Source: https://www.ssb.texas.gov/securities-professionals/dealer-adviser-registration/getting-started-registered-investment-adviser-3
Timestamp: 2019-04-22 04:40:15+00:00

Document:
This Q&A format is designed to provide you with responses to questions frequently addressed to Registration staff in connection with the registration or notice filings of investment advisers and their representatives. This discussion cannot address every possible scenario, so readers should consult the Texas Securities Act and Board Rules for additional information. These FAQs are not intended as legal advice. Readers are encouraged to consult an attorney.
References to the Investment Advisers Act of 1940 refer to the Title 15 of the United States Code, Chapter 2D, Section 80b-1 et seq. References to SEC Rules refer to the regulations promulgated by the United States Securities and Exchange Commission (SEC) located in Title 17 of the Code of Federal Regulations (CFR) Chapter II, Part 275. Also available is a currently updated, but unofficial edition of the Electronic Code of Federal Regulations (e-CFR).
Investment advisers who are private fund advisers have different requirements. To determine if you qualify as a private fund adviser see the FAQs for private fund advisers.
1.A.1. How do I determine if I register as an investment adviser with the SEC or with the Texas Securities Commissioner?
The National Securities Markets Improvement Act of 1996 (NSMIA) divided the registration of investment advisers and their representatives between the SEC and the state regulators. Generally, investment advisers with $25 million or more in assets under management (See FAQ 1.A.2) registered with the SEC. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) raised this threshold from $25 million to $100 million in assets under management. After July 21, 2011, new investment adviser applicants with less than $100 million under management are prohibited from registering with the SEC and must register with the appropriate state securities authorities.
Although most other investment advisers not meeting the $100 million assets under management threshold will register with the states, exceptions exist. Certain categories of investment advisers will register with the SEC regardless of their assets under management. (See FAQ 1.A.8) Also, investment advisers not required to register with the SEC because they are excluded from the definition of investment adviser in Section 202(a)(11) of the Investment Advisers Act of 1940 are also not required to register with the states. Please note that the definition of investment adviser in Section 4.N of the Act excludes banks from the definition of investment adviser.
After Dodd-Frank, the SEC increased the assets under management threshold for mandatory SEC registration to $110 million and provided that investment advisers having between $100 and $110 million in assets under management may choose whether to register with the SEC or the states. See SEC Rule 203A-1 (17 CFR §275.203A-1).The safe harbor from SEC registration for an investment adviser opting to register with the state securities authority (rather than the SEC) must be based on a reasonable belief that it is not required to register with the SEC because it does not have sufficient assets under management. This safe harbor is available only to an adviser that is registered with the state in which it has its principal office and place of business.
In this context, the term “principal office and place of business” means where the executive office of the investment adviser is located. This is where the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser. (SEC Rules 203A 3(c) and 222-1(b) (17 CFR §275.203A 3 and §275.222-1) An investment adviser can have only one principal place of business.
1.A.2. How are assets under management defined for purposes of the threshold?
The term “assets under management” means the securities portfolios with respect to which the investment adviser provides continuous and regular supervisory or management services. See Investment Advisers Act of 1940, Section 203A(a)(2), SEC Rule 203A-3 (17 CFR §275.203A-3), and FAQ’s 1.A.3 and 1.A.4 for definitions of these terms. The Instructions to Form ADV, further defined other aspects of this definition. An adviser includes the entire value of each securities portfolio for which it provides continuous and regular supervisory or management services, in determining the amount of assets under management. If the adviser provides continuous and regular supervisory or management services for only a portion of a securities portfolio, only that portion of the securities portfolio may be included as part of the adviser’s assets under management.
1.A.3. What are securities portfolios, referenced above?
A securities portfolio is any account with at least 50% of its total value consisting of securities. An investment adviser may treat cash and cash equivalents as securities for the purpose of determining whether an account is a securities portfolio. Additional guidance on securities portfolios can be found in the instructions to Form ADV, Item 5.F, Calculating Your Regulatory Assets Under Management.
1.A.4. What is continuous and regular supervisory or management services, referenced above?
Guidance on whether an adviser provides an account with continuous and regular supervisory or management services is provided in the Instructions for Item 5 of Form ADV. These three factors are considered when making the determination: the terms of the advisory contract, the form of compensation, and the management practices of the adviser.
As a general matter, an account over which an adviser has discretionary authority and for which it provides ongoing supervisory or management services receives continuous and regular supervisory or management services. Most discretionary accounts meet this standard. Additionally, a limited number of non-discretionary arrangements may receive continuous and regular supervisory or management services if the adviser has an ongoing responsibility to select or make recommendations, based on the needs of the client, as to specific securities or other investments the account may purchase or sell and, if such recommendations are accepted by the client, the adviser is responsible for arranging or effecting the purchase or sale.
1.A.5. When is the value of the assets under management determined?
The value of the assets under management is determined within 90 days prior to the date of filing Form ADV and is based on the current market value of the assets. Thereafter, the value of assets under management is reported in an annual updating amendment filed within 90 days following the end of the adviser’s fiscal year.
1.A.6. What if I register with the SEC and subsequently the value of the assets under management falls below $100 million?
An SEC-registered adviser may remain registered with the SEC if its regulatory assets under management are $90 million or more. See SEC rule 203A-1 (17 CFR §275.203A-1). As indicated in FAQ 1.A.5, the value of the assets under management is evaluated and reported in an annual updating amendment. An adviser that is no longer eligible for registration with the SEC must withdraw its registration within 180 days after the adviser’s fiscal year end by filing Form ADV-W. Within that period, the adviser must become registered in all applicable states. Until an adviser files its Form ADV-W, it remains subject to SEC regulation, and also regulation in the states in which it must register. See SEC rule 203A-1(b)(2) 17 CFR §275.203A-1). An adviser violates Texas law if it renders investment advice without completing registration with the Texas Securities Commissioner at the time its registration with the SEC is withdrawn or canceled.
1.A.7. What if I register with Texas and subsequently my assets under management exceed $100 million?
The transition from Texas to SEC registration parallels the transition from SEC to Texas registration. An adviser whose assets under management grow to $100 million must apply for registration with the SEC within 90 days of filing an annual updating amendment to its Form ADV reporting that it has at least $100 million of assets under management. See SEC Rule 203A 1 (17 CFR §275.203A 1).
1.A.8. Are there other categories of advisers who register with the SEC regardless of whether they meet the assets under management threshold amount?
Is an adviser (or a subadviser) to an investment company registered under the Investment Company Act of 1940 or a company which has elected to be a business development company pursuant to Section 54 of the Investment Company Act of 1940 and has not withdrawn the election.
Has its principal office in a foreign country.
Is newly formed and reasonably expects to be eligible for SEC registration ($100 million of assets under management) within 120 days. See SEC Rule 203A-2 (17 CFR §275.203A-2).
Is a “related investment adviser” that controls, is controlled by, or is under common control with an investment adviser that is registered with the SEC, provided the “principal office and place of business” (See FAQ 1.A.1) of the affiliated investment adviser is the same as that of the SEC registered adviser. See SEC Rule 203A-2 (17 CFR §275.203A-2.
Is required to register in 15 or more states. See SEC Rule 203A-2 (17 CFR §275.203A-2.
Is an Internet investment adviser relying on SEC Rule 203A-2 providing investment advice to all of its clients exclusively through an interactive website, except that the adviser may provide investment advice to fewer than 15 clients through other means during the preceding 12 months.
Is a mid-size firm that has assets under management of $25 million or more but less than $100 million and the adviser is (1) not required to be registered as an adviser with the state securities authority in the state where it maintains its principal office and place of business, or (2) not subject to examination by the state securities authority of the state where it maintains its principal office and place of business.
Has received an SEC order exempting the adviser from the prohibition on registering with the SEC.
1.A.9. Didn't NSMIA create a national de minimis exemption from investment adviser registration?
Yes. See Section 18a of the Investment Advisers Act of 1940. If an investment adviser does not have a place of business (See FAQ 1.A.10) located in Texas and, during the preceding 12 month period, had no more than five clients (See FAQ 1.A.11) who are Texas residents, the investment adviser is not required to register with the Texas Securities Commissioner. See Rule 116.1(b)(2)(A)(iv). However, a notice filing and fee are required. See Rule 116.1(b)(2)(C) and FAQ 1.A.12. This is satisfied by filing Form ADV through the IARD system for the firm as well as filing Form U 4 for each investment adviser representative through the CRD system.
1.A.10. What constitutes an adviser's place of business for purposes of the national de minimis exemption referenced in FAQ 1.A.9?
any other location that is held out to the general public as a location at which the investment adviser provides investment advisory services, solicits, meets with, or otherwise communicates with clients. SEC Rule 222 1(a) (17 CFR §275.222 1).
1.A.11. Who is counted as a client for purposes of the national de minimis exemption, referenced in FAQ 1.A.9?
The following rules apply when calculating the number of clients for purposes of the national de minimis exemption.
equivalent of the natural person who has the same principal residence will be treated as a single client. See SEC Rules 222-2 and 203(b)(3) 1 (17 CFR §§275.222 2 and 275.203(b)(3) 1).
A corporation, general partnership, limited partnership, limited liability company, trust, or other legal organization that receives investment advice based on its (the entity’s) investment objectives, rather than the objectives of its shareholders, partners, limited partners, members, or beneficiaries (its owners) will be treated as a single client. Similarly, two or more of these entities receiving investment advice based on its (the entity’s) investment objectives that also have identical owners will be treated as a single client.
The beneficial owners of common entities are not required to have identical ownership interests in order for the entities to be treated as a single client, although an adviser cannot avoid registration by arranging nominal common ownership. An Owner will also be counted as a client if the investment adviser provides investment advisory services to the Owner separate and apart from the services it provides to the entity.
A limited partnership or limited liability company is a client of any general partner, managing member, or other person acting as investment adviser to the partnership or limited liability company. See SEC Rule 203(b)(3) 1 (17 CFR §275.203(b)(3) 1).
All clients in Texas are counted for purposes of the de minimis exemption, regardless of whether another exemption from investment adviser registration is available under the Texas Act or Rules.
Where an investment adviser provides advisory services to a private fund, the SEC rule specifies that, in most instances, the fund would be considered a single client. There are exceptions to this general rule, including instances in which the adviser provides advice on an individual basis to the fund investors separate and apart from the advice provided to the fund. Therefore, “looking through” to count clients of a fund for purposes of the national de minimis standard is generally prohibited by SEC Rule 202(a)(30)-1.
An investment adviser with its principal office and place of business in the United States must count all clients. An investment adviser with its principal office and place of business outside the United States counts only clients that are residents of the United States. See SEC Rule 203(b)(3) 1 (17 CFR §275.203(b)(3) 1). See FAQ 1.A.1 for the definition of principal office and place of business.
1.A.12. Even though I'm not required to register as an investment adviser with the Texas Securities Commissioner (because of the exclusions noted in FAQ's 1.A.1, 1.A.8, or 1.A.9), do I have to make any filing with Texas?
Yes. The investment adviser must make a notice filing and pay an initial fee equal to the amount that would have been paid had the investment adviser or investment adviser representative filed for registration with Texas. The notice filing is made and the fee is paid through the IARD system by filing Form ADV for the investment adviser and Form U4 for the investment adviser representative. See Rule 116.1. Thereafter, additional filings and fees are required both annually and on amendment of the adviser’s Form ADV. See Rule 116.1(b)(2)(C).
1.B.1. I am employed as a representative of an investment adviser. The investment adviser does not have to register with the Texas Securities Commissioner (because of exclusions or exemptions noted in FAQ's 1.A.1, 1.A.8, or 1.A.9). Do I have to register with the Texas Securities Commissioner if I have clients in Texas? Do I make a notice filing instead of registering?
The SEC has defined a supervised person as a partner, officer, director, or employee (including independent contractor) of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser. However, only a supervised person who is an investment adviser representative (See FAQ 1.B.2) and has a place of business (See FAQ 1.B.6) in Texas is required to register with Texas. See Rule 116.1(b)(2)(B). A supervised person with Texas clients who does not meet both these criteria will make a notice filing with Texas instead of registering. A notice filing is accomplished by filing Form U-4 for each investment adviser representative through CRD.
The SEC, in Release IA-1733 Section III, recognized the authority of the states to continue to collect fees from those supervised persons not currently required to be registered in a state, but who would have been required to register in that state prior to NSMIA. Further, in Section II(3)(b)(iv) of The Great Divide: Amendments to the Investment Advisers Act and Related Commission Rulemaking, a report by the SEC Task Force on Investment Adviser Regulation, the SEC staff acknowledged the authority of a state to require the registration of representatives of investment advisers that take advantage of the national de minimis exemption. Texas has chosen to only require a notice filing from such representatives, a less burdensome requirement than a registration filing.
1.B.2. Who is an investment adviser representative (IAR) for investment advisers relying on exclusions or exemptions noted in FAQ's 1.A.1 and 1.A.8?
A supervised person is also an IAR if the supervised person has more than five clients who are natural persons and more than 10% of the person’s clients are natural persons. This client test is measured with respect to all of an IAR’s clients nationwide, and compliance with the 5-client and 10% test is to be determined at all times (rather than periodically) with respect to current clients. Supervised persons who do not, on a regular basis, solicit, meet with, or otherwise communicate with clients of the investment adviser, or who provide only impersonal investment advice, are excluded from the definition of IAR. If more than one supervised person provides advice to a client, the client is attributed to each supervised person. Client in this context has the same meaning as that discussed in FAQ 1.A.11. See SEC Rule 203A-3(a) (17 CFR §275.203A-3(a)).
Two categories of natural persons excluded from the 5-client or 10% threshold are: a natural person who has at least $1.0 million under management with the IAR’s firm immediately after entering into an advisory contract or a natural person who the firm reasonably believes has a net worth in excess of $2.0 million (together with assets held jointly with a spouse) prior to entering into the advisory contract. See SEC Rule 205-3(d)(1) (17 CFR §275.205-3(d)(1)).
1.B.3. I am operating in Texas as a solicitor for an SEC-registered investment adviser. Must I also register or make a filing with the Texas Securities Commissioner?
As a general rule, if a solicitor is a supervised person, the solicitor is not required to register with the Texas Securities Commissioner. Whether a solicitor for an SEC-registered investment advisor is subject to state registration requirements turns on: (1) whether the solicitor is a supervised person, (see FAQ 1.B.1) and (2) whether the solicitor is an IAR (see FAQ 1.B.2). If a solicitor of an SEC-registered investment adviser does not provide investment advice, the solicitor is not required to register with the Texas Securities Commissioner, but is subject to the fee and notice filing provisions. A third-party solicitor for an SEC-registered investment adviser (i.e., a solicitor who is not an employee of the adviser) is not a supervised person and, therefore, has to register with the Texas Securities Commissioner. A solicitor who solicits on behalf of both a Texas-registered investment adviser and an SEC-registered investment adviser, is subject to Texas registration requirements.
1.B.4. I am operating in Texas as a solicitor for a Texas-registered investment adviser. Must I also register or make a notice filing with the Texas Securities Commissioner?
A solicitor of a Texas-registered investment adviser must register with the Texas Securities Commissioner and meet all state registration requirements contained in the Act and Rules.
1.B.5. I am an IAR of a SEC-registered investment adviser. Do I have to register or make notice filings with the Texas Securities Commissioner?
An IAR of a SEC-registered investment adviser, having a place of business (See FAQ 1.B.6) in Texas must register and qualify as an investment adviser representative with the Texas Securities Commissioner. An IAR without a place of business in Texas must notice file.
1.B.6. What qualifies as a place of business, for purposes of FAQ 1.B.5?
any other location that is held out to the general public as a location at which the IAR provides investment advisory services, solicits, meets with, or otherwise communicates with clients. See SEC Rule 203A-3(b) (17 CFR §275.203A-3).
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 IAR is or will be available to meet or communicate with clients is considered such a location. The definition encompasses permanent and temporary offices as well as other locations at which an IAR may provide advisory services, such as a hotel or auditorium. Frequency of the Activity at a particular location is not relevant for this determination.
1.C.1. I want to set up financial plans for my mother and for other relatives and friends who live in Dallas. May I help them without having to register as an investment adviser in Texas?
Yes, if you receive no financial compensation for your services. The definition of investment adviser in Rule 116.1 refers to a “person or company who, for compensation, … provides investment advice… .” Accordingly, so long as you do not receive compensation for any investment advice you render from Texas or to a Texas resident, you need not register.
1.C.2. I am an investment adviser who lives outside of Texas. One of my best clients, Mr. Jones, is moving to Texas in a few weeks. May I continue to service his account without having to register in Texas? He would be my only Texas client.
Yes, if you do not have a place of business in Texas. See FAQ's 1.A.9 and 1.A.10. However, a notice filing and fee is required. See Rule 116.1(b)(2) and FAQ 1.A.12.
Yes, if the institutional investor is one of the types of institutions listed in the Act, Section 5.H, and Rule 109.6.
1.C.4. I am located in Texas and have been asked by a Texas billionaire to serve as his personal financial planner in exchange for a fee. Since he is a very wealthy and sophisticated investor, as well as my old college roommate and partner in several business ventures, do I need to register in Texas as an investment adviser?
Yes, you do. Even though this friend and business partner would qualify as an individual accredited investor under SEC rules, Texas has no exemption for rendering investment advice to individual accredited investors.
1.D.1 What kind of books and records do I need to maintain to comply with Texas investment adviser registration?
To determine what books and records you must keep you must first determine where you maintain your principal place of business (See FAQ 1.D.3). In this context, your principal place of business is where the executive office of the investment adviser is located and from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser. See SEC Rule 222-1(b) (17 CFR §275.222-1). If it is a state other than Texas and you are registered as an investment adviser with that state, compliance with the applicable books and records requirements of that other state will suffice. See Rule 116.5(b) and (c) if your principal place of business is in Texas.
1.D.2 What minimum capital and bonding requirements apply to me as an investment adviser registered in Texas?
You look to the requirements imposed by the state where you maintain your principal place of business (See FAQ 1.D.3). In this context, your principal place of business is where the executive office of the investment adviser is located and from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser. See SEC Rule 222-1(b) (17 CFR §275.222-1). If you are registered as an investment adviser with that state, compliance with its requirements will suffice. If your principal place of business is in Texas, you would look to the Texas requirements. Texas has no minimum capital or bonding requirements. However, insolvency may be a basis for the Texas Securities Commissioner’s denial, revocation, or suspension of an investment adviser’s registration. See Section 14.A(4) of the Act.
1.D.3 I am involved in rendering investment advice; however, I am registered with the SEC rather than the Texas Securities Commissioner. Do I need to comply with any other provisions of the Act in conducting my sales activities?
Yes, for example, certain of the civil liability provisions of Sections 33 and 33-1 and the penal provisions in Section 29 of the Act will still apply to you, including the antifraud provisions of Section 29.C. Violations of the provisions of Section 29 are felonies and carry substantial penalties, including, for the most serious violations, up to life imprisonment and a $10,000 fine. Although NSMIA affected who must register with state regulators, it preserves the state’s fraud authority. Accordingly, the state’s authority to investigate and bring enforcement actions with respect to fraud or deceit against an investment adviser, or person associated with an investment adviser, remains unaffected. See Rule 116.1(b)(2)(D). As an SEC-registered investment adviser, you would not be required to comply with Texas regulatory provisions such as those that establish record keeping, disclosure, and capital requirements. You must, however, preserve any books and records you were previously required to maintain under the law of the state where you maintained your principal office and place of business (See FAQ 1.A.1) prior to registering with the SEC. See SEC Rule 204-2(k) (17 CFR §275.204-2).
1.D.4 I am involved in rendering investment advice. I am, however, exempted under the Texas Act and Rules from registering with the Texas Securities Commissioner. Do I need to comply with any other provisions of the Act in conducting my sales activities?
Yes. The civil liability provisions of Sections 33 and 33-1 of the Act and the penal provisions of Section 29 will apply to you, including the antifraud provisions of Section 29.C, even though you are operating under an exemption from registration. As noted in FAQ 1.D.3, violations of Section 29 constitute felonies and carry substantial penalties.
1.D.5 As an investment adviser, are there limitations on the use made of information I have pertaining to my clients?
2.A.2 Who can be a designated officer (DO)?
A corporate officer, partner, or sole proprietor of the Texas-registered firm. See Rule 116.2(b). This designation does not require residence in Texas by the DO. If a Form ADV is used, the DO must be named as an officer, partner or sole proprietor on Schedule A of Form ADV. If the DO is not included on Schedule A, a letter must be provided stating the DO’s corporate title and confirming that the DO is an officer of the applicant as defined in or Rule 116.1(a)(12).
2.A.3 Who can be a Texas branch office supervisor?
Any Texas-registered representative who has been designated as such by the firm. See Rule 116.2(c).
2.B.1 I have a current license as an investment adviser representative having passed the Series 7 and Series 66 exams. What do I have to do to keep these effective? How long before I must retake any exams?
The examinations you have passed meet the requirements for investment adviser or investment adviser representative registration in Texas. Generally, as long as your registration remains active, you will not need to retake the exams. However, if your registration in Texas becomes inactive for a period of two years or longer, you must retake examinations to become registered again.
2.B.2 What examinations are required for registration as an investment adviser?
In order to register as an investment adviser a person must complete the Uniform Investment Adviser Law Examination (Series 65) or the General Securities Representative Examination (Series 7) and the Uniform Combined State Law Examination (Series 66). See Rule 116.3.
2.B.3 Are there any exemptions from the examination requirements for investment advisers or their representatives?
Applicants who are designated by the American College, Bryn Mawr, Pennsylvania, as chartered financial consultants (ChFC).
2.B.4. I have completed the Series 6 and Series 66 examinations. Do I need to complete another exam before I can apply for registration as an investment adviser?
No, you may apply for a restricted registration to deal exclusively in securities issued by open-end investment companies (mutual funds) without taking any additional examinations. However, you must limit all of your investment advisory services and your registration to the area of investment company products. See Rules 116.1(c)(2) and 116.3(b)(1).
2.B.5 FINRA granted me a waiver of the Series 7 exam requirement. Do I still need to take the exam to register in Texas?
convicted of any misdemeanor which directly relates to the person's securities-related duties and responsibilities.
Applications showing a conviction are considered on a case-by-case basis. See Rule 116.6a.
Yes, registrants and notice filers must renew annually. Additionally, there is a continuing requirement to update throughout the year if a change occurs in the information furnished on the original application. This is true of both registrants and of investment advisers who merely make notice filings with the Texas Securities Commissioner.
No. Section 19.C of the Act provides the penalties for late filings. To avoid paying penalties, a new application can be submitted. A break in registration status occurs if the renewal is not timely filed. Similarly, registration is terminated if the renewal fee is not timely paid. Refiling the registration or filing a late renewal does not result in backdating of the effective date of registration. If there is a break in the registration status because a renewal is not timely filed and an investment adviser continues operations during this gap in registration, the investment adviser is subject to sanctions for unregistered activity.
Registrants who meet the December 31 deadline will be issued a new Certificate of Registration by mid-January of the following year. The Firm's Certificate of Registration is now available electronically and must be accessed from our website at www.ssb.texas.gov/securities-professionals/certificate-search. You must have the Firm's CRD or Texas File number to search for your certificate.

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