption, parts 1 and 2 of the Form ADV must be submitted to the SEC with a description of the business, its clients, ownership, fees, and other various issues deemed material to the SEC and to investors. A federally registered investment adviser is subject to the Advisers Act and its rules as well as increased oversight by the SEC, primarily through its inspection and enforcement powers. A registered investment adviser is responsible for implementing policies and procedures to ensure that it has a compliance program that is reasonably designed to prevent violations of the Advisers Act. Regardless of being registered with the SEC or the state level, RIAs are required to have a set of written compliance policies and procedures, including a code of ethics, and to appoint a chief compliance officer to oversee the firm’s compliance program.