Chapter 2: Regulation of Investment Advisers & Investment Adviser Representatives

Investment Adviser (IA)

A person or firm that provides advice or analysis about securities, is compensated in any form, and engages in the business regularly of providing such advice. If all three elements are present, registration is required unless an exclusion or exemption applies.

Investment Adviser (IA)

A person or firm that provides advice or analysis about securities, is compensated in any form, and engages in the business regularly of providing such advice. If all three elements are present, registration is required unless an exclusion or exemption applies.

Investment Adviser Representative (IAR)

A natural person who is associated with an IA and performs advisory functions such as making recommendations, managing portfolios, determining advice, soliciting advisory business, or supervising those activities. IARs never register with the SEC—only with states.

Three Elements of the Investment Adviser Definition

The three required characteristics that define an IA:

1. Advice about securities

2. Compensation for that advice

3. Regular business of providing advice
   All three must be present for IA registration to be required.

Advice About Securities

A recommendation or analysis specific to a client’s situation involving securities. Generic or blanket recommendations are not considered advice under the USA.

Compensation

Anything of value received in exchange for advice, including asset-based fees, hourly fees, flat fees, subscription fees, or indirect compensation. Commissions alone do not constitute IA compensation unless advice is separately paid for.

Regular Business

Holding oneself out to the public as providing investment advice or earning a significant portion of income from advisory activities. Occasional or incidental advice does not meet this standard.

Incidental Advice

Investment advice given as part of another primary profession and not separately compensated for advisory services. This advice does not require IA registration.

LATE Professionals

Professionals who may provide incidental investment advice without IA registration:

• Lawyers

• Accountants

• Teachers

• Engineers

Fee-Only Adviser

An adviser who receives compensation only from clients, typically via asset-based, hourly, or flat fees, and does not receive commissions.

Fee-Based Adviser

An adviser who earns both advisory fees and commissions. Fee-based advisers must register as IAs if they provide ongoing advice for a fee.

Assets Under Management (AUM)

The total market value of assets over which an adviser provides continuous and regular supervisory or management services, measured at fiscal year-end for registration purposes.

Dual Registration

When a firm is registered as both a broker-dealer and an investment adviser, usually because it offers both commission-based accounts and fee-based advisory accounts.

Wrap Account

A managed advisory account where the client pays one asset-based fee covering advice, portfolio management, and transaction costs. Wrap accounts are advisory products, requiring IA registration.

Wrap Fee Program Brochure

A disclosure document describing services, fees, and conflicts associated with a wrap account. It must be delivered to each wrap fee client.

Federal Covered Adviser

An IA registered with the SEC, not the states. Federal covered advisers are excluded from the USA definition of IA and are subject to notice filing instead of state registration.

SEC Registration Threshold

An IA must register with the SEC if:

• AUM exceeds $110 million

• Optional SEC registration at $100 million or more

• Must withdraw from SEC registration if AUM falls below $90 million

IA Registration Buffer

The $90M–$110M AUM range allowing flexibility between state and SEC registration to avoid frequent switching.

Mid-Sized Adviser

An IA with $25 million to less than $100 million in AUM, generally required to register with states, unless otherwise required to register federally.

Small Adviser

An IA with less than $25 million in AUM, typically state-registered unless an exemption applies.

Pension Consultant

An adviser providing advice to pension plans. SEC registration is required if aggregate plan assets are $200 million or more, regardless of number of states or AUM.

Internet Adviser (Robo-Adviser)

An IA that provides personalized advice through an interactive website. Internet advisers must register with the SEC regardless of AUM.

Private Fund Adviser

An adviser to hedge funds, venture capital funds, or private equity funds. SEC registration required at $150 million or more in private fund AUM.

Exempt Reporting Adviser (ERA)

A private fund adviser with less than $150 million in private fund AUM. Exempt from SEC registration but subject to reporting and possible state regulation.

Notice Filing

A filing required by federal covered advisers in states where they do business, consisting of Form ADV and fees, but not full registration.

Doing Business in a State (IA)

Defined as:

• Having a place of business, OR

• Having six or more retail clients in the state within the past 12 months

De Minimis Exemption (IA)

An IA is exempt from state registration if it has no office in the state and five or fewer retail clients in that state during the past 12 months.

Entities Excluded from IA Definition

Firms not required to register as IAs:

• Advice limited to U.S. government securities

• Publishers of non-specific investment information

• Banks, trust companies, insurance companies

• Broker-dealers providing only incidental advice

• IARs themselves

State-Level Client Exemptions

IAs without an office in the state need not register if clients are limited to:

• Investment companies

• Other IAs or BDs

• Banks and insurance companies

• Employee benefit plans ≥ $1M

• Private funds ≥ $150M

• Government entities

IAR Registration Requirement

Required for individuals who:

• Make recommendations

• Manage portfolios

• Determine advice

• Solicit advisory business

• Supervise advisory activities

IAR Registration Rules

• Never register with the SEC

• Federal covered IA → register only where office is located

• State-registered IA → register where office is located or where there are six or more retail clients

Ministerial (Clerical) Functions

Administrative duties only. Individuals performing solely ministerial tasks are not IARs and do not register.

Snowbird Exemption

Allows an IAR to conduct temporary business with existing clients who are visiting another state without registering there.

Solicitor

A person compensated for referring clients to an IA. Solicitors must register as IAs if their services otherwise meet IA registration requirements.

Promoter

A person who provides testimonials or endorsements under the SEC Marketing Rule. Promoters are not required to register as IAs.

Form ADV

The primary disclosure and registration document for IAs, filed electronically through IARD.

Form ADV-W

Used to withdraw IA registration when transitioning between SEC and state registration.

Form U-4

The registration form used by individuals, including IARs, to apply for state registration.

Investment Adviser Registration Depository (IARD)

The electronic filing system used for IA and IAR registration, notice filings, and renewals.

Consent to Service of Process

A legal document appointing the state administrator as agent for service of legal papers. Required only for initial registration, not renewals.

IAR Qualification Exams

• Series 65, OR

• Series 7 + Series 66
  Waived for holders of CFP, CFA, ChFC, CIC, or PFS designations.

Fiduciary Duty

A legal obligation requiring IAs and IARs to put client interests first, avoid conflicts, and provide full and fair disclosure. More stringent than the BD best-interest standard.

Custody

Occurs when an IA has possession of client funds or securities or authority to withdraw assets, including fee deductions and discretionary trading authority.

Custody Requirements

Include:

• Segregation of client assets

• Quarterly statements

• Annual surprise audit

• Disclosure on Form ADV

• Enhanced recordkeeping

Minimum Net Worth Requirements (State IAs)

• $35,000 if custody

• $10,000 if discretion only

• Positive net worth if prepaid fees > $500, 6+ months in advance

Qualified Custodian

A financial institution that holds client assets and maintains segregation under a written agreement with the IA.

Books and Records Requirement

IAs must maintain detailed records for five years, with the first two years in the principal office, including client records, transactions, advertising, and supervisory procedures.

IAR Continuing Education (CE)

Required annually where adopted:

• 6 credits in Products & Practices

• 6 credits in Ethics & Professional Responsibility
  Failure results in CE Inactive status.

Licensing Period

IA and IAR registrations run from January 1 to December 31 and must be renewed annually.