- Investment Advisers — Are Your “IA Reps” Registered as Required? Why You Should Care
- January 7, 2014 | Authors: Peter D. Fetzer; Terry D. Nelson
- Law Firms: Foley & Lardner LLP - Milwaukee Office ; Foley & Lardner LLP - Madison Office
As we approach the end of the calendar year, it is a good time for investment advisers to check if all of its personnel who are providing services as an “investment adviser representative” (“IA Rep”) are registered where required under applicable state securities laws. This annual registration check-up is an important step in preventing and detecting violations of the IA Rep registration requirements. Such violations could lead to both regulatory enforcement actions against the adviser and the IA Rep and provide clients of the adviser serviced by the IA Rep with a private right of action under the applicable state securities law to recoup advisory fees paid during the period of the violation.
An “IA representative” is defined under Rule 203A-3(a)(1) under the Investment Advisers Act of 1940 as a “supervised person” (i.e., an employee, officer or director) of an investment adviser who:
- Has more than 5 natural person clients (other than “excepted persons”); and
- More than 10% of his or her clients are natural persons (other than “excepted persons”). The term “excepted person” means a natural person who is a “qualified client” as defined under Rule 205-3(d)(1) under the Advisers Act. A “qualified client” is defined as a natural person or company client who has at least $1 million under the management of the adviser or has a net worth (together, with the client’s spouse of assets held jointly) of more than $2 million (not including the client’s personal residence as an asset).
This definition of an IA Rep is applicable for supervised persons of a SEC registered IA. For advisers who are registered under state law, the definition of an IA Rep under the applicable state securities law is applied. Generally, most state laws define the term IA Rep in much the same way as under the Advisers Act, but there may be a wider net cast by the state law and state registered advisers should consult with the state securities law of each state in which it and its IA Reps have a place of business.
The state registration requirements for IA reps. of a registered IA generally consist of filing the Form U-4 for the individual electronically through the CRD system, depositing the appropriate registration fees, complying with the IA Rep examination requirements (generally the Series 65 or Series 66 and Series 7 exam) or qualify for a waiver of such examination by having a certain professional designation. Unless the individual applicant has an enforcement history, registration approval is general obtained within 10 to 15 days of filing the application. The applicant should not be acting as an IA Rep for the adviser in the state in which registration is applied at any time prior to obtaining registration by such state.
Generally, an IA Rep is not required to register in any state in which he or she does not have a place of business and has less than six clients in the state during the preceding 12 months.
If the adviser has supervised persons that may potentially provide services as an IA Rep within the near future in a state where registration is required, it is prudent to have those persons apply for registration ahead of time in order to avoid a delay of providing services to clients because the IA Rep was not timely registered to provide the services.
The penalties for noncompliance with the IA Rep registration requirements for both the IA Rep and the adviser can be severe. For example: (i) the state regulator may bring enforcement action (in the form of a fine, administrative order of prohibition or cease and desist, IA registration suspension, revocation or censure, denial of IA Rep registration, or a combination of all of the above). The implementation of enforcement actions by a state regulator would: (i) be required disclosure within the adviser’s publicly available Form ADV and on the IA Rep’s Form U-4; and (ii) provide a private right of action for clients serviced by the IA Rep while not registered which would provide for the return of advisory fees paid during such period, plus interest at the statutory rate and reimbursement of reasonable attorneys fees. Both the adviser and the IA Rep and the officers and directors of the adviser (unless they could show that they could not have reasonably known of the activities resulting in the violations) are jointly and severally liable with respect to each client’s private right of action.