RIA Compliance and Practice Management Blog

RIA Registration with the SEC as a Multi-State Investment Adviser

Posted by RIA in a Box

Oct 10, 2017 10:08:11 AM

Registering with the SEC as a multi-state advisorWhile many registered investment adviser ("RIA") firms aspire to qualify for federal registration with the Securities and Exchange Commission ("SEC"), many firms will never reach the traditional qualification of $100 million in regulatory assets under management. One option for firms with less than $100 million in regulatory AUM to explore is to register as a multi-state adviser with the Commission. SEC Rule 203A-2(d) provides this exception from the general prohibition from SEC registration for RIA firms that are required to be registered in 15 or more states. 

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The key word for RIA firms to focus in on here is “required”. Merely registering the firm in 15 states is not sufficient to qualify the firm to register with the SEC. Rule 203A-2(d)(1) reads as follows:

Upon submission of its application for registration with the Commission, is required by the laws of 15 or more States to register as an investment adviser with the state securities authority in the respective States, and thereafter would, but for this section, be required by the laws of at least 15 States to register as an investment adviser with the state securities authority in the respective States.

Some background on the rule is in order. Prior to the implementation of the Dodd-Frank RIA registration threshold changes, the multi-state adviser exemption was only available to firms required to be registered in 30 or more states. With the minimum regulatory AUM needed to qualify for SEC registration increasing from $25 million to $100 million, the geographic footprint necessary to claim the multi-state adviser exception was reduced to 15 states. This enabled firms who had previously been registered with the SEC, but did not have the necessary regulatory AUM post-Dodd-Frank to remain SEC-registered based on the geographic reach of the firm. This geographic footprint reduction allowed mid-sized firms in multiple states to avoid dealing with the differences in securities regulations from state to state, which carries its own set of complications. As of October 1, 2017, of the 12,616 RIA firms registered with the SEC, 117 firms rely on the "multi-state adviser" exception to qualify the firm for federal registration.

In particular, this exemption can also help firms that exclusively or primarily provide continuous financial planning services to clients to qualify for SEC registration. Given that many financial planning-focused RIA firms with a large geographic footprint may not technically manage regulatory AUM, this exemption can be highly valuable.

However, as with any exemption claimed, the advisory firm must be able to articulate and document the reason(s) the exemption applies. When claiming the multi-state adviser exception, the firm must maintain a list of all states in which the firm would be required to register and the basis for that determination in “an easily accessible place”. In particular, Rule 203A-2(d)(3) reads as follows:

Maintains in an easily accessible place a record of the States in which the investment adviser has determined it would, but for the exemption, be required to register for a period of not less than five years from the filing of a Form ADV that includes a representation that is based on such record.

Registration requirements vary from state to state, so the determining factor for a registration requirement in one state may not apply in another. The firm must review their rationale regularly to ensure they are still required to be registered in each state on the list. Firms utilizing this multi-state exemption should maintain a spreadsheet to list the states and reasons the firm would be required to register in. As stated above, this list must be retained for at least 5 years from the Form ADV filing to which the list applies. This means that the firm should update the list at least annually and retain a 5-year look back for the states in which the adviser was required to be registered. If at any point the adviser is no longer required to register in 15 or more states, the firm loses the ability to claim the multi-state adviser exception and is required to de-register with the SEC and instead register with all the applicable states.

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As RIA compliance consultants, we strongly advise all RIA firms exploring the multi-state registration exemption to perform careful diligence to ensure the firm qualifies for the exemption. Firms utilizing the exemption should expect SEC regulatory examination staff to carefully probe the firm's documentation related to its use of the exemption as it is commonly misused. Our team of compliance experts stand ready to help you navigate the varying state registration requirements and help determine whether the multi-state adviser exception provides your firm a pathway to SEC registration.

Lexington Compliance, RIA in a Box LLC, and MyRIACompliance are not law firms, investment advisory firms, or CPA firms. Lexington Compliance, RIA in a Box LLC, and MyRIACompliance do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Operations, RIA Compliance

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