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Demystifying RIA/IAR Legal Requirements

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One area that often presents a source of confusion, particularly for Securities and Exchange Commission-registered firms, is investment advisor representative registrations. Unlike firms, where registration and oversight responsibilities are split between the states and the SEC, individuals are registered exclusively with the various states. There is no individual registrations at the SEC level (at this point), even for representatives of SEC-registered advisors.

My colleague Ryan Walter explained how a firm should evaluate whether an individual is subject to state registration. He started with reference to Section 203A(b) of the Advisers Act that provides:

(1) No law of any State or political subdivision thereof requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person — (A) that is registered under section 80b–3 of this title as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State.” (emphasis added).

As indicated above, the Advisers Act only preempts state registration requirements to the extent the supervised person is not also an “investment advisor representative.” In other words, if a supervised person falls within the Advisers Act definition of an investment advisor representative, then the state, subject to the below analysis, can license, register, or otherwise qualify that individual.

An “investment advisor representative” generally means a supervised person of the investment advisor:

• Who has more than five clients who are natural persons (other than excepted persons); and • More than 10% of whose clients are natural persons (other than excepted persons). An “excepted person,” for the purposes of the above definition, generally aligns with the definition of a “high net worth individual” for Form ADV reporting purposes.

If the individual has not yet been exempted from the definition of investment advisor representative per the above, then we move on to the final stage of the analysis: Does the individual have a place of business located within that State?

“Place of business” of an investment advisor representative means:

• An office at which the investment advisor representative regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients; and • Any other location that is held out to the general public as a location at which the investment advisor representative provides investment advisory services, solicits, meets with, or otherwise communicates with clients.

For the purposes of rule 203A-3(b), an advisor representative generally would be considered to hold him/herself out to the general public as having a location at which he conducts advisory business by, for example, publishing information in a professional directory or a telephone listing, or distributing advertisements, business cards, stationery, or similar communications that identify the location as one at which the advisor representative is or will be available to meet or communicate with clients.

Investment advisor representatives can only be compelled to register in states in which they maintain a place of business. If an SEC-registered investment advisor only has a place of business in New Jersey, then New Jersey is the only state (subject to potential limited exceptions) that can require registration of that firm’s investment advisor representatives, regardless of the number of clients served or amount of assets managed in any other state.

Once an advisory firm has determined that a state is permitted to require registration, it is then a matter of examining the laws of that state or states per the above to ascertain whether investment advisor representative registration is required.

Although the analysis of various state licensing requirements is a job better left to attorneys, the above analysis can serve as a helpful guide in winnowing down the number of possible states for review.

Thomas D. Giachetti is chairman of the Investment Management and Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York and Philadelphia that represents investment advisors, financial planners, BDs, CPA firms, registered reps and investment companies, and is a regular contributor to Investment Advisor. He can be reached at [email protected].


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