In order to register your registered investment adviser ("RIA") firm with the proper authorities, you’ll want to make sure you have your forms and filings in order.
While not all of the forms we’ll review here are required upfront (most are, but as always, there are exceptions and exemptions), authorities will expect to see them if and when they audit your firm.
The Form ADV is made up of five parts:
- Part 1A asks a lot of “who” questions, primarily centered around the owners and advisors at your firm. This section is required whether you are registering with the SEC or the state.
- Part 1B is only required if you are registering with state authorities, not the SEC.
- Part 2A requires you to write a narrative brochure where you’ll lay out information about your firm’s processes, services, fees, etc. This is required when registering with the SEC, unless you are an exempt reporting advisor.
- Part 2B contains supplemental information about anyone providing financial advice at your firm, including education, business background, conflicts of interest, and disciplinary information.
- Part 3, better known as “Form CRS,” was added in the spring of 2020. It is required for firms registering with the SEC that serve retail investors. In short, the Form CRS is a non-technical document intended for clients that must contain five sections.
For more information on the Form ADV, check out the SEC’s General Instructions and Glossary for the Form ADV.
An important note: The number one most common registration deficiency found by the North American Securities Administrators Association ("NASAA") during recent audits was mismatched Form ADV sections. Review your firm’s Form ADV regularly to ensure consistency.
Policies & Procedures Manual
In November 2020, NASAA adopted a new model rule that clarified the essential policies and procedures documents an RIA firm must have. According to the new rule, investment advisors must provide the following:
- Compliance Policies and Procedures: RIAs must establish, maintain, and enforce written compliance policies and procedures reasonably designed to prevent violations by the RIA of the Uniform Securities Act of 1956 and the rules that the securities administrator has adopted under the Act.
- Supervisory Policies and Procedures: RIAs must establish, maintain, and enforce written supervisory policies and procedures reasonably designed to prevent violations by the RIA's supervised persons of the Uniform Securities Act of 1956 and the rules that the securities administrator has adopted under the Act.
- Proxy Voting Policies and Procedures: If an RIA has the authority to vote client securities, then they must explain the process follow the written policies and procedures. If the firm does not have the authority to vote on client securities, then this information must be disclosed to clients.
- Physical Security and Cybersecurity Policies and Procedures: RIAs must establish, implement, update, and enforce written physical security and cybersecurity policies and procedures reasonably designed to ensure the confidentiality, integrity, and availability of physical and electronic records and information. The policies and procedures must be tailored to the RIA’s business model, taking into account the size of the firm, types of services provided, and number of locations.
- Code of Ethics: RIAs must establish, maintain, and enforce a written code of ethics that outlines how employees are expected to conduct business, as well as the course of action if an employee violates the Code of Ethics.
- Material Non-Public Information Policy and Procedures: RIAs must establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information by the RIA or any person associated with the firm.
- Business Continuity and Succession Plan: RIAs must establish, maintain, and enforce written policies and procedures relating to business continuity and succession planning.
Investment Advisory Contracts
It is important that you consider how you will create and maintain investment advisory agreements. While this is not submitted as part of an SEC RIA application, most states will examine your form client contracts as part of the registration process. In previous years, NASAA found upwards of 44% of firms audited had at least one deficiency in client agreements.
In order to help keep your contracts in order, consider the following questions:
- Does your firm have a properly executed, written client agreement on file for each client relationship?
- Does the fee, formula for calculating the fee, and frequency match how the client is billed?
- Are your firm’s current services provided and/or discretionary authority properly outlined in the executed agreement?
- Does the contract include any hedge clauses that may stand in conflict with your firm’s fiduciary responsibility?
Investment Adviser Representative (IAR) Licensing Requirements
If you’re starting your own RIA, chances are you already hold a Series 7, 65, or 66 license (or one of the professional designations accepted in lieu of them). Now is a good time to make sure everything is up to date and meets the requirements of the authorities you will be registering with.