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Regulation and Compliance > State Regulation

Consider These . . .

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There are myriad steps breakaway brokers must consider when opening up their own firms. Tom Giachetti, a partner with the law firm Stark & Stark in Princeton, New Jersey, detailed the steps breakaway brokers should take during a recent conference call.

What type of firm do you want to start? When deciding whether or not to become an independent RIA firm, advisors should first determine whether they want it to be a sole proprietorship, corporation, or limited liability company. I prefer a corporation or limited liability company, and whether or not you form a corporation or limited liability company will depend on state law considerations and different tax considerations.

What are the registration requirements for the advisor? Whether you’re a registered rep, former wirehouse broker, or independent broker who now wants to become the principal of an independent firm, you have to pass a test in most states, and in most states you’ll also have to register as an investment advisor representative of the new firm you’re creating. In most states you’ll need a Series 65 or Series 66 exam, although in many states there are exemptions for certain designations like CFA, CFP, and in some states CPA, and attorney.

How do you register the firm? Advisors can register the firm with the state or with the SEC. Firms with assets of less than $25 million register on a state level. Firms with more than $25 million may register with the SEC. Once firms reach $30 million and over, they must register with the SEC.

What is required if your firm is operating in other states? You have to worry about state notice and registration filing. If you register with the SEC on a federal level, you still have state obligations for your firm. You have to make a notice filing with the state to make sure the state knows you’re doing business in the state as an investment advisor.

What else will the firm need? You’ll need a written disclosure statement, the Form ADV, which is the most important document an advisor can have. It describes the scope of the services, fees, and conflicts of interest the firm or its representatives may have, and it provides transparency to the custodian and perspective clients.

What about the engagement with clients? Typically, there is a financial planning agreement between the RIA and the client. These agreements clearly indicate the services provided and the obligations of each party. Also, the SEC now requires firms to adopt and implement policies and procedures; most states are now following the SEC rules. You also have to be prepared for a regulatory examination.

How do you make the transition of accounts? Make sure you find a custodian that can assist you in doing this. Also make sure you do not provide any information to the custodian that might breach your duty of loyalty or your restricted covenant agreement with the wirehouse prior to your resignation.


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