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How to Become an Investment Advisor Webinars: SEC Investment Advisor Registration Process | RIA Compliance Consultants
How to Become an Investment Advisor Webinars: SEC Investment Advisor Registration Process
RIA Compliance Consultants summarizes the process for registering with the SEC as an investment advisor which includes establishing and funding an IARD account, filing the Form ADV Part 1A and Schedules A & B via IARD system, uploading the Form ADV Part 2A via IARD system, review by SEC, notice filing with the applicable state securities regulators, filing the Form U4 of the investment adviser representatives (IARs) with the applicable state securities regulators and preparing for an SEC limited scope audit.
So once you've determined who you're going to register with, the SEC or state, now you start the registration process. The SEC registration process includes, first and foremost, establishing and funding your IARD/CRD account. That's where you're going to pay your state registration and licensing fees, any system user fees. It's where you're going to prepare the form ADV and submit the form. The form ADV Part 1 is prepared in the IARD system. The form ADV Part 1 and Part 2 are submitted through the IARD system. The CRD system is where you prepare and submit the form U4 to get the investment adviser reps license under the firm. For SEC-registered firms, you complete Part 1A and then the applicable schedule, so Schedule A, Schedule B, Schedule C. Schedule A and B are where you report owners-- indirect and direct owners. Schedule D is where you fill out some additional information, like that certification I was talking about earlier. You indicate the 120 days [INAUDIBLE] on Schedule D. Something like, if you have-- there's a question in Part 1A that says do you have a website. If you do, you have to put that on D. So there's different things that go on the Schedule D. The Part 2A is prepared outside the system. It's a true brochure format, so there is not technically a form that you go out there and complete. Like the Part 1A is a mark the box, fill in the blank type document. But Part 2 is here's a set of instructions. Now you have to write a brochure that meets the instruction, the requirements in the instruction. So SEC-registered firms have to complete the Part 2A and upload it through the IARD system. The SEC has minimal review upfront. From what we can tell, they look at the Part 1A, and as long as everything looks good there, they register you. And we're basing that off the fact that we've never had the SEC come back and question anything on the Part 2A, the way the states do. So we don't think they review that upfront. But the SEC process-- the initial registration process-- typically goes faster than the states do. It usually takes 30 days or less for the SEC to approve or deny an application. They actually state that they have 45 days to approve or deny an application. So it doesn't mean that you can do less work to get the registration documents done, by any means or anything like that, because these documents are your disclosure documents. Regulators are going to look at them during an exam. It's just the SEC tends to look at some of those documents more after the fact in the examination process than they do right upfront for registration. SEC-registered firms have to notice file in states where they have a place of business or where they exceed the state's de minimis exemption. So states still want to know that you're conducting business as an investment adviser rep there. You are not regulated by the state. The state can come in if they have suspicion of fraud being done within the state. But otherwise, they're not going to regulate you, the SEC is. But the states still get to collect their fee, and you have to notice file. So again, generally speaking, you have to notice file where you have a place of business, and then anywhere where you exceed the state's de minimis exemption, which for the majority of states is five clients or less. You can have up to five clients and not have to be notice filed there if you don't have a place of business there. The exceptions to this rule that we're aware of are Texas, Louisiana, Nebraska, and New Hampshire. Those states require you to notice file prior to having one client in the state. Those states, again, are Texas, Louisiana, Nebraska, and New Hampshire. Prior to one client, you need to notice file with the state. SEC-registered firms still have to have the reps licensed with the applicable state by submitting the form U4 to the states. Again, Minnesota, Wyoming, and New York do not currently license investment adviser reps, so reps in those states do not have to be licensed. The SEC has been known to get out there and do the audit more quickly than the states have. Usually you would see them within the first year at least doing an initial audit to get an overview of the firm and determine the risk ranking. There was a lot of changes that went on last year with the implementation of Dodd-Frank and the new 100 million versus 25 million requirement. So there was a large transition of reps from SEC to state registration. There were reps that had never had to be registered before that had to get registered with the SEC-- those that were managing private funds. So we've been in a period of transition. So it'll be interesting to see what the audit process looks like now that this transaction has taken place. But we really just kind of started seeing where that is. So I'm not sure how quickly the SEC will get out there. But my recommendation is plan on them being out there within the first year. The state registration process is slightly different. You have to establish and fund your IARD/CRD account, just like you do on the SEC side. But on the state side, you have to complete Part 1A and Part 1B and all applicable schedules. Part 1B is for state-registered firms only. SEC firms don't do Part 1B. You have to upload Part 2A and Part 2B through the IARD system. Part 2B are supplemental brochures that have to be prepared for each investment adviser representative. SEC-registered firms have to prepare the Part 2Bs as well. They just don't have to submit them as part of the registration process. But state firms do. A lot of states will require you to submit financial statements as part of the application process. You will be required to submit copies of any client agreements that you're going to use. And those client agreements have to be consistent with all the fees and services that you disclose in your form ADV document. And then there could be various miscellaneous state forms that you might have to submit. The New York qualification form that I mentioned earlier is a good example of a state-specific form. So you need to review the state's registration requirements and make sure that you submit all required paperwork, or you're going to slow down your registration process that is already slow enough. You have to license the investment adviser representative under the firm by submitting the form U4s. The state registration process is much more complex. They are going to go through all of these documents that I referenced previously very closely. It is very common that they are going to come back and ask questions, or they're going to want revision. What you want to do is you want to keep those to just easy tweaks that you can make quickly and get back to them. But every state has its own quirks about wanting this sentence under this item instead of under this item, and having to have this specific verbiage in a particular section-- different things like that. So when people go it on their own, they sometimes end up going back and forth with the regulators several times. Us, we get used to those. But I can't even say that ours will-- even though we're used to and we deal with reps throughout the United States, it does not mean that ours will fly through easily as can be. Because it depends on who's looking at it, and what day they're looking at it. And every firm's situation is different. So you shouldn't plan on having a cookie-cutter document. You should plan on having a document that's written to your firm's specific situation. Expect approval or denial to take at least 30 to 45 days in most states. Some states will take longer. I've heard recently that Colorado can be kind of slow. He-- the main person there-- usually likes to take his full amount of time that he has to review it because he has many of them coming across his desk. And then once he rejects it back, his clock starts over again. So Colorado can be slower than some other states. California is probably the slowest state out there. They're just understaffed usually. And so in California, I warn people to plan on it taking 45 to 90 days for them to review and approve an application. And then if it gets done quicker, you're pleasantly surprised. But usually if you plan on that, that's what it's going to take.
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Description: RIA Compliance Consultants summarizes the process for registering with the SEC as an investment advisor which includes establishing and funding an IARD account, filing the Form ADV Part 1A and Schedules A & B via IARD system, uploading the Form ADV Part 2A via IARD system, review by SEC, notice filing with the applicable state securities regulators, filing the Form U4 of the investment adviser representatives (IARs) with the applicable state securities regulators and preparing for an SEC limited scope audit.