When Should You Register?

2) Separate Account Manager Assets May Qualify: Advisors that allocate assets among other managers (a “manager of managers”), but only if the advisor has discretionary authority to hire and fire managers and reallocate assets among them; and

3) Assets Most Likely Do Not Qualify: The advisor provides “qualifying” non-discretionary advisory services, but only provides advice on an intermittent or periodic basis “(such as upon client request, in response to a market event or on a specific date (e.g., the account is reviewed and adjusted quarterly)).” Thus, a non-discretionary advisor that reviews and/or reallocates client assets only periodically (e.g., quarterly), will, under the SEC examples, most likely not meet the “continuous and regular supervision or management services” test.

The Separate Account Issue

Why is this important? It has a bearing as to whether an advisor should be/remain with the SEC or be state registered. Many SEC registered advisors may learn during an SEC exam that they do not have a sufficient amount of qualifying assets under management to remain SEC registered. Thus, an SEC advisor who has transitioned a substantial portion of its assets to separate account managers should make sure that either: (1) it retains discretionary authority to hire or fire the separate account managers without first obtaining client consent; or (2) it has retained at least $25 million of qualifying assets under its management (i.e., assets for which it provides “continuous and regular supervision or management services”).

Conversely, based upon SEC definitions and examples, a non-discretionary state registered investment advisor does not need to transition to SEC registration solely because it advises on $30 million or more of assets. Rather, it will depend on the manner in which the non-discretionary advisor provides services to its clients. If a state registered investment advisor having more than $30 million in qualifying “securities portfolios” wants to remain as a state registered investment advisor, that non-discretionary state advisor, if true, should make clear on its written disclosure statement (and in its written advisory agreement) that it does not provide “continuous and regular supervision or management services,” and that absent mitigating circumstances, it reviews accounts no more frequently than quarterly, regardless of whether the advisor is paid an ongoing fee based upon assets under management.

Why would a state-registered advisor want to remain state registered even if it has more than $30 million of assets consisting of “securities portfolios?” For most who do so, it is because they do not currently provide “continuous and regular supervision or management services” and the vast majority of their clients reside in one specific state, and they have relatively few clients in other states that would require additional state registrations. (i.e., generally more than five clients in a state). For other state advisors, there is a perception (right or wrong) that there is much less regulatory scrutiny and/or compliance oversight/responsibility required at the state level.

The Caveat

The understanding and review of the above criteria has been uneven. Some states have been referring advisors with more than $30 million under management to the SEC, without first ascertaining whether the assets “qualify” for SEC registration specific purposes. Moreover, the SEC, absent clear disclosure by the advisor to the contrary, is sometimes disregarding its own guidelines, and encouraging or requiring state advisors who do not appear to provide “continuous and regular supervision or management services” to transition to SEC registration exclusively based upon the dollar amount of “assets under management.” That makes it all the more important for a non-discretionary advisor desiring to maintain state registration status to make clear on its written disclosure statement that it does not provide “continuous and regular supervision or management services,” and that absent mitigating circumstances it reviews accounts no more frequently than quarterly.

As an advisor increases assets under management or changes the manner in which it manages those assets (i.e., transitions to separate account managers), it should be mindful as to whether the increase or change will have an impact on its state /SEC registration status.

Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a firm with offices in Princeton, New York, and Philadelphia representing investment advisors, financial planners, broker/dealers, CPA firms, registered reps, and investment companies throughout the U.S. He can be reached at [email protected].