Introduction
As advisory firms begin the annual ritual of tallying up their assets under management (AUM), it seemed like an appropriate time to detail the steps involved in switching from state to SEC registration. Though not a difficult process in and of itself, like all things that involve the U.S. Securities and Exchange Commission, it does have its pitfalls and dangers. Besides, we realize that most advisers consider any interaction with the Investment Adviser Registration Depository (IARD) a form of cruel and unusual punishment. Therefore, in keeping with the charitable nature of the holiday season, our gift to all those advisers making the switch from state to SEC registration is to demystify the process and help ease the transition.
Eligibility and Timing
While most advisers know that they may apply for registration with the SEC when their AUM reaches $25 million and are required to apply for registration with the SEC when their AUM reaches $30 million, many advisers are unsure about the timing of such registration. We often get calls during the year from frantic advisers who report to us that their AUM has just hit $30,000,000.01 and that they must immediately apply for registration with the SEC. Though we certainly are willing to help our clients transition to SEC registration at any time they so desire (if eligible, that is), most, if not all, breath a great sigh of relief when we tell them that they are only required to initiate the registration process if they report AUM of at least $30 million on their annual updating amendment. In other words, even if your AUM equals or exceeds $30 million during the year, it is the advisory firm’s AUM as of December 31st that triggers SEC registration.
Our clients are even more appreciative when we tell them that they can delay having to apply for registration with the SEC until as late as June 31st if they so choose. How is this so? Since advisers have until March 31st of each year to file their annual updating amendment and then an additional 90 days to then apply for SEC registration, the calendar reads mid-year before the first document must be filed.
Mind you, we are not advocating that an adviser delay registration. Indeed, many advisers are rightly proud of becoming eligible for SEC registration and want to begin the process shortly after filing their annual updating amendment. Other advisers, however, are wary of the compliance obligations attendant to SEC registration and are thankful for the short reprieve. We suggest to all advisers that they use the time leading up to their application for SEC registration to review their compliance policies and procedures and to make sure they are in full compliance with the rather onerous dictates of the Investment Advisers Act.
How to Apply
Quite simply, an adviser files for SEC registration by logging onto the IARD system, clicking on “New Filing” under the heading ADV and under ADV Filing Types choosing “Apply for Registration as an Investment Adviser with the SEC.” Because the adviser is already registered with at least one state and “entitled” to use the IARD system, the adviser will find that the Form ADV that shows up on the screen is already pre-populated with all of the adviser’s information. As a matter of fact, if the adviser immediately runs a completeness check they will discover that only two pieces of additional information (besides signatures) are needed to complete this form:
Item 2 - SEC Registration
Under Section A of Item 2, the adviser must select one of the eleven types of eligibility for SEC registration. Almost 100% of the time an adviser will select the first eligibility category - assets under management of $25 million or more. Under Section B of Item 2, the adviser must select the states in which the adviser will notice file. Initially these are the states in which they maintain their current state registrations.
Schedule A - Direct Owners/Executive Officers
The only requirement here is that the advisory firm must designate someone as Chief Compliance Officer.
Next, sign the document on both the State Registered Investment Adviser Execution Page (remember the advisory firm is still exclusively state registered) and the Domestic Investment Adviser Execution Page, press the Submit button and congratulate yourself on a job well done. Within 45 days after you file your Form ADV registration application, the SEC must grant your registration or begin proceedings to deny it, assuming that you have fully and properly completed all items of the form and accompanying schedules. The SEC staff will return any Form ADV that is not fully and properly completed. A new 45 day period will begin when the Form ADV is resubmitted.
Withdrawal from State Registration
Do not - repeat do not - withdraw from state registration until you have been notified that you are registered with SEC. If you withdraw from your state registration prior to the effective date of your SEC registration, you will be no longer be a registered investment adviser.
After you first become registered with the SEC, you will, for a brief period of time, be both a state registered and SEC registered adviser. Do not worry about this as this is a common occurrence and does not subject you to increased regulatory scrutiny. Unless you are leaving a trail of fraud and deceit in your wake, state regulators will now leave you alone.
Form ADV-W
Once your registration with the SEC becomes effective you can then begin the process of withdrawing from state registration. This is done by filing the Form ADV-W, also via the IARD system. After logging onto the IARD system, the adviser should select “New Filing” under the heading ADV-W. You will immediately be assaulted by a full page warning in bright red lettering, the crux of which is that by submitting Form ADV-W to withdraw your advisory firm from registration may affect the registration of your firm’s investment adviser representatives.
At the bottom of the warning page you are given two options - Full Withdraw and Partial Withdrawal. Click on Partial Withdrawal link to begin the process.
The first section of the Form ADV-W is entitled “Status.” You will notice that the answer to the question “Check the box that indicates what you would like to do” has already been answered as follows: Withdraw from registration in some, but not all, of the jurisdictions with which you are registered (a “partial withdraw”). If, for some reason, this answer has not been selected, you should check it off. The next question in the Status section asks you to indicate the jurisdictions from which you are withdrawing your investment adviser registration. Skip choice “(a)” which would withdraw you from the SEC and under choice “(b)” check off those states in which you are currently registered as an investment adviser.
Item 1 on Form ADV-W concerns the advisory firm’s identifying information and will be pre-populated with the required content. It is prudent to give this a quick review. Item 2 inquires as to whether you (e.g., your advisory firm) have ceased conducting advisory business in the jurisdictions from which you are withdrawing. The answer to this should be “no” as you most likely have notice filed in the same states from which you are now withdrawing as a state-registered adviser. In the space provided for “reasons for withdrawal” you should write “Switching from state to SEC registration.”
Item 3 asks whether you or a related person have custody of client assets. Remember, for purposes of the Form ADV-W, your advisory firm will have custody if it directly or indirectly holds client funds or securities, has any authority to obtain possession of them, or has the ability to appropriate them. Your firm has custody, for example, if it has a general power of attorney over a client’s account or signatory power over a client’s checking account. For purposes of the Form ADV-W your firm does not have custody by the mere fact it directly deducts its advisory fees from client accounts. If your firm does have custody, you must then provide the number of clients for whom you have custody of cash or securities; the amount of clients’ cash for which you have custody; the market value of clients’ securities for which you have custody and the market value of any other assets for which you have custody.
Item 4 asks whether your advisory firm has received any advisory fees for investment advisory services or publications that you have not rendered or delivered; or (ii) borrowed any money from clients that you have not repaid. If so, you will be required to provide amounts of any such money. Item 5 inquires as to whether your advisory firm has assigned any of its investment advisory contracts to another person. If the answer is yes, you will need to list each person to whom you assigned any of your advisory contracts on Schedule W1 of the Form ADV-W. Item 6 asks if there are any unsatisfied judgments or liens against your advisory firm.
Pursuant to Item 7, if you answered “yes” to Item 3 (Custody); Item 4 (Money Owed to Clients) or Item 6 (Judgments and Liens) you must complete Schedule W2 of the Form ADV-W. This is where you are required to disclose the nature and amount of your advisory firm’s assets and liabilities and its net worth as of the last day of the month prior to the filing of the Form ADV-W.
Item 8 requires (i) the name and address of each person who has or will have custody or possession of your books and records; and (ii) each location at which any of your books and records are or will be kept. You must list this information on Schedule W1, and you must complete a separate Schedule W1 for each person who has or will have custody of your books and records at each location. The instructions to Form ADV-W contains useful information to assist you in completing this section correctly.
The only remaining task is to sign the Execution Page, click on the “Completeness Check” button in the left hand column and, if everything is set to go, click on the “Submit” button.
Good Luck and Happy Holidays!
Important Information
The information contained in this article is only a summary of the rules and regulations that apply to state-registered investment advisers. It is not intended to be a comprehensive analysis of the rules and regulations applicable to state-registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. If you are in need of further information or have specific questions regarding the compliance obligations applicable to the conduct of your investment advisory business, please contact U.S. Compliance Consultants toll free at 888-798-2930.
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