An investment adviser provides advice regarding buying and selling securities for a fee separate from other services. The NASAA Investment Adviser Guide is a good starting point for information. Among other things, it discusses the distinction between investment advisers (firms) and investment adviser representatives (the individuals actually giving advice to customers). Where it gets complex is for sole proprietors, who often are considered by states to be both investment advisers and investment adviser representatives, and thus may be required to obtain firm and individual licenses (in addition to any general business requirements), though some jurisdictions do waive the dual licensing requirement.
Not all states license investment adviser representatives, but most of those that do require that the individual pass the Series 65 exam (or an equivalent), file an application, pay a fee, and comply with other requirements such as undergoing a background check. The Series 65 is a rigorous test designed to demonstrate that an individual has the basic knowledge to act as an investment adviser representative. It covers state laws, rules and ethical obligations, as well as general principles of investing. You can read more about the Series 65 and other exams by clicking on the “Exams” menu button under the “Industry Resources” tab on the NASAA homepage or by clicking here.
An individual normally has two years after passing the exam to become licensed; the exam remains valid as long as the individual remains licensed. Firms and individuals that qualify must register electronically through the Investment Adviser Registration Depository (IARD) in most states, though a few still allow paper filings. A paper version of the form that is required of firms (Form ADV), with instructions and a glossary, can be found by clicking on the “Uniform Forms” tab, which is located under the “Industry Resources” tab on the NASAA homepage or by clicking here.
The Form ADV has two parts. Part 1 asks for information about an adviser’s business, the persons who own or control the adviser, and whether the adviser or certain of its personnel have been sanctioned for violating the securities or other laws. Part 2 comprises Part 2A (Brochure) and Part 2B (Brochure Supplement). Part 2A provides clients, in narrative format, with information about the adviser’s business practices, fees, and conflicts of interest the adviser may have with its clients.
Advisers must deliver Part 2A to each client before or at the time you enter into an advisory agreement with that client pursuant to applicable state rules. The first step is to download and fill out an entitlement package, which is mailed to the Financial Industry Regulatory Authority (“FINRA”), the vendor that operates the IARD for NASAA and the SEC. A CRD number and password are assigned that enable access to the secure “WebIARD” site where on-line forms are completed.
Before submitting the forms electronically, applicable IARD system fees and state registration fees must be paid to FINRA. Once the firm is licensed, the next step is for it to register individuals as investment adviser representatives, utilizing Form U4 if your applicable state registers investment adviser representatives. Before starting, firms and individuals should consult with investment adviser licensing departments of securities regulators in states where they have a place of business or expect to have clients. Click here for a list of state securities regulators.
Firms that have less than $100 million of assets under continuous and regular management (See Form ADV for calculation instructions of regulatory assets under management) generally must register with the state or states in which they have a place of business and in which they have clients, while firms that have more than $110 million under management must register with the SEC. Between $90 and $110 million the firm is allowed to register with either the SEC or applicable states at its discretion ($25 – $100 million assets under management) and depending on the firm’s initial registration status. (There are other exceptions to state registration, such as for firms doing business in 15 or more states.) Firms that are registered with the SEC usually have to “notice file” in a state in which they have clients by providing a copy of their Form ADV and pay a filing fee. Click here for additional information regarding mid-sized advisers.
A small investment adviser is an investment adviser that has up to $25 million dollars assets under management.
