Registration and Compliance 


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    Investment Advisers

    Fiduciary Duty
    The Advisers Act imposes a fiduciary duty on investment advisers. An investment adviser has an affirmative duty of utmost good faith to act solely in the best interests of the client and to make full and fair disclosure of all material facts. The SEC has indicated that an adviser’s fiduciary duties include: 

    • A duty to have a reasonable independent basis for its investment advice
    • A duty to obtain best execution for client’s securities transactions where the adviser directs brokerage
    • A duty to ensure its investment advice is in the best interest of the client
    • A duty to refrain from effecting personal securities transactions inconsistent with client interests
    • A duty of loyalty to clients
    • A duty to disclose conflicts of interest

    The fiduciary duty an investment adviser owes its clients is a key legal difference between an investment adviser and a broker-dealer. A broker-dealer or a registered representative of a broker-dealer is not a fiduciary when rendering investment advice in connection with executing securities transactions for its clients, rather the investment recommended must merely be suitable to the client.


    Federal Registration

    SEC registration begins with the Form ADV, which is completed by the corporation, partnership, or other entityrather than an individualwhich operates as the investment adviser. The adviser’s registration covers its employees. The Form ADV is submitted electronically to the SEC through the Investment Advisers Registration Depository (IARD), which is operated by the Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD). Fees are paid according to the amount of assets under management. The SEC will review your Form ADV after it is filed and, within 45 days, grant registration or contact you with further questions.


    Among your ongoing compliance obligations as an investment adviser, you must:
      

    1. Amend your Form ADV upon changes to certain items of the Form ADV or your adviser’s brochure
    2. File an Annual Updating Amendment within 90 days after your fiscal year


    State Registration

    To be required to register as an investment adviser with a state, you must meet a certain threshold. Generally, a state cannot impose registration if you (i) do not have a place of business in the state and (ii) had fewer than six clients (similar to the federal definition of “client”) who are state residents in the last 12 months. This is only a registration threshold; it does not preclude states from bringing actions against you for fraud and deceit. 

    If you must register with a state, the process includes filing and disclosure obligations. Registration procedures are similar to the SEC’s, and with many states you can file a Form ADV, along with certain supplementary forms and schedules. Annual renewals and fees will be entailed.


    Compliance

    Other ongoing compliance obligations may include:

    • Providing disclosure and financial statements to clients
    • Examinations and qualifications
    • Photographs and fingerprints
    • Limits on advisory fees
    • Limits on advertising and certain business practices
    • Restrictions on custody of client assets
    • Principal or agency cross transactions
    • Limits on wrap fees
    • Avoiding conflict of interest situations
    • Restrictions on sharing advisory compensation
    • Licensing of representatives
    • Continuing education
    • Record retention
    • Maintaining customer complaint files
    • Capital or financial adequacy
    • Customer background documentation
    • Guidelines on electronic communication and Internet use
    • Drafting a code of ethics
    • Compliance policies and procedures
      • Persons or companies that have at least $750,000 under management of the adviser 

      • Persons or companies the adviser believes to have a net worth of more than $1.5 million or are “qualified purchasers” under the Investment Company Act

      • Persons who are officers, directors, trustees or general partners of the adviser

      • Employees of the adviser who have participated in the adviser’sor another company’s investment activities for at least 12 months 

      If you are an investment adviser representative, any state in which you do business can impose registration, licensing or qualification requirements. For example, you may have to file a Form U-4 and pay a fee, and you may have to pass a Series 65 Uniform Investment Adviser Law or Series 66 Uniform Combined State Law Examination unless you have received certain industry certifications such as Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Chartered Financial Consultant (CFC), or the Personal Financial Specialist (PFS) designation. 


      Broker-Dealers

      Definition of “Broker” and “Dealer”

      Broker-dealers are subject to regulation under the Securities Exchange Act of 1934 (the Exchange Act). The Exchange Act defines a “broker” as any person engaged in the business of effecting securities transactions for the account of others. A “dealer” is defined as any person engaged in the business of buying and selling securities for his own account. A broker acts as agent, while a dealer acts as principal.

      Federal Registration

      The Exchange Act generally makes it unlawful for a broker or dealer to use any means of interstate commerce to affect transactions in securities unless the broker or dealer is registered with the SEC.


      Individuals who work for a registered broker-dealer are referred to as “associated persons,” whether they are employees or independent contractors of the broker-dealer. These individuals are also referred to as “registered representatives.” Although associated persons usually do not have to register separately with the SEC, they must be properly supervised by a registered broker-dealer and be registered with applicable self-regulatory organizations.


      To register as a broker-dealer, an entity must:

      • File a Form BD and register with the SEC
      • Become a member of a self-regulatory organization (SRO)for example, FINRA or a national securities exchange
      • Become a member of the Securities Investor Protection Corporation (SIPC)
      • Comply with applicable state requirements
      • Ensure that its associated persons satisfy qualification and registration requirements

      Form BD.  Broker-dealers register with the SEC by filing a Form BD (Uniform Application for Broker-Dealer Registration) through the Central Registration Depository (CRD), a central registration information data bank and application processing facility operated by FINRA. There is no SEC filing fee. 


      Within 45 days of filing a completed application, the SEC will either grant registration or begin proceedings to determine whether it should deny registration. An SEC registration may be granted with the condition that SRO membership must be obtained. The SROs have separate membership application procedures and are not required to act within 45 days of filing an application. Time frames for registration with individual states may also differ from the federal and SRO time frames.


      A registered broker-dealer must promptly update its Form BD by filing amendments whenever information on file becomes inaccurate or incomplete for any reason.



      FINRA Membership
      .  In addition to registering with the SEC, a broker-dealer must become a member of an SRO, such as FINRA, or a national securities exchange. SROs assist the SEC in regulating the activities of broker-dealers.
      Submitting an application for membership in FINRA is a significant undertaking. Some firms utilize service bureaus for assistance in completing and processing FINRA membership applications. The FINRA membership process takes up to180 days to complete.


      An applicant for FINRA membership must prepare and submit Form NMA (New Member Application) electronically through the CRD, pre-fund filing fees, submit a notarized Form BD and prepare and submit Form U-4 for each associated person.  


      Form NMA requires detailed information concerning the applicant’s business activities and operations, ownership organization and structure, business lines, personnel, net capital and sources of funding, contractual and business arrangements, policies and procedures, facilities and recordkeeping systems. A membership interview between a representative of the applicant and the FINRA district office staff is required. After considering the application, membership interview, other information provided by the applicant and the public interest, FINRA issues a decision whether the application is granted, granted with restrictions, or denied.


      Click here
      for additional information on becoming a FINRA member.



      SIPC Membership
      .  A registered broker-dealer must be a member of the Securities Investor Protection Corporation (SIPC). SIPC insures that its members’ customers receive back their cash and securities in the event of a member’s liquidation, up to $500,000 per customer for cash and securities.

      State Registration 

      Every state has its own requirements for broker-dealers conducting business in that state. A broker-dealer and its associated persons are required to register in the state(s) where they maintain an office, and may need to register in each state in which clients are located. Most state securities agencies use the CRD system for processing the Form BD and registration fees. The CRD system also processes applications for associated person registration for the states.

      Compliance

      Broker-dealers must comply with applicable federal and state securities laws, and with FINRA requirements designed to maintain high industry standards.


      Ongoing obligations include:  
      • Duty of fair dealing to customers
      • Suitability requirements for customers
      • Duty of best execution
      • Customer confirmations
      • Disclosure of credit terms
      • Restrictions on short sales, trading during an offering and insider trading
      • Restrictions on private securities transactions
      • Analyst requirements
      • Penny stock rules
      • Privacy of consumer financial information
      • Minimum net capital
      • Use of customer balances and customer protection
      • Required books, records and reports
      • Risk assessment requirements
      • Written supervisory procedures
      • Examinations and inspections
      • Limits on advertising
      • Fidelity bonds
      • Lost and stolen securities
      • Fingerprinting requirements
      • Use of electronic media and electronic signatures
      • Anti-money laundering program
      • Office of Foreign Assets Control regulations
      • Business continuity planning

      Click here for additional information on broker-dealer regulation:


      Associated Persons

      Persons associated with a registered broker-dealer must register with FINRA based on the type of business engaged in by the broker-dealer, the securities products handled by the individual, and the capacity in which the individual functions. FINRA prescribes two levels of qualification and registration:

      • Registered representatives generally sales personnel engaged in securities business activities.
      • Principalsgenerally officers of the applicant and other management and supervisory personnel involved in day-to-day management or operations of the applicant’s securities business.


      Principals and registered representatives must pass qualifying examinations, for example the Series 7 General Securities Representative for registered representatives and the Series 24 General Securities Principal for principals. 


      Click here
      for additional information on qualifications exams.

      Solicitors

      A registered investment adviser (including a broker-dealer also registered as an investment adviser) may pay cash referral fees to third parties, including accountants, for soliciting clients for or referring clients to the adviser if the following requirements are met:

      • The solicitor is not subject to a statutory disqualification (such as an SEC order, conviction of certain crimes or enjoined from certain conduct or investment activities)
      • The fee is paid under a written agreement which describes the solicitor’s activities, its compensation and requires the solicitor to deliver the adviser’s brochure to the client
      • Written disclosure to the client regarding the relationship between the adviser and solicitor, the compensation arrangement, and the amount being charged to the client in addition to the advisory fee
      • Written acknowledgment from the client of receipt of the adviser’s brochure and the solicitor’s separate disclosure document.


      CPA firms receiving referral fees should consult state board of accountancy rules to confirm that the firm can receive such compensation.


      Review the
      AICPA Code of Professional Conduct for more information.

       

       

       

       

       

       

       

       

       

       

       

       

       




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