More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
Do you currently serve in a supervisory role with a state- or SEC-registered investment advisor firm? Are you a chief compliance officer or a chief operating officer? If so, then you may be considered an investment advisor representative (IAR) subject to registration in the state where you do business or supervise other IARs.
With all the recent concentration at the SEC level on the role of chief compliance officers and the corresponding role of firm management relative to compliance culture, states are also looking at those roles and whether registration is required for those who supervise investment professionals, regardless of whether the supervisor provides any investment advisory services. Remember, it is the states that regulate whether the individuals who are associated with your firm must be registered. Too many firms forget this.
It is critical to review those in your firm who might require IAR registration, including, of course, those who provide investment advisory services (including financial planning and marketing). Too often I encounter firms who erroneously believed that certain of their employees were exempt, had previously passed requisite exams or had attained certain qualifying designations (CFA, CFP, etc.). However, a qualifying exam or designation is only half of the requirement—the most important part is to register those individuals. Failure to appropriately register such individuals can result in both regulatory enforcement and financial liability. For example, if the firm is subject to a client complaint and the individuals providing advice were not appropriately registered, the firm’s ability to defend itself could be severely compromised regardless of the merits of the claim. It could also compromise the firm’s insurance coverage for the claim. When I conduct compliance reviews throughout the country, these are issues that we address.
So, given this emphasis, especially as it relates to supervisory professionals, I sat down with my colleague, Max Schatzow, who advised me of the relevant issues.
Schatzow advised that most states follow a definition of IAR similar to that in the Uniform Securities Act. An IAR generally is a person who, for compensation, makes recommendations or otherwise renders advice regarding securities; manages accounts or portfolios of clients; determines which recommendation or advice regarding securities should be given; solicits, offers or negotiates for the sale of or sells investment advisory services; or supervises employees who perform any of the foregoing.
Only states require registration of IARs, not the SEC. However, those who must be registered include individuals working for both state- and SEC-registered firms.
If you are responsible for supervising sales agents, advisors who manage client accounts, or advisors making investment recommendations, then according to some state’s laws, you may have to register as an IAR.
It is important to be familiar with your jurisdiction’s laws on IARs because not all states treat supervisory personnel as IARs. Some states omit supervisors from the definition of IAR, while other states provide limited exemptions for supervisors.
If you meet the definition of IAR because you have a supervisory role, then your firm may have to register you through the electronic Central Registration Depository (CRD). In addition, most states will require an IAR to pass the Series 65 exam (or an equivalent exam). Also, depending on your state’s requirements for IARs, you may have to undergo a background check and submit fingerprints to the state regulators.
Before you register by filing a Form U4, it is recommended that you speak with experienced counsel to determine if registration is necessary and if you must meet any additional requirements prior to filing. Given the current aggressive regulatory environment, this is an issue that must be appropriately addressed.