Many investment advisers want to grow and scale their RIA firms. In our last article, we focused on outlining a few steps you can take to grow your firm’s business organically. In this article, we are going to walk you through the process of transitioning your RIA firm from a state registration to an SEC registration.
There are many benefits for an RIA firm to qualify for federal registration with the U.S. Securities and Exchange Commission (SEC). One of the most noteworthy benefits is once your firm is SEC registered, your compliance program only needs to focus and answer to one federal regulator, versus multiple state regulators.
While the SEC registration scenario doesn’t eliminate any of your firm’s compliance responsibilities, having just one set of regulations does make it a little easier to manage.
When Can I Transition My State RIA Firm to the SEC?
As you grow your business, you should start thinking about transitioning from state registration to SEC registration when your regulatory assets under management (AUM) approach $100 million (or $25 million in the case of New York domiciled RIAs). Reaching this regulatory threshold is the most common way an RIA may qualify for SEC registration. Per Section 80b-3a of the Investment Advisers Act of 1940 and the Instructions to Form ADV, SEC registration as a large advisory firm is required when the RIA’s regulatory assets under management (AUM) exceeds $110 million, although SEC registration is allowed when the RIA’s AUM is $100 million or more.
There is also a multi-state advisor option that allows an RIA with less than $100 million in regulatory AUM to transition to SEC registration if the RIA is required to be registered with the state securities authorities in 15 or more states. This exception falls under SEC Rule 203A-2(d), and generally applies only when the RIA exceeds or will exceed the client de minimis threshold imposed by each of the 15 or more states, and/or has a “place of business” in the state(s) that would otherwise require registering the RIA there.
A third option to transition from state to SEC registration is via the Internet Investment Adviser exemption in SEC Rule 203A-2(e). This option is available only to RIAs that offer investment advice exclusively through an interactive website, meaning a website in which computer software-based models or applications provide investment advice to clients based on personal information each client supplies through the website. Another name for this is Robo-Advisors, and it is becoming an increasingly popular way for RIAs to provide investment advice to clients.
Navigating the Transition from State to SEC Registration
Upon confirming registration with the SEC is required or authorized, the process for registering is much the same as initially registering with a state securities regulator. Form ADV Part 1 must be amended to indicate the eligibility for SEC registration; the Part 2A Brochure should be amended to disclose the transition from state to SEC registration and also to address SEC-specific disclosures; and a Part 3 Form CRS (Client Relationship Summary) is required to be filed for SEC RIA firms with any retail clients. Filing the SEC registration will require payment of the appropriate federal registration fee.
For any state where the RIA will advise six or more clients (or one or more clients in Texas, Louisiana, New Hampshire, and Nebraska), the RIA must also notice file by checking the box in Form ADV, and pay the state notice filing fee(s).
Following SEC registration approval, the RIA must file a partial Form ADV-W to withdraw its state registration(s). Some states automatically approve the withdrawal request, while other states take longer to review the RIA’s reason for the withdrawal request before approving the withdrawal.
Investment Advisor Representatives (IARs) of SEC registered firms are exempt from the state registration requirements outside of their home state and any state where the IAR operates from a “place of business.” Each IAR’s Form U4 should be amended to uncheck the box on any state where registration is no longer required.
Regulatory reporting requirements for all RIAs managing client securities (but generally limited to large advisory firms) may also include filing Schedule 13D and Schedule 13G, which must be filed on EDGAR and a copy of the filing sent to the security issuer. Form 13F must be filed by an RIA having investment discretion with respect to accounts cumulatively holding $100 million or more of NASDAQ or exchange-traded securities. Form 13H must be filed by any “large trader,” which includes an RIA whose transactions in national market system securities equal or exceed either two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.
In addition to the regulatory filing requirements, RIAs transitioning to SEC registration must update their internal compliance policies and procedures to be in accordance with SEC Rule 206(4)-7, including conduct of an annual compliance review, and updates to the required books and records per SEC Rule 204-2. SEC registered RIAs must also establish and maintain a Code of Ethics per SEC Rule 204A-1 that sets forth standards of conduct for advisory persons and addresses conflicts that arise from personal trading.
Best Practices
Assessing and navigating the SEC registration process is equally complicated when compared to applying for registration with a state securities authority. However, transitioning to the SEC requires additional regulatory filings (Form CRS) and internal compliance documents (updated compliance manual and a new Code of Ethics) that most RIAs don’t have the capacity to alone.
The best business practice is to engage with a compliance and regulatory consultant who has the experience and depth of knowledge capable of project managing an SEC transition efficiently and at low cost. The consultant should provide updated compliance policies and procedures, including a Code of Ethics, and draft the amendments to Form U4, Form ADV (including a new Form CRS), and the Form ADV-W following SEC registration approval. The consultant should also advise on amendments to Form U4 to ensure all unnecessary state registrations are unchecked.
At the very least, an RIA thinking about making the transition to the SEC should review the books and records requirements in Rule 204-2, the compliance requirements in Rule 206(4)-7, and the registration requirements in Rules 203A-2 and
