As RIA compliance consultants, we advise all of our clients that the end of the year is a great time for your registered investment advisory firm's chief compliance officer (CCO) to review your RIA firm's client and registration records to ensure that the firm is registered or notice filed in the proper states. Being improperly registered is a serious but quite avoidable RIA compliance mistake if the the RIA firm takes a proactive approach to ensure that the firm is always registered or notice filed in the proper states. Such a proactive RIA compliance approach begins with the CCO being properly informed on when an RIA firm is required to register or notice file in a given state.
Generally speaking, an RIA firm must register or notice file when one of the following applies:
- The RIA firm has a physical presence in the state
- The RIA firm has more than 5 clients who are located in the state
- The RIA firm is actively soliciting in the state
However, there a few notable states that do require an RIA firm to register or notice file in a state before taking on its 1st client. From an RIA compliance standpoint, this registration scenario arises when a particular state does not adhere to the standard "de minimis exemption." If the RIA firm is not properly aware of these "exception states," it can unfortunately lead to potential RIA registration compliance issues. For state-registered RIA firms, the two states that require the investment advisory firm to register before taking on their 1st client are:
For SEC-registered firms, the states in which the RIA firm may need to notice file before taking on their 1st client include:
- New Hampshire
Please note that these "exception states" do change on a regular basis and RIA firms should always check to see if any states have been added or removed.
In addition to the initial and annual renewal registration filing process, RIA firms must also pay the proper annual firm filing fees in any state that they are registered or notice filed in. For state-registered RIA firms, these firm filing fees are in addition to the individual investment adviser representative (IAR) annual filing fees. For SEC-registered RIA firms, these firm notice filing fees are in addition to both the individual IAR and SEC annual filing fees. For SEC-registered RIA firms, it also important to note that all individual IAR registrations are handled at the state level as the SEC does not administer the registration of individual IARs.
Regularly checking to ensure that the firm is registered or notice filed in the proper states is a vital component of any RIA firm's compliance program regardless of its size. However, a better compliance practice is to not only check regularly to ensure that the firm is properly registered, but to also make proactively checking the firm's registration status before taking on a new advisory client a part of the advisory firm's new client on-boarding process. It is also important to remember that an RIA firm can not begin advising its 6th client (or 1st client in the "exception states") before it is properly registered or notice filed in that state. Thus, another good recommended RIA compliance practice is to begin the registration process in a new state as soon as the firm takes on its 5th client in the state assuming that the firm expects to provide investment advisory services to additional clients in the state in the future.
As a final good recommended RIA compliance practice, we strongly encourage your RIA firm's CCO to check with your state regulator or RIA compliance consultant to confirm that there has been no change in a state's RIA registration or notice filing requirements as these rules do tend to change from time to time.