This article addresses the procedure by which an investment adviser registers
with the US Securities Exchange Commission (“SEC”) under the
Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Although this article deals primarily with the procedural aspects of SEC
registration of Registered Investment Advisers (“RIA”), other
memoranda are available with regard to related topics, such as affiliate
registrations, CFTC registration, exemptions from registration in certain cases, or how to set up a hedge fund in the US.
I. Summary of Steps and Obligations
Once an investment adviser determines that it is either required to register
or, assuming it is eligible, wishes to register voluntarily, the applicant
must complete and file Form ADV, which can be found on the SEC’s
http://www.sec.gov. Form ADV contains two parts, which are described in more detail in Sections
III and V of this article:
Part 1 of Form ADV is filed electronically with the Investment Adviser
Registration Depository (“IARD”). Information regarding the
IARD filing can be found on the Commission’s website at:
http://www.sec.gov/divisions/investment/iard.shtml. Part 1 provides for disclosure of detailed information about the applicant,
which, once filed, will be publicly available on the IARD.
- Part 2 of Form ADV contains additional information about the investment
adviser (Part 2A) and its supervised persons (Part 2B). Part 2A (the “Brochure”)
must be filed electronically with the IARD. An applicant is not required
to file Part 2B (the “Brochure Supplement”) of Form ADV, but
it must maintain a copy of each supervised person’s Brochure Supplement
in its files at all times. An investment adviser must initially furnish
its Brochure to a client before or at the time the investment adviser
enters into an advisory contract with such client, and it must initially
furnish a supervised person’s Brochure Supplement to each client
before or at the time when that specific supervised person begins to provide
advisory services to that specific client.
II. Getting Started – The SEC Registrant Entitlement Packet
An applicant, i.e., the investment adviser, must designate at least one
person to serve as the Super Account Administrator with respect to the
IARD. A Super Account Administrator is the person responsible for maintaining
and updating an investment adviser’s Form ADV in the IARD system.
As further described below, the Super Account Administrator will be provided
with access codes to log into IARD and to update an investment adviser’s Form ADV.
Before an applicant can complete and file Parts 1 and 2A of Form ADV, the
applicant must first establish an account with the IARD (referred to as
the IARD User Account). To establish an IARD User Account, the applicant
accesses the IARD website and completes the SEC Registrant Entitlement
Packet that can be accessed at
http://www.iard.com. The SEC Registrant Entitlement Packet consists of the following:
- A memorandum from the Financial Industry Regulatory Authority (the “FINRA”)
Two forms for completion:
- The FINRA Entitlement Agreement (“FEA”); and
- The IARD Super Account Administrator (“SAA”) Entitlement Form.
The applicant submits (i) the FINRA Entitlement Agreement, (ii) the IARD
Account Administrator Entitlement Form, and (iii) the CRD Participant
IA-Only Account Administrator Entitlement Form (CRD Participant IA-Only
AEFF) in paper form to the FINRA Entitlement Group. The FINRA Entitlement
Group processes the forms. Thereafter, FINRA will contact the applicant’s
Super Account Administrator and provide the Super Account Administrator
with the following:
- The investment adviser’s CRD number;
- The Super Account Administrator’s User ID; and
- The initial password for accessing IARD.
At that point, FINRA does the following:
- Sets up the applicant’s IARD User Account; and
- Sets up the IARD Financial Account for billing and payment of fees.
Next, within seven to ten business days, FINRA will contact the Super Account
Administrator via e-mail with a link to the IARD Confirmation Packet.
The IARD Confirmation Packet provides the Super Account Administrator
with information regarding the Super Account Administrator’s role,
responsibilities, security information, and links to other information.
The IARD Confirmation Packet contains the following six attachments:
- Recommended Hardware/Software Configuration;
- Account Management Tool General Overview;
- IARD Account Administrator Roles & Responsibilities;
- Password Change Instructions;
- Password Change Instructions for IARD Users; and
- FINRA Entitlement Program Support.
III. The IARD Financial Account
An applicant is required to have sufficient funds on deposit to cover its
initial setup fee prior to filing Parts 1 and 2A of Form ADV. Moreover,
once the applicant has become a RIA, it must ensure that there are sufficient
funds in the IARD Financial Account to cover the annual updating fees.
The fees are rather modest, assessed on a sliding scale depending upon
the amount of assets under management. Currently, the fee schedule is
Note that the applicant may send the appropriate fees by Web E-Pay, check
or by wire. Details on how to submit funds by Web CRD/IARD E-Pay, check
or wire can be found at
http://www.iard.com/fee_schedule.asp. Allow 48 hours for the processing of funds. Once the funds are credited
to the applicant’s IARD Financial Account, the filing may proceed.
IV. Completing Part 1 of Form ADV
Part 1 of Form ADV requires the investment adviser to disclose information
about its business, the persons who own or control it and whether it or
its key personnel have been sanctioned for violating securities or other
laws. It is critical that the applicant provide full disclosure because
it is unlawful under the Advisers Act to willfully make an untrue statement
of material fact or to willfully omit a material fact in any registration
application or report. An applicant that fails to comply runs the risk of having its registration
revoked and/or potentially being subject to administrative proceedings
and civil penalties.
B. Responses and Disclosures
When completing Part 1 of Form ADV, an applicant is required to disclose,
among other things, the following:
- The investment adviser’s principal office and place of business,
its contact information, and business hours.
- The investment adviser’s web site address, if any.
- Where the investment adviser’s books and records are maintained.
- Whether the applicant has filed notice as an investment adviser at the
state-level and, if so, with which states.
- The investment adviser’s form of organization: corporation, sole
proprietorship, Limited Liability Company, partnership, limited liability
partnership or other.
- The number of employees and their functions.
- The number of clients and type of client.
- Compensation arrangement (details regarding the investment adviser’s
existing compensation arrangements with its clients).
- The amount of assets under management.
- Whether the investment adviser is registered in another capacity, e.g.
a commodity pool operator.
- Whether the investment adviser is affiliated with another financial institution,
e.g. a broker-dealer.
- Whether the investment adviser engages in principal transactions or agency
Whether the investment adviser has custody of its clients’ cash or
The identity of the investment adviser’s direct owners, indirect
owners and executive officers.
- The disciplinary history of the investment adviser.
The disciplinary history of the investment adviser’s “advisory
Pursuant to the SEC’s recent amendment of Form ADV Part 1, the following
information is now also required to be disclosed:
- The requirements met by the investment adviser which allow for registration
with the SEC.
- Additional information about the investment adviser’s advisory business.
- Additional client data.
- Information regarding each private fund advised by the investment adviser.
- The investment adviser’s business and custodial practices.
- Additional disciplinary event information.
Note that the term “assets under management” now refers to
“Regulatory Assets Under Management” (“RAUM”)
which is different from “AUM” and “Net Asset Value”
(“NAV”) as used in the industry. RAUM starts with the asset
side of the balance sheet and includes assets that previously were disregarded
and now must be included such as: (i) family or proprietary assets, (ii)
assets advised without receiving compensation and (iii) assets of foreign
clients. In addition, investment advisers must calculate their regulatory
assets under management on a gross basis. With respect to the assets of
private funds, the SEC imposed certain additional requirements for advisers
to such funds in calculating their regulatory assets under management:
(i) an investment adviser must include the value of assets of any private
fund for which it provides “continuous and regular supervisory or
management services” regardless of nature of the assets of the fund
(i.e., once a fund is a "private fund" all of the fund's
assets must be included in the calculation regardless of what portion
of such fund’s portfolio is comprised of "securities");
(ii) an investment adviser must include uncalled capital commitments of
private funds in its calculation, and (iii) an investment adviser must
use market value for assets of private funds, or fair value where the
market is not available.
Once Part 1 of Form ADV is filed with the SEC, the SEC generally has forty-five
(45) days after receipt of the Form ADV to declare an applicant’s
registration effective or to institute a proceeding to determine whether
to deny registration. The SEC will mail an Effective Order to an applicant
once an applicant’s registration is declared effective. In practice,
an applicant can expect a response from the SEC granting registration
within two week after filing Part 1 of Form ADV.
V. Continuing Obligations with Respect to Part 1 of Form ADV
A registered investment adviser is obligated to file certain amendments
to Form ADV Part 1 through the IARD system as follows:
A. Prompt Amendments
An investment adviser must promptly file an amendment if:
Information provided in the most recent Form ADV in response to the following
items in Part 1A becomes inaccurate in any way:
- identifying information, including name of the investment adviser, address,
contact person, etc. (Item 1);
- type of entity (e.g. limited liability company, limited liability partnership,
corporation, etc.) and/or state of organization or fiscal year information (Item 3);
- changes to an investment adviser’s or related person’s custody
of client assets (Item 9); and
- disciplinary disclosure for the investment adviser and its “advisory
affiliates” (Item 11).
- Information provided in the most recent Form ADV in response to the following
items in Part 1A becomes materially inaccurate in any way:
- succession to the business of another investment adviser (Item 4);
- participation or interest in client transactions (including any proprietary
or sales interest or changes in investment or brokerage discretion) (Item 8); and
- direct and indirect control persons of the investment adviser (Item 10).
B. Annual Amendments
With respect to any other changes to Part 1 of Form ADV, amendments are
required to be filed annually within ninety (90) days after the investment
adviser’s fiscal year end. The investment adviser will be charged
the IARD annual fee at the time the investment adviser makes its annual
amendment, which is due within ninety (90) days after the investment adviser’s
fiscal year end.
VI. Completing Part 2 of Form ADV
A. The Brochure
Part 2A contains eighteen separate disclosure items on topics such as fees
and compensation agreements, conflicts, types of advisory clients, investment
strategies and risk, brokerage practices and other financial information
that must be addressed in a “plain English” style in the Brochure.
The SEC amended Advisers Act Rule 204-1 to require all investment advisers
to file their new Brochures electronically with the SEC via the IARD system
as a text-searchable PDF attachment to Form ADV Part 1. There is also
a new requirement to summarize material changes made to Part 2A since
the investment adviser’s last annual amendment. The Brochure must
be updated annually, and investment advisers may create separate brochures
for different types of advisory clients.
Advisers Act Rule 204-3 requires investment advisers to make an initial
delivery of a current Brochure before or at the time the investment adviser
enters into the contract with a client. An investment adviser must also
deliver to each client annually (within one hundred and twenty (120) days
of the end of such investment adviser’s fiscal year) either a copy
of the current Brochure that includes a summary of all material changes,
or a summary of all changes with an offer to provide a copy of the current
Brochure without charge. Investment advisers must also make interim deliveries
of the updated Brochure to clients when there is a new disclosure of a
disciplinary event or a material change to disciplinary information. As
an alternative to delivering the Brochure on an interim basis to reflect
these changes, investment advisers may deliver a statement describing
the material facts relating to the change.
B. The Brochure Supplement
Advisers Act Rule 204-3 requires that each Brochure be accompanied by Brochure
Supplements that provide information about the advisory personnel on whom
the particular client relies for investment advice. Brochure Supplements
must be prepared for each supervised person who either (i) formulates
investment advice for that client and has direct client contact, or (ii)
makes discretionary investment decisions for that client’s assets,
even if the supervised person has no direct client contact. The Brochure Supplements contain disclosure items about the relevant supervised
persons including (but not limited to) their formal education and business
background for the past five (5) years, material legal or disciplinary
events, compensation, economic benefits and an explanation of how the
investment adviser monitors the advice provided by the supervised person.
Investment advisers are not required to file the Brochure Supplements with
the SEC. However, the Brochure Supplements for supervised persons must
initially be given to each client or prospective client before or at the
time when that specific supervised person begins to provide advisory services
to that particular client. As with the Brochure, interim deliveries must
also be made when there is new disclosure of a disciplinary event or a
material change to disciplinary information already disclosed, accompanied
by a statement describing the revised material facts. However, unlike
the Brochure, investment advisers are not required to deliver Brochure
Supplements annually to existing clients.
VII. Selected Continuing Obligations of a Registered Investment Adviser
A. Books and Records
Once the investment adviser is registered with the SEC, the SEC has the
ability to conduct an examination of the adviser’s books and records.
The recordkeeping requirements for all investment advisers are set forth
in Advisers Act Rule 204-2 and generally fall into two categories: general
accounting and business records, and additional records required due to
the fiduciary nature of the advisory business. All records must be maintained
in a “true, accurate and current” manner. Of note, the SEC has stated that for foreign advisers registered in the
US, only records relating to transactions involving US resident clients
must be maintained for certain recordkeeping requirements (as detailed below).
Rule 204-2 requires that all advisers maintain the following general records
- Accounting records (ledgers, checkbooks, bank statements, bills, financial
- A memorandum detailing each security order (which must include terms and
conditions of each order, identity of persons involved and account information,
for transactions involving US persons only);
- Documents supporting performance information (for transactions involving
US persons only);
- All written contracts;
- Lists of discretionary accounts;
- All powers of attorney (for transactions involving US persons only);
- Documents supporting personal securities transactions of any “advisory
- All written communications (including all writing related to recommendations
and advice, the execution of orders and the receipt and disbursement of
client funds, for transactions involving US persons only, in certain circumstances);
All email and electronic communications (For transactions involving US
persons only, in certain circumstances);
- Separate retention policies apply for email and electronic record storage.
- Client solicitation agreements; and
Rule 204-2(b) requires that advisers who have custody of client assets
must maintain additional records, including but not limited to:
- Record of all purchases, sales, receipts and deliveries of securities;
- Separate record for each client’s account showing all of the above
- Record of all securities in which any client has a position;
- Copies of custody compliance procedures;
- Copies of transaction confirmations; and
Copies of all internal control reports.
All advisers to private funds must also maintain separate records relating
to each private fund that is advised. These records include but are not
- The amount of assets under management (“AUM”) and use of leverage;
- Records of each client’s securities transactions;
- Information regarding each security owned by any client;
- Copies of all proxy voting procedures (if applicable); and
Additional proxy voting records.
In addition to maintaining all necessary records, registered advisers must
also have policies and procedures in place to ensure that all records
are maintained in the correct manner. All records required to be maintained
under Rule 204-2 must be kept for a period of at least five (5) years
following the end of the fiscal year during which the last entry was made
on a particular record, the first two (2) years of which the records must
be kept in an “appropriate office” of the adviser.
Depending on the type of advisory activities that an adviser engages in,
there may be additional recordkeeping rules that apply (i.e. Commodity
Futures Trading Commission (“CFTC”) or National Futures Association
(“NFA”) rules). Please contact us for a complete list of all
of the required books and records that must be maintained by a registered
investment adviser under the Advisers Act and any other applicable statutes.
If a registered investment adviser is deemed to have custody of its clients’
assets, it must comply with Rule 206(4)-2 of the Advisers Act. The adviser
must therefore maintain those funds and securities with a qualified custodian
and must notify all clients promptly in writing of the name and address
of the qualified custodian as well as the manner in which the funds and
securities are maintained. The qualified custodian is also required to
send account statements to all clients of the adviser on at least a quarterly
basis. These statements must:
- Identify the amount of funds and each security in the client’s account; and
- Detail all the transactions in the client’s account during the past quarter.
In addition, the adviser must have a reasonable basis, after due inquiry,
for believing that the qualified custodian has sent the account statements
to all clients. The adviser can form this “reasonable belief”
by obtaining a copy of the account statement delivered to the clients
by the qualified custodian.
While the adviser may also send account statements to its clients, this
cannot substitute for the requirement that the statements must be sent
by the qualified custodian. If the adviser voluntarily sends its own statements
to clients, the required notice and the statements sent by the adviser
must include a legend directing the client to compare the account statements
received from the adviser to those received from the qualified custodian.
The adviser must also be subject to a “surprise examination,”
an examination that takes place at least once each calendar year by the
adviser’s independent public accountant. This examination must take
place at the time of the accountant’s choosing without any prior
notice to the adviser. The adviser must also enter into a written agreement
with the accountant that provides the following:
- The first surprise examination must occur within six (6) months of the
adviser having custody of client funds;
- The accountant must file Form ADV-E with the SEC within one hundred and
twenty (120) days after the examination, confirming that the surprise
examination has taken place and describing the nature of the examination;
- The accountant must notify the SEC within one (1) business day of finding
any material discrepancies during the examination; and
- The accountant must file Form ADV-E within four (4) business days of resignation,
dismissal or termination of the engagement, accompanied by a statement
that includes the nature of the resignation, dismissal or termination
of the engagement and an explanation of any related problems concerning
Advisers to hedge funds and certain other private funds can avoid the “surprise
examination” requirement the notice requires and the quarterly account
statement requirement if those hedge funds and private funds are audited
at least annually by an independent public accountant that is registered
with, and subject to regular inspection by, the Public Company Accounting
Oversight Board (“PCAOB”) and the fund distributes its audited
financial statements prepared in accordance with Generally Accepted Accounting
Principles (“GAAP”) to all investors within one hundred and
twenty (120) days of its fiscal year end (or one hundred and eighty (180)
days for fund of funds). However, if the adviser advises only managed
accounts, this relief is not available. Also, the “surprise examination”
requirement will not apply to an adviser that maintains client funds and
securities with a qualified custodian and has custody of client assets
solely because of the adviser’s authority to deduct advisory fees
from client accounts.
C. Blue Sky/State Regulation Issues
Depending on where the investment adviser’s investors are located,
the adviser may need to make the appropriate “Blue Sky” filings
in certain states. The filing requirements and fees vary from state to
state. Some states also require notice registration filings.
VIII. Form PF
Any RIA that advises one or more private funds and has more than $150 million in AUM must file Form PF.
Form PF refers to two categorical “sizes” of investment advisers
that impact the frequency and detail of an investment adviser’s
- “Smaller” private fund investment advisers are those that have
between $150 million and $1.5 billion in AUM. These investment advisers
will have to make Form PF filings annually. All smaller private fund investment
advisers will have to make their first filing within one hundred and twenty
(120) days of the end of the investment adviser’s fiscal year. These
investment advisers must fill out Form PF Section 1a (general information
about the investment adviser and its clients), Section 1b (specific information
regarding its private funds) and Section 1c (specific information about
any hedge fund clients).
- “Large Private Fund Advisers” are those that have at least
$1.5 billion in aggregate AUM. These investment advisers will have to
file Form PF reports quarterly rather than annually within sixty (60)
days following the end of each quarter. In addition to filling out Sections
1a, 1b and 1c of Form PF, Large Private Fund Advisers who advise hedge
funds must also fill out Sections 2(a) and 2(b), which require information
about the hedge funds being advised, exposures and trading, risk metrics,
financing and investor information. Advisers to liquidity funds must fill
out Section 3, which requires information on their aggregate advised liquidity
funds’ identifying and operation information, assets, financing
and investor information. Advisers to private equity funds must fill out
Section 4, which requires information on their aggregate advised private
equity funds’ identifying, financing and investment information.
If an investment adviser’s AUM increases to over $1.5 billion so
as to affect its categorization under Form PF, it may have to transition
from the smaller adviser reporting level to the Large Private Fund Adviser
reporting level. Such investment advisers will switch from annual to quarterly
reporting at the next end-of-quarter following the aforementioned change
in AUM. If an investment adviser’s AUM decreases under the Large
Private Fund Adviser threshold, it must file a supplemental Form PF confirming
its eligibility for the new annual reporting level as a smaller private
Lastly, in addition to the above the following investment advisers must
comply with Form PF filing requirements:
- Any investment adviser with at least $5 billion in RAUM attributable to
hedge funds as of the last day of the fiscal quarter most recently completed;
- Any investment adviser managing a liquidity fund with at least $5 billion
in RAUM attributable to both liquidity funds and registered money market
funds as of the last day of the fiscal quarter most recently completed
prior to; and
- Any investment adviser with at least $5 billion in RAUM attributable to
private equity funds as of the last day of its first fiscal year.
For more information on the topic discussed, contact
Michael G. Tannenbaum at
firstname.lastname@example.org or the partner with whom you deal at the law firm.
Michael G. Tannenbaum, is a founding partner of Tannenbaum Helpern Syracuse & Hirschtritt
LLP in New York and is co-head of its Financial Services, Private Funds
and Capital Markets Practice.
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Note that while there are several exemptions from SEC registration that
are available to investment advisers, there are also reporting requirements
that apply, even for those advisers that are otherwise exempt. Such advisers
are called “Exempt Reporting Advisers” (ERAs) and care should
be taken to comply with those requirements. Please contact us if you need
further information about this aspect the regulations.
Section 207 of the Advisers Act.
In the context of US domiciled funds, a hedge fund manager acting as the
general partner to a limited partnership (or as the managing member to
a limited liability company) is deemed to have custody and therefore must
comply with the custody rule under Rule 206(4)-2 under the Advisers Act.
In the context of non-US domiciled funds, the SEC staff has taken the
position that if a member of the investment adviser is acting as one of
the directors of the non-US domiciled fund, the SEC may deem the investment
adviser to have custody because the position of being a director gives
that person the power to direct funds and securities and therefore such
a person can potentially abscond with the funds and securities.
Note that Rule 206(4)-7 of the Advisers Act requires a registered investment
adviser to identify the Chief Compliance Officer on Schedule A, Item 2(a)
of Form ADV Part 1.
“Advisory affiliates” are (1) all of the adviser’s current employees
(other than employees performing only clerical, administrative, support
or similar functions); (2) all of the adviser’s officers, partners,
or directors (or any person performing similar functions); and (3) all
persons directly or indirectly controlling the adviser or controlled by
If advice for a client is provided by a team of more than five (5) supervised
persons, Brochure Supplements need only be provided to the client for
the five (5) supervised persons with the most significant responsibility
for the day-to-day advice given to that client.
See Advisers Act Rule 204-2(a).
See Mercury Asset Management plc, SEC No-Action Letter (Apr. 16, 1993).
See generally Advisers Act Rule 204-2.
See Advisers Act Rule 204-2(b).
See Advisers Act Rule 204-2(c).
See Advisers Act Rule 204-2(e)(3)(i).
For the purposes of Form PF, included in any aggregate AUM calculation
are (i) “parallel managed accounts” and (ii) the AUM of any
“related person” of the adviser. “Parallel managed accounts”
are “assets of managed accounts advised by the firm that pursue
substantially the same investment objective and strategy and invest in
substantially the same positions as the private fund.” However,
parallel managed accounts do not need to be included if the value of those
accounts exceeds the value of the private funds with which they are managed.
A “related person” is any officer, partner or director of
the adviser, all persons directly or indirectly controlling, controlled
by or under common control with the adviser, and all of the adviser’s
employees (other than those performing clerical function), other than
related persons that are “separately operated”.