Investment Advisers & Representatives

Investment Adviser Registration

Under the Uniform Securities Act, an investment adviser (IA) must register with the state Administrator unless it qualifies for an exclusion from the definition or an exemption from registration. As discussed in Chapter 1, the definition of investment adviser captures any person who, for compensation, engages in the business of advising others about the value of securities or the advisability of investing in securities. The registration requirements for IAs are among the most heavily tested topics on the Series 66 exam.

The IA registration process mirrors the broker-dealer process in many respects. The IA must file an application with the state Administrator (typically Form ADV through the Investment Adviser Registration Depository, or IARD), pay the required fees, meet minimum financial requirements, post a surety bond if required, and file a consent to service of process. The registration becomes effective at noon on the 30th day after filing, unless the Administrator grants an earlier effective date or denies the application.

Like BD registrations, IA registrations expire on December 31 of each year and must be renewed annually. The renewal requires updated financial information, payment of fees, and amendments to Form ADV if any material changes have occurred.

Form ADV: The uniform application form for investment adviser registration, filed through the IARD system. Form ADV has two parts: Part 1 contains information about the adviser's business, ownership, clients, employees, practices, affiliations, and disciplinary history. Part 2 (the "brochure") contains narrative information written in plain English about the adviser's services, fees, conflicts of interest, and disciplinary events. Part 2 must be delivered to clients.

State vs. Federal Registration

The division between state and federal registration of investment advisers is governed by the Investment Advisers Act of 1940 as amended by NSMIA and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The general framework is as follows:

Small advisers (AUM under $25 million): Register with the state. Cannot register with the SEC unless no state registration is available.
Mid-size advisers (AUM $25 million to $100 million): Generally register with the state. May register with the SEC if registered in 15 or more states (to avoid multi-state registration burdens).
Large advisers (AUM $100 million or more): Must register with the SEC (federal covered advisers). Cannot register with the state, but must make notice filings.
Advisers to investment companies: Must register with the SEC regardless of AUM.
Pension consultants with AUM over $200 million: Must register with the SEC.

AUM Threshold	Registration Level	Notice Filing Required?
Under $25 million	State only	N/A (state-registered)
$25M - $100M	State (or SEC if in 15+ states)	N/A unless SEC-registered
$100M - $110M	May register with SEC or state (buffer zone)	Yes, if SEC-registered
Over $110 million	SEC (federal covered adviser)	Yes, in states where adviser has a place of business
Any (advises investment companies)	SEC (regardless of AUM)	Yes

The $100 million AUM threshold for SEC registration is a key testable number. Remember: advisers with $100 million or more in AUM are generally federal covered advisers and must register with the SEC. They cannot register with the state but must make notice filings. However, the SEC provides a "buffer zone" between $100M and $110M to prevent advisers from constantly switching between state and federal registration due to market fluctuations.

Federal Covered Advisers

A federal covered adviser is an investment adviser that is registered with the SEC under the Investment Advisers Act of 1940. Federal covered advisers are exempt from state registration but must comply with state notice filing requirements and are subject to state anti-fraud authority. The state cannot require federal covered advisers to register at the state level, and the state cannot impose additional substantive requirements beyond what federal law requires.

Federal covered advisers include advisers with AUM of $100 million or more (subject to the buffer zone), advisers to registered investment companies (mutual funds), advisers that are nationally recognized statistical rating organizations (NRSROs), and certain other categories specified by SEC rule.

Notice Filing for Federal Covered Advisers

States may require federal covered advisers to make notice filings, which typically consist of a copy of the documents filed with the SEC (Form ADV), a consent to service of process, and the applicable filing fee. The notice filing must be made in every state where the adviser has a place of business. Some states also require notice filing in states where the adviser has clients, even without a physical office.

The notice filing does not give the state authority to regulate the adviser's business practices or impose conditions on its operations. The state's authority over federal covered advisers is limited to requiring the notice filing, collecting fees, and enforcing anti-fraud provisions.

Do not confuse the state's authority over federal covered advisers with its authority over state-registered advisers. The state cannot deny, suspend, or revoke the registration of a federal covered adviser (because the adviser is not registered with the state). The state can only require notice filing, collect fees, and enforce anti-fraud provisions. This is a critical distinction on the exam.

Investment Adviser Representative Registration

An investment adviser representative (IAR) is an individual who, on behalf of an investment adviser, makes recommendations, manages client accounts, determines investment advice to be given, solicits advisory clients, or supervises those who perform these functions. Like agents, IARs are always natural persons (individuals), never firms.

IARs must register in the state where they have a place of business. The registration is filed through the IARD system using Form U4. The IAR's registration is linked to the employing investment adviser. If the IAR changes firms, the IAR must re-register under the new adviser's registration.

Where Must IARs Register?

The registration requirement for IARs depends on whether the employing adviser is state-registered or federally registered:

IARs of state-registered advisers: Must register in the state where the adviser is registered and where the IAR has a place of business or conducts advisory activities
IARs of federal covered advisers: Must register in the state where the IAR has a place of business. This is a critical requirement: even though the adviser itself is federal covered and cannot be required to register at the state level, the IAR must still register in any state where the IAR has a place of business

Global Wealth Management is a federal covered adviser (SEC-registered with $500 million AUM) with offices in New York, California, and Texas. It employs 50 IARs across these three offices. Even though Global Wealth is a federal covered adviser and cannot be required to register at the state level, each of its IARs must register in the state where they have a place of business. An IAR working in the New York office must register in New York. An IAR working in the California office must register in California. The IARs file Form U4 through the IARD system in each relevant state.

De Minimis Exemption for IAs

The USA provides a de minimis exemption for investment advisers who have no place of business in a state. Under this exemption, an IA without a place of business in a state may have up to five clients in that state during the preceding 12 months without needing to register. This exemption allows advisers to serve a small number of out-of-state clients without the burden of multi-state registration.

Important conditions for the de minimis exemption include: the adviser must not hold itself out to the general public in the state as an investment adviser, and the adviser must not be advising any registered investment company or business development company. If the adviser exceeds five clients in the state, it must register (or qualify as a federal covered adviser).

Remember the de minimis rule: "5 in 12" — An IA with no place of business in a state may have up to 5 clients in that state during a 12-month period without registering. Think of it as "a handful of clients in a year." The moment the IA gets a 6th client or establishes a place of business, the exemption is lost.

Fiduciary Obligations of Investment Advisers

Investment advisers owe their clients a fiduciary duty, which is the highest standard of care recognized in law. This fiduciary duty was established by the Supreme Court in SEC v. Capital Gains Research Bureau (1963), which held that the Investment Advisers Act of 1940 imposes a fiduciary duty on investment advisers to act in the best interests of their clients.

The fiduciary duty encompasses several specific obligations:

Duty of Loyalty: The adviser must put the client's interests ahead of its own. The adviser cannot benefit at the client's expense and must avoid or fully disclose all conflicts of interest. This includes disclosing any financial incentives, affiliations, or arrangements that could influence the adviser's recommendations.
Duty of Care: The adviser must provide advice that is suitable for the client based on the client's financial situation, investment objectives, risk tolerance, time horizon, and other relevant factors. The adviser must conduct a reasonable investigation before making recommendations and must monitor the client's portfolio on an ongoing basis.
Duty to Disclose: The adviser must make full and fair disclosure of all material facts. Material facts include any information that a reasonable client would consider important in making an investment decision or in deciding whether to hire or retain the adviser. This includes conflicts of interest, disciplinary history, compensation arrangements, and investment risks.
Duty of Good Faith: The adviser must act honestly and in good faith in all dealings with clients. The adviser cannot engage in deceptive or manipulative practices.

The fiduciary duty of investment advisers is broader and more rigorous than the suitability obligation of broker-dealers. While BDs must ensure their recommendations are suitable, IAs must act in the best interest of clients at all times. This means an IA must disclose all conflicts, avoid self-dealing, provide ongoing monitoring, and always prioritize the client's interests. The fiduciary duty applies to all IAs and IARs, whether state-registered or federal covered.

The Brochure Rule (Form ADV Part 2)

One of the most important disclosure obligations is the brochure rule. Investment advisers must deliver a written disclosure document (Form ADV Part 2A, known as the "firm brochure") to clients. The brochure must be delivered to prospective clients before or at the time of entering into an advisory contract, or no later than 48 hours after entering into the contract (in which case the client has 5 business days to terminate without penalty).

The brochure must include information about the adviser's services, fees and compensation, types of clients, methods of analysis and investment strategies, disciplinary information, other financial industry activities, code of ethics, brokerage practices, review of accounts, client referrals and compensation, custody of client assets, investment discretion, and voting client securities (proxy voting).

In addition, advisers must deliver a brochure supplement (Form ADV Part 2B) for each supervised person who provides advisory services to the client. The supplement includes the individual's educational background, business experience, disciplinary history, and other relevant information.

Deep Dive Custody Requirements for Investment Advisers

An investment adviser has custody of client assets when it holds, directly or indirectly, client funds or securities, or has the authority to obtain possession of them. Custody creates significant risks for clients because the adviser could potentially misappropriate the assets. For this reason, both federal and state law impose strict requirements on advisers that have custody.

Under the custody rule, an IA with custody must maintain the client's assets with a qualified custodian (typically a bank, broker-dealer, or trust company). The qualified custodian must send account statements directly to the client at least quarterly. The adviser must undergo an annual surprise examination by an independent public accountant to verify the assets. The adviser must also notify the Administrator promptly if it has or may have custody.

An adviser is deemed to have custody if it has authority to withdraw funds from a client's account (beyond deducting advisory fees), if it acts as a general partner or managing member of a pooled investment vehicle, or if it serves as a trustee for client trusts. Merely having the authority to deduct advisory fees from a client's account may also constitute custody, depending on the specific circumstances and state rules.

Advisers that do not have custody are subject to fewer requirements but must still ensure that client assets are maintained with a qualified custodian and that clients receive regular account statements. The distinction between having and not having custody is an important consideration in structuring an advisory practice.

IA Exclusions and Exemptions from Registration

As discussed in Chapter 1, several categories of persons are excluded from the definition of investment adviser under the USA (the "LATE" exclusions). In addition to these exclusions, the USA provides exemptions from registration for certain advisers who meet the definition but are not required to register.

Persons Excluded from the IA Definition

Persons who are excluded from the definition are not investment advisers at all and therefore have no registration obligation. The key exclusions include:

Lawyers, accountants, engineers, and teachers whose investment advice is solely incidental to their profession
Broker-dealers whose advisory services are solely incidental to their brokerage business and who receive no special compensation for advice
Publishers of bona fide newspapers, news magazines, or financial publications of general and regular circulation
Banks, savings institutions, and trust companies
Federal covered advisers (excluded from the state definition because they are regulated at the federal level)
Any other person excluded by rule of the Administrator

Persons Exempt from IA Registration

Persons who meet the definition of investment adviser but are exempt from registration include:

Advisers with no place of business in the state whose only clients in the state are other investment advisers, broker-dealers, banks, insurance companies, employee benefit plans, government entities, or other institutional investors
Advisers with no place of business in the state who have five or fewer non-institutional clients in the state during the preceding 12 months (the de minimis exemption discussed above)
Any other person exempted by rule of the Administrator

The exam tests the difference between exclusions and exemptions for IAs. Excluded persons are NOT investment advisers at all (they do not meet the definition). Exempt persons ARE investment advisers but are excused from registration. Both excluded and exempt persons remain subject to anti-fraud provisions. The most commonly tested exclusion is the broker-dealer exclusion (advice must be incidental and no special compensation received).