Investment Adviser Guide
As an investment adviser, you may deal with clients in a number of ways, from fee-only planning to full account management. Because clients entrust their financial well being to the advice of their adviser, the advisory firm must be a financially viable entity. §DFI Sec 5.02, Wis. Adm. Code, sets forth the net worth requirements for all state-registered investment advisers. As an investment adviser whose home office is located in Wisconsin, these are the only net worth requirements that will be imposed upon you. Other states in which you conduct business cannot impose different net worth requirements on advisers who are headquartered in Wisconsin. Conversely, Wisconsin net worth requirements cannot be applied to advisers whose home offices are in other states, provided those advisers are registered in their home states and are in compliance with their home state's net worth requirements.
"Net worth" is defined in §DFI Sec 5.02(5), Wis. Adm. Code, as an excess of assets over liabilities as determined by generally accepted accounting principles. Subsections (a) through (d) provide direction with regard to items that cannot be included as assets in the computation of net worth. Additionally, when liabilities can be shown to be collateralized by assets (including capital assets such as equipment, property, etc.) that are owned by the adviser, those liabilities are excluded from the computation. Likewise, liabilities owed to the owners or shareholders of the adviser are excluded. All other types of liabilities, including non-collateralized short and long term debt, must be included in the computation.
The first level of the net worth requirement applies to advisers who accept prepayment of fees exceeding $1,200 that are collected six months or more in advance. If you require a prepayment of an assets under management fee equal to or greater than $1,200 and specified that the fee covers the following six months or longer period of services, you would be subject to the net worth requirement. If you charged more than $1,200 for planning services which would include services provided throughout a year rather than a walk away plan given to the client in, say, 30 days, you would be subject to the net worth requirement. In these instances, the adviser must maintain a positive net worth. While there is no dollar limit set for the minimum net worth in these instances, the staff will review your net worth position during an examination. The staff may comment on a low net worth position if, in its opinion, the financial position of the adviser might pose a concern with regard to ongoing service to its clients.
There is no special net worth requirement in Wisconsin for advisers that have discretionary authority over client accounts. Either of the two previously discussed net worth requirements would still apply if you charge fees in advance or maintain custody of client assets.
In maintaining a minimum net worth, the rule specifies that the adviser maintain the required worth "at all times." §DFI Sec 5.03(1)(m), Wis. Adm. Code, requires you to maintain a record that can be used to calculate your net worth on any given day. The Division does not require you to file an annual report or other financial data on a regular basis. The record you maintain should allow you, at the request of the staff, to prepare a net worth computation as of the date requested by the staff.
If you hold your investment adviser registration as an individual (as opposed to the investment adviser registration being in the name of a corporation or LLC for example), you are required by §DFI Sec 5.02(3), Wis. Adm. Code, to segregate the amount needed for the net worth requirement from your personal capital. These funds and/or securities can only be used for the purposes of the investment advisory business and not any other personal or business uses. For example, securities segregated for the advisory business cannot be pledged as collateral on a personal loan. You should keep a record of the current balance of any such accounts as part of your record for net worth verification as outline above.
You should always be aware of your financial condition and if, at any time, your net worth falls below the required minimum, you must immediately notify the Division of the deficiency and advise of the steps you are taking to bring your net worth into compliance. ( §DFI Sec 5.04(1), Wis. Adm. Code) This notice must be in writing and may be delivered by overnight express, fax or e-mail.