Registration / Notice Requirements For Investment Advisers

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Investment Advisers Must Register

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The Act states that it is unlawful for any person to transact business in the State as an investment adviser unless that person is registered in the State, or unless that person is exempt from licensing.

The Act states that it is unlawful for any investment adviser that is required to be registered to employ an investment adviser representative unless that representative is registered.

If an investment adviser representative ceases to work for a registered investment adviser, that individual's registration is no longer effective. When the representative begins or terminates employment with an investment adviser, the investment adviser must promptly notify the Administrator.

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"IAs" Cannot Employ Persons Who Have Been Suspended or Barred

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Furthermore, investment advisers are prohibited from employing, directly or indirectly, any person, who has been suspended or barred by the Administrator from association with a broker-dealer or investment adviser.

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Persons EXCLUDED from Investment Adviser definition Investment Adviser Representatives

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Employees of investment advisers (thus the employing firm must register as an "investment adviser"; its individual employees do not register as investment advisers - rather they register as "investment adviser representatives" (covered in the next section).

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Persons EXCLUDED from Investment Adviser definition Depository Institutions

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Banks, savings and loans, trusts.

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Persons EXCLUDED from Investment Adviser definition Professionals

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Lawyers, accountants, engineers, teachers, whose performance of these services is solely incidental to their professional practice.

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Persons EXCLUDED from Investment Adviser definition Broker-Dealers

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Broker-Dealers whose performance of these services is incidental to the conduct of the business and who receive no special compensation for these services.

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Persons EXCLUDED from Investment Adviser definition Publishers Of Newsletters That Do NOT Give Advice Based Upon Specific Investment Situations

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Publishers, employees or columnists of bona fide newspapers, news magazines, business or financial periodicals and owners and employees of cable, radio, or television networks, where the content does NOT consist of rendering advice based upon the specific investment situation of each client.

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Persons EXCLUDED from Investment Adviser definition Federal Covered Advisers

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Federal Covered Advisers

The definition of a federal covered adviser was covered previously in this chapter. To broadly summarize these, a federal covered adviser is defined as:

* an adviser that manages $100,000,000 or more of assets; or
* an adviser to registered investment companies; or
* any person excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.

Thus, advisers who manage $100,000,000 or more of assets; or who advise registered investment companies; or who are excluded from the definition of an investment adviser under the Investment Advisers Act of 1940; are NOT required to register in the State - since they are "federal covered advisers."

The concept here is that the Federal regulators are only concerned with the "big guys"; while the "local police" - the States - are concerned with the little guys.

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Federal covered advisers must file notice in the State

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Also note that federal covered advisers that must register with the SEC, must also "notify" each State (file notice in the State along with a consent to service of process covered later in this chapter) in which they conduct business and pay a State filing fee (which the States really like!).

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Advisers with No Office in the State Who Deal Only with Institutional Investors are EXEMPT

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The Act EXEMPTS the following investment advisers from the licensing and registration requirements. These are advisers with no place of business in the State, whose only clients in the State consist solely of:

* Other Investment Advisers;
* Federal Covered Advisers;
* Broker-Dealers;
* Banks, Trust Companies and Savings and Loan Institutions;
* Insurance Companies;
* Investment Companies as defined under the Investment Company Act of 1940;
* Employee Benefit Plans with Assets of at least $1,000,000;
* Government Agencies;
* Anyone so designated by the Administrator.

In these cases, the general public is not receiving the investment advice, so the protection afforded by registration is not needed. Also notice that if any of these advisers had a place of business in the State, then they would be required to register in the State.

(As you learn the exclusions and exemptions under the Act, you might now be confused because broker-dealers with no place of business in the State who only deal with institutions are EXCLUDED from the definition, while investment advisers with no place of business in the State who only deal with institutions are EXEMPTED from registration. This is a "historical relic." The wording used for the broker-dealer "exclusion" dates back to the original Uniform Securities Act of 1956. When the investment adviser registration rules were rewritten in this Act to confirm to NSMIA in 1996, the rule for IAs was revised to "correctly" call this an exemption, since the firm is really an investment adviser, but because it only deals with professional clients and has no place of business in the State, the firm is exempt from registration. Of course, when the IA wording was changed from exclusion to exemption, the original BD wording was left untouched, since it was not affected by NSMIA!)

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Advisers with no office in the State with no more than 5 clients in State in past year - EXEMPT

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Advisers who have no place of business in the State, with no more than 5 clients in the State (except financial or institutional investors) within a 12 month period are exempt. Please note that 5 is the "recommended" figure; the actual number may vary from State to State.

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De minimis exemption

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This exemption is often called the "de minimis" exemption, since the adviser is "minimally" engaged in the business in the State if it has so few clients.

Thus, an "out-of-state" firm that has only a "few" clients in another State, does not have to register in that State. Of course, the advisory firm must still register in the State where it has an office; and must register in any State in which it has no office, where it has 5 or more clients (other than the institutional clients listed above).

(Also note that this is a tested item, because it has been adopted by almost every State, as compared to the broker-dealer "de minimis" rule that some States have, and others do not.)

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Canadian Adviser exempt for Existing customers who are temporarily in the U.S.

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The Act also addresses Canadian advisers, since their customers often travel extensively in the United States. As long as a Canadian adviser does not have a place of business in the United States, it is exempt from registration (as are its agents) when effecting business with pre-existing customers who are temporarily in the United States.

To summarize these exemptions, advisers with no place of business in a State who:

* only deal with professionals; or
* have 5 or fewer clients in that State; or
* are Canadian advisers with pre-existing customers that are Canadian citizens who are temporarily in the United States;

are EXEMPT from registration in that State.

Also note that the difference between those persons EXCLUDED from the definition of an investment adviser; and those persons who are defined as investment advisers but who are EXEMPT from the registration requirement, must be known for the exam.