Registering as an Investment Adviser

The Investment Advisers Act makes it unlawful for an investment adviser, unless registered, to use the mails or any means of interstate commerce in connection with the advisory business. Two questions follow from that sentence. The first is whether a person falls within the statutory definition of investment adviser at all. The second, for those who do, is which regulator takes the registration. Neither question is answered by preference.

Who falls within the definition

The statutory definition captures any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing or selling securities, and any person who for compensation and as part of a regular business issues analyses or reports concerning securities. The three elements are compensation, a business, and advice about securities. All three must be present, and the compensation need not be a separate fee.

Compensation is read broadly. It need not come from the person advised, need not be labeled an advisory fee, and need not be the firm's only or principal revenue. A commission, a share of another party's fee, or a bundled charge that includes an advisory element all satisfy the element. What the element excludes is genuinely uncompensated advice, which in a commercial setting is rarer than firms assume.

A list of exclusions follows. Banks and bank holding companies fall outside within limits. So do lawyers, accountants, engineers and teachers whose advisory services are solely incidental to their professions. Publishers of bona fide newspapers and financial publications of general and regular circulation are excluded, as are persons whose advice is limited to United States government securities. The exclusion of greatest practical consequence is the one for brokers and dealers whose advisory performance is solely incidental and who receive no special compensation for it.

Which regulator takes the registration

Federal law divides the field. An adviser regulated by the state in which it maintains its principal office is generally barred from registering with the Commission unless it has assets under management above a statutory threshold or advises a registered investment company. Advisers below that line register with their state securities regulator and, where they operate across state boundaries, with additional states under those states' own rules.

Between the state tier and the federal tier sits a category of mid-sized advisers. An adviser in that band registers with the Commission only where the home state does not examine advisers, or where the adviser would otherwise be required to register in fifteen or more states. The design pushes the examination function to whichever regulator is actually equipped to perform it, and it means two firms of identical size can end up with different regulators depending on where they sit.

What the application form asks

Registration is made on Form ADV, filed electronically. Part 1 collects structured data: ownership, control persons, the business's size and client types, custody arrangements, affiliations, and a lengthy disciplinary history section covering the firm and its advisory affiliates. Part 2 is the narrative brochure written in plain English. Part 3 is a short relationship summary for retail investors. States impose their own supplements and, unlike the federal regulator, may review the substance of an application before allowing it to proceed.

The form is also the source of the public record. Both parts are published through the regulator's disclosure system, which means the brochure a firm writes for clients is simultaneously a document any competitor, journalist or plaintiff can read. That dual audience shapes drafting, and it is one reason firms are tempted toward generality in the very items where specificity is required.

The disciplinary section is the part that most often causes difficulty, because its questions reach beyond securities matters into criminal charges, regulatory actions by any authority, and certain civil judgments, and because they extend to persons who are not obviously within the firm. Answering affirmatively does not bar registration. Answering inaccurately is itself a violation, and it supplies a straightforward enforcement theory that does not require proving anything about the underlying conduct.

Custody is the item most likely to be misanswered. The form's definition reaches arrangements a firm may not think of as custody, including authority to deduct fees directly from client accounts, possession of client login credentials, and service as trustee or general partner of a pooled vehicle. Reporting custody triggers additional obligations, including a surprise examination in some configurations, which is why the answer is examined closely.

When registration takes effect

The statute provides that registration becomes effective within forty-five days of the filing of an application, unless the Commission institutes proceedings to determine whether registration should be denied. That is a lapse-of-time mechanism rather than an approval. Staff comments during the period are common and are usually resolved by amendment, and a firm that files an incomplete application will find the clock effectively restarted by the need to refile.

State practice differs and is often more interventionist. Several states review the substance of the brochure, the advisory contract and the fee schedule before allowing an application to proceed, and some impose net capital or bonding requirements that have no federal analogue. A firm registering in multiple states should expect the process to be governed by whichever state is slowest and most exacting.

Effectiveness is the start of a continuing set of obligations rather than the end of a process. The annual updating amendment, the brochure delivery cycle described in the disclosure brochure and its annual update, the recordkeeping regime set out in books and records and how long they are kept, and the written compliance program all begin on the effective date, and each is tested in the periodic examination the registration makes the firm subject to.

Registration status also determines which conduct standard applies to the firm's recommendations. An adviser is a fiduciary under the antifraud provisions of the Advisers Act, while a broker-dealer making a recommendation to a retail customer is governed by a separate rule. The comparison is drawn in adviser or broker: which rules apply, and the substance of the retail standard is set out in the standard owed to a retail customer.