NASAA is pleased to provide the following answers to frequently asked questions about investment advisers.
How should I prepare for an audit/exam by a state securities regulator?
Q. I want to become an investment adviser. What steps should I follow?
A. An investment adviser provides advice regarding buying and selling securities for a fee separate from other services. The NASAA Investment Adviser Guide is a good starting point for information. Among other things, it discusses the distinction between investment advisers (firms) and investment adviser representatives (the individuals actually giving advice to customers). Where it gets complex is for sole proprietors, who often are considered by states to be both investment advisers and investment adviser representatives, and thus may be required to obtain firm and individual licenses (in addition to any general business requirements), though some jurisdictions do waive the dual licensing requirement.
Not all states license investment adviser representatives, but most of those that do require that the individual pass the Series 65 exam (or an equivalent), file an application, pay a fee, and comply with other requirements such as undergoing a background check. The Series 65 is a rigorous test designed to demonstrate that an individual has the basic knowledge to act as an investment adviser representative. It covers state laws, rules and ethical obligations, as well as general principles of investing. You can read more about the Series 65 and other exams by clicking on the “Exams” menu button under the “Industry Resources” tab on the NASAA homepage or by clicking here.
An individual normally has two years after passing the exam to become licensed; the exam remains valid as long as the individual remains licensed. Firms and individuals that qualify must register electronically through the Investment Adviser Registration Depository (IARD) in most states, though a few still allow paper filings. A paper version of the form that is required of firms (Form ADV), with instructions and a glossary, can be found by clicking on the “Uniform Forms” tab, which is located under the “Industry Resources” tab on the NASAA homepage or by clicking here.
The Form ADV has two parts. Part 1 asks for information about an adviser’s business, the persons who own or control the adviser, and whether the adviser or certain of its personnel have been sanctioned for violating the securities or other laws. Part 2 comprises Part 2A (Brochure) and Part 2B (Brochure Supplement). Part 2A provides clients, in narrative format, with information about the adviser’s business practices, fees, and conflicts of interest the adviser may have with its clients.
Advisers must deliver Part 2A to each client before or at the time you enter into an advisory agreement with that client pursuant to applicable state rules. The first step is to download and fill out an entitlement package, which is mailed to the Financial Industry Regulatory Authority (“FINRA”), the vendor that operates the IARD for NASAA and the SEC. A CRD number and password are assigned that enable access to the secure “WebIARD” site where on-line forms are completed.
Before submitting the forms electronically, applicable IARD system fees and state registration fees must be paid to FINRA. Once the firm is licensed, the next step is for it to register individuals as investment adviser representatives, utilizing Form U4 if your applicable state registers investment adviser representatives. Before starting, firms and individuals should consult with investment adviser licensing departments of securities regulators in states where they have a place of business or expect to have clients. Click here for a list of state securities regulators.
Q. What determines whether I register my firm with a state or the SEC?
A. Firms that have less than $100 million of assets under continuous and regular management (See Form ADV for calculation instructions of regulatory assets under management) generally must register with the state or states in which they have a place of business and in which they have clients, while firms that have more than $110 million under management must register with the SEC. Between $90 and $110 million the firm is allowed to register with either the SEC or applicable states at its discretion ($25 – $100 million assets under management) and depending on the firms initial registration status. (There are other exceptions to state registration, such as for firms doing business in 15 or more states.) Firms that are registered with the SEC usually have to “notice file” in a state in which they have clients by providing a copy of their Form ADV and pay a filing fee.Click here for additional information regarding mid-sized advisers.
Q. Where can I get help completing the various registration forms?
A. A state filer should first consult with the securities regulator in any state in which it has a place of business or expects to have clients. Click here for a list of state securities regulators. For technical questions about IARD and for payment information, call the Gateway Call Center at (240) 386-4848, or e-mail to webiard@FINRA.org.
For assistance in obtaining the contact information for state securities regulators, you may contact NASAA by calling (202) 737-0900 between the hours of 8:30 a.m. and 6 p.m. Eastern time.
SEC registrants should call (202) 942-0691, or send an e-mail to IARDLIVE@sec.gov. (Note that states are responsible for licensing investment adviser representatives, including those who work for SEC registrants.)See SEC Rule 203A-3
For information on the status of your filing, contact your state regulator or the Gateway Call Center (240) 386-4848 if you are a state registrant. For SEC registrants, call (202) 551-7250.
Q. What application form do I use to register my firm, and where can I find it?
A. When you electronically register your firm, you will use Form ADV on the secure, password-protected portion of the Investment Adviser Registration Depository (IARD). You can get a paper version with instructions, attachments, and a glossary by visiting the “Uniform Forms” section under the “Industry Resources” tab on the NASAA homepage, or by clicking here. Firms must register electronically through the Investment Adviser Registration Depository (IARD) in most states, though a few still allow paper filings.
Q. What is Form ADV Part 2A, and can it be filed electronically?
A. Part 2A of Form ADV, often called the “brochure,” is a disclosure document, in narrative format, that describes a firm’s business and the methods used to charge clients. With few exceptions, states require the Part 2A to be filed electronically through WebIARD. For additional information on electronic filing of Part 2A please click here.
Q. What is Form ADV Part 2B, and can it be filed electronically?
A. Part 2C of Form ADV, often called the “brochure supplement,” is a disclosure document, in narrative format, that provides information on supervised persons of the adviser. If you are registered or are registering with one or more state securities authorities, you must file through IARD a copy of the brochure supplement for each supervised person doing business in that state. For additional information on electronic filing of Part 2B please click here.
Q. Our firm is registered with the SEC. Must we also register with states?
A. While SEC registered advisers are not required to become registered with the states, those firms generally are required to make a “notice filing” in the states where they have clients and places of business. This entails electronically designating that the appropriate state(s) receive a copy of the firm’s Form ADV filing and paying a fee. Even though SEC registered advisers do not register with the states, the states still retain anti-fraud jurisdiction over them.
Q. When must Form ADV be amended?
A. A firm should file the annual updating amendment within 90 days of the close of its fiscal year (e.g., by March 31st for firms on a calendar-year basis). The firm should update information that has changed, including recalculating regulatory assets under management. During the year, if there are material changes to the information on the Form ADV, the firm should do an “other-than-annual” amendment within 30 days of the change. State regulators can answer questions about whether a change is deemed material. State registrants pay no IARD fees for filing the annual update or other amendments to Form ADV other than a once-yearly system fee covering computerization costs.
Q. What is an investment adviser representative?
A. Most states follow a definition of investment adviser representative similar to that in the Uniform Securities Act. An investment adviser representative generally is a person who, for compensation (1) makes any recommendations or otherwise renders advice regarding securities; (2) manages accounts or portfolios of clients; (3) determines which recommendation or advice regarding securities should be given; (4) solicits, offers, or negotiates for the sale of or sells investment advisory services, or (5) supervises employees who perform any of the foregoing. Only states register investment adviser representatives, not the SEC, but those who must be registered include individuals working for both state and SEC-registered firms. See SEC Rule 203A-3 and applicable state rules.
Q. When must an individual investment adviser representative register with a state?
A. Individual investment adviser representatives generally must be registered in states where they have a place of business. Some jurisdictions base registration on the number of clients. This applies to both state and SEC-registered advisers.
Q. Is there a federal licensing requirement for individuals?
A. No; the SEC just registers firms meeting the applicable criteria. Individual investment adviser representatives, whether they work for SEC or state-registered investment adviser firms, must be registered under state law.
Q. I solicit clients for an investment adviser. Must I register?
A. The Uniform Securities Act includes anyone “who solicits, offers, or negotiates for the sale of or sells investment advisory services” within the definition of investment adviser representative, though there may be special solicitor registration provisions. Solicitors should check with all jurisdictions in which they will be doing business.
Q. I will be getting “basis points” or referral fees for business I send to an investment adviser. Must I register?
A. As is the case with solicitors, state law often requires qualification and registration for individuals receiving referral fees or receiving a percentage of business from an investment adviser. Check with the applicable jurisdiction(s).
Q. I have been in the investment adviser business for years. Must I still pass an exam and register?
A. States have varying requirements on when individuals are grandfathered based on prior experience. Even when the exam is waived, registration may be required.
Q. I am registered at the state and federal levels as a stockbroker. Must I be separately licensed as an investment adviser?
A. Most states require a separate license if a person is receiving separate compensation for investment advice, but some states have exemptions that allow qualified brokerage agents to act as investment adviser representatives without further qualification, and in some cases, without further registration. NASAA’s IA/BD Exemption Chart is a good starting place, but you should confirm your status with the appropriate state regulator(s).
Q. How does my firm register individuals, and what forms should I use?
A. Individuals normally are registered through the electronic Central Registration Depository (CRD), which includes information on brokerage firms and agents. When signing up for the IARD, a firm also fills out a CRD Entitlement Form and is given access to the CRD for the purpose of registering individual investment adviser representatives. Form U4 is used to register investment adviser representatives. You also can access Form U4 and instructions here.
Q. Besides filing the forms and paying necessary fees, are there other requirements for state-registered firms or individuals?
A. Although there is a growing movement towards uniformity, state regulators may impose other requirements. For firms, these might include having to demonstrate minimum net worth, obtaining a surety bond, submitting client contracts for review, or agreeing to service of process. Some states subject individuals to the same type of background check as brokerage agents. It is best to check with the appropriate regulator about additional requirements before filing; waiting until after your forms are filed can delay licensing and your ability to conduct business.
A. No; your typed signature on the electronic execution page is sufficient.
Q. Where do I send my state registration and computer system fees?
A. All fees are paid to FINRA, which operates the IARD and CRD for the states and SEC. FINRA distributes registration fees to the appropriate states. Computer system fees cover FINRA’s expenses related to operation of the electronic filing system.
Initial registration fees are deposited into a firm’s “Daily Account.” In November of each year, renewal fees for state-registered firms and all IA representatives are paid into a separate “Renewal Account.” Click here for more information about these accounts, as well as information on electronic payment and payment by mail or delivery service. The site also includes charts showing each jurisdiction’s firm and representative fees. (Note that SEC filers renew their firms’ registrations at a different time – when their annual amendments are due; however, even SEC-registered investment adviser firms must renew their investment adviser representative registrations with the states in November.)
If you have questions about your account status, or need to move funds from one account to another, contact the Gateway Call Center, (240) 386-4848, orwebiard@FINRA.org.
Q. I am switching to the IARD electronic registration system from being a paper filer. Are there special steps I need to take?
A. Yes; first-time electronic filers of both Forms ADV and U4 that previously registered manually need to do a “transition filing” before completing the registration forms. The transition filing alerts the state(s) where a firm or individual previously was registered of the imminent electronic registration; the state then notifies the IARD system not to charge again for fees that already have been paid. Additional information on transitioning for firms and representatives can be foundhere.
Q. When I filed a U-4, the IARD automatically scheduled me for a Series 65 examination and charged my account $135, even though I am grandfathered in the state. Can I get a refund?
A. When a U4 is filed to register someone as an investment adviser representative, the CRD will automatically open a Series 65 exam window, and debit the firm’s daily account for $135, if the individual is not shown as already having passed the exam, is not already licensed by another jurisdiction, or does not qualify for an automatic exam waiver (such as holding a qualifying professional designation).
A state, however, may subsequently grant an exam waiver after manual review because the individual is grandfathered or otherwise qualifies under state law. When that happens, and after a registration is approved in every jurisdiction where it was sought, your state regulator can instruct FINRA to close the exam window and refund the exam fee to your Daily Account. They will need the firm’s name and CRD number, the name and CRD number of the person for whom the exam was scheduled, and the transaction number and posting date for the exam charge (from the firm’s daily account summary).
Q. What information about a firm and its representatives is publicly available?
A. Part 1 of electronically registered firms’ Form ADV is publicly disclosed, without personal identifying information such as Social Security number or home address. State regulators will provide to requestors information about firms and individuals from their IARD and CRD records as authorized by state law. This includes disciplinary history, if any.
Q. Once I am registered, can I publicly advertise myself as an investment adviser or financial planner?
A. This is an area where you definitely need to check with your state regulator. To prevent an individual from misrepresenting qualifications to the public, many states have limitations on how investment advisers and Investment Adviser representatives can advertise their services.
Q. I passed the Series 65, but my firm didn’t register me with a state. Now two years have passed and my exam is shown in my record as “expired.” Can I get licensed in another state?
A. If a firm does not register an investment adviser representative because the position does not require it or the state does not register investment adviser representatives, the person’s exam will be shown as “expired” in the CRD two years after the exam date (or most recent termination date). Most states have discretion to waive the requirement to retake the exam. The state usually will require documentation that the individual was, in fact, performing investment advisory functions in the interim.
Q. What are the new investment adviser representative requirements in New York State?
A. While New York does not register individual investment adviser representatives, State law requires that those providing investment advice must demonstrate to the Attorney General’s Investor Protection and Securities Bureau that they are qualified. Passing the Series 65 is one way to do so. The Bureau can provide specific information, including the forms that may be required. The Investor Protection and Securities Bureau’s phone number is (212) 416-8200.
Q. I don’t have a computer. How can I register on the IARD?
A. You have three options: You may use any computer to fill out and submit your forms, including those at a library with Internet access. You may use a Service Bureau that will file your forms for you for a fee. Depending on state law, you may be able to apply for a temporary hardship exemption using Form ADV-H. However, you will still need to make electronic filings at the end of the temporary exemption period.
Q. How can I change the name of my firm on the IARD?
A. Take the following steps on the IARD secure web site to change the name: Select ADV, new filing on the site. Click on Submit An Other-Than-Annual Amendment or Submit An Annual Updating Amendment, as appropriate. Select Item 1- Identifying Information on the navigation panel. Put a check in the box under Item C indicating whether this is going to be a change to the firm’s legal name and/or primary business name. Type in the new name and press the Save button. Type in an execution page and Save. Click on Submit Filing on left hand navigation panel. The Gateway Call Center, (240) 386-4848 or webiard@FINRA.org can provide additional assistance.
Q. What is the definition of “high net worth individual” as used in Part I-A of Form ADV?
A. A “high net worth individual” is an individual with at least $750,000 managed by an adviser, or whose net worth exceeds $1,500,000. The net worth of an individual may include assets held jointly with his or her spouse.
Q. My firm manages a wrap fee program. Is the program one client, or do I count each of the participants as clients?
A. Each wrap fee program participant to whom you provided investment advisory services should be counted as a client
Q. How do I convert my firm from being state-registered to being SEC-registered or vice versa? When do I submit my partial ADV-W?
A. To convert from being a state-registered adviser to being a SEC-registered adviser, submit the filing type “Apply for registration as an investment adviser with the SEC.” After the SEC approves your registration you should file a “Partial ADV-W” to withdraw your state registration(s).
Do NOT file your Partial ADV-W until your application for SEC registration is approved or you will be unregistered and may be unable to conduct your business during this period of time. To convert from being a SEC-registered adviser to being a state-registered adviser, submit the filing type “Apply for registration as an investment adviser with one or more states.” After your state registration has been approved, then you should file a “Partial ADV-W” to withdraw your SEC registration.
Do NOT file your Partial ADV-W until your state registration application(s) are approved or you will be unregistered and may be unable to conduct your business during this period of time. The Gateway Call Center, (240) 386-4848 orwebiard@FINRA.org can provide additional assistance.
Q. I am in a state that allows manual registration. Can I still file electronically?
A. While not every state has mandated use of the IARD system, every state will accept registration via the IARD. There is a cost difference for electronic registration because of the $150 computer set-up fee and $100 annual maintenance fee for state advisers. On the other hand, the IARD system is convenient, quick and facilitates your doing business in multiple states.
Q. How should I prepare for an audit/exam by a state securities regulator?
A. Many state securities regulators conduct audits/exams of the investment adviser firms registered in their states. If you are notified that your firm will be the subject of an audit/exam there are some simple steps that you can take that will facilitate the process. First, if the regulator, prior to the exam/audit date, provides you with a list of documents that are needed for the exam/audit, be sure to have the documents available ahead of time and organize them according to the request. Second, make sure the regulator has a work space and access to a copier. Finally, if there are multiple employees at the firm, identify a point of contact for the regulator.