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Investment Adviser Guide

IAs and the SEC

Only larger advisers that have $100 million or more of assets under management, that provide advice to investment company clients or who are required to be registered in 15 or more states are be permitted to register with the SEC. Advisers with less than $100 million of assets under management and advisers such as fee-only planners or those who give advice which is acted upon at the discretion of the client, are regulated solely by state securities agencies in 49 states. Only the following types of advisers are permitted to register with the SEC and therefore, must register with the SEC, unless exempt under section 203(b)] of the Act:

  • Advisers that have "assets under management" of $100 million or more.
  • Advisers to registered investment companies.
  • Advisers who would be required to be registered in 15 or more states.
  • Advisers that have their principal office and place of business in a state that does not have an investment adviser examination program (currently, only New York and Wyoming), or that have their principal office and place of business outside the United States.
  • Advisers that are exempted from the prohibition by SEC rule or order.

The SEC has adopted a rule exempting the following categories of investment advisers from the prohibition on registration:

  • Nationally recognized statistical rating organizations ("NRSROS"). [Rule 203a-2(a)]
  • Pension consultants that provide investment advice with respect to $200 million or more of plan assets. [Rule 203a-2(b)]
  • An investment adviser to a company which has elected to be a business development company pursuant to section 54 of the Investment Company Act of 1940 and has not withdrawn the election, and you have at least $25 million of regulatory assets under management
  • Certain investment advisers sharing the same principal office and place of business with an affiliated investment adviser that is registered with the SEC. [Rule 203a-2(c)]
  • Certain newly-formed investment advisers that have a reasonable expectation of being eligible for SEC registration within 120 days of formation. [Rule 203a-2(d)]
  • An Internet adviser relying on rule 203A-2(e)

For additional information on the prohibition on SEC registration, refer to Investment Advisers Act Release Nos. 1633 (May 15, 1997) and 1733 (July 17, 1998).

To prevent problems with constantly fluctuating asset values forcing numerous changes between state and federal regulation, a buffer has been instituted whereby your assets can grow to $110 million before you must switch from state registration to SEC registration. This provision allows you to voluntarily switch from state to SEC above $100 million but does not make it mandatory until your assets go above $110 million.
Should your business change such that you meet one of the criteria above, you may elect to change from state regulation to SEC regulation. Such a change should only be considered when you are sure your business will continue to meet the criteria for federal registration. For instance, if you have assets under management that grow beyond the $100 million mark, you should not immediately apply for SEC registration unless you are certain that the assets will not drop below that level within the following 120 days.

You may include assets in brokerage accounts as assets under management if you provide those accounts with continuous and regular supervisory or management services. The test for determining whether brokerage accounts receive continuous and regular supervisory or management services is the same as for all other types of client accounts. Accounts where the adviser regularly reviews the portfolio and makes independent investment decisions would meet the criteria. Likewise, certain types of "switch" activities where the adviser is constantly identifying investments to be switched on predetermined market indicators would qualify. Typically, only accounts over which a securities agent or broker-dealer has discretionary authority would receive continuous and regular supervisory or management services. Merely reviewing a monthly statement and telling a customer what the gain or loss was for the month is not continuous and regular supervision which would qualify as assets under management.

If your assets under management rise to and remain over $110 million for 90 days beyond the filing of the amended Form ADV showing the change in your assets under management in Part 1A, Item 5, you must register with the SEC within 120 days of that filing.

If you do become eligible to be a federal covered adviser, you should not withdraw your state registrations until your SEC registration becomes effective. You should then file an amended Form ADV with the Division with Part 1A, Item 2A marked for the reason for SEC eligibility and Item 2B for each state where you intend to be notice filed. You will be required to pay a Notice Filing Fee of $200 for your new status as a federal covered adviser; previous fees from a state registration are not refunded or applied.

With passage of the Dodd Frank Wall Street Reform and Consumer Protection Act in July 2011, the 15 client de minimis from SEC registration has been eliminated and now, advisers with even one client may be required to be registered, regardless of the type of client. This particularly affects advisers to one or more private funds which may have relied on this or other exemptions in the past. If you are an adviser to only private funds, meaning you have no individual or other types of non-fund clients, please see the Private Fund Adviser section of this Guide to determine if you are required to be registered as an investment adviser in Wisconsin.

CONTINUED SEC AUTHORITY

Investment advisers who are required to be state registered are generally subject only to state investment adviser regulations. However, the SEC still retains jurisdiction over state registered advisers in a number of areas. Perhaps foremost is Section 206 of the Act, the anti-fraud section, which prohibits misstatements or misleading statements, omissions of material facts and other fraudulent acts and practices in connection with the conduct of investment advisory business. As a fiduciary, an investment adviser owes its clients undivided loyalty, and may not engage in activity that conflicts with a client's interest without the client's consent. In S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963), the United States Supreme Court held that, under Section 206, advisers have an affirmative obligation of utmost good faith and full and fair disclosure of all material facts to their clients, as well as a duty to avoid misleading them. Section 206 of the federal Statutes applies to all firms and persons meeting the Act's definition of investment adviser, whether registered with the SEC, a state securities authority, or not at all.

Other provisions of the Act that apply to state licensed advisers include:

  • Section 204a, which requires advisers to establish, maintain, and enforce written procedures reasonably designed to prevent the misuse of material nonpublic information.
  • Section 205, which contains prohibitions on advisory contracts that:
    (i) contain certain performance fee arrangements,
    (ii) permit an assignment of the advisory contract to be made without the consent of the client, and
    (iii) fail to require an adviser that is a partnership to notify clients of a change in the membership of the partnership.
  • Section 206(3), which makes it unlawful for any investment adviser acting as principal for its own account to knowingly sell any security to, or purchase any security from, a client, without disclosing to the client in writing before the completion of the transaction the capacity in which the adviser is acting and obtaining the client's consent. (The exemption provided in rule 206(3)-2 from the prohibitions of section 206(3), however, is available to all advisers, including state registered advisers.)