Are there any specific qualifications required for an individual to register as an IAR?

INVESTMENT ADVISOR REGISTRATION FREQUENTLY ASKED QUESTONS Many people have questions about becoming an investment advisor and the process for registering and beginning one s own advising practice. These are general questions and answers. Each situation for registering can be unique and each the requirements for each state are different. It is in an individual s best interest to contact a compliance consultant or attorney that has experience in dealing with the registration process. The consultant will also have an understanding of the differences between the state securities regulators and those of the United States Securities and Exchange Commission (SEC) as there are some differences when the application process begins. What is the definition of an investment advisor/adviser? An individual or firm that receives compensation by providing advice or analysis regarding securities or securities markets and makes recommendations to an individual based on the knowledge they have. An investment advisor is one who provides regular investment advice and/or financial planning advice to clients for a fee. Note: The different spellings of the words should not confuse you. The words both mean the same thing. The spelling advisor is the one most frequently used in the financial industry. The word spelled as adviser is used by Congress. Not to be confused, both can be used interchangeably. How is an Investment Advisor Representative (IAR) different than a Registered Investment Advisor (RIA)? Does an approved RIA firm have to have a registered IAR to conduct business as an advisor representative? An IAR is an individual who registers to do business as an investment advisor under an RIA (firm). An investment advisor representative is generally defined as an individual, who for compensation, a) determines and makes recommendations regarding investment opportunities; b) manages client assets; c) sells and/or solicits advisory services; and d) conducts self in a supervisory position to those who provide the above-listed services. The rules and regulations relative to each state should be reviewed and state regulators should be consulted with as it pertains to each individual. The definition of an IAR can vary from state to state, specifically with respect to soliciting activities. Most states will require an individual to register as an IAR within the applicable state where the primary business is conducted and/or has a specific number of clients that requires registration. In most states, regulators require that a registered RIA have at least one IAR whom is registered. At the time the registration is submitted on behalf of a firm, state regulators will require the appropriate documents be filed for an individual, simultaneously with the registration material of the firm filing for approval. If the firm is an SEC registered firm, there is no requirement that an IAR be affiliated with it. However, SEC firms will be notice filed with the home state of the firm and upon review, state securities will see that no individual has registered as an IAR and then will require that the firm have a registered representative on behalf of the firm in the applicable state. Are there any specific qualifications required for an individual to register as an IAR? In order to register and/or qualify for registration as an IAR you must successfully complete the Series 65 examination (Series 65). There are exceptions and exemptions to this requirement. If an individual currently holds

and maintains in good standing the following certifications, most states will waive the passing of the Series 65. (Note: an individual does not need to have a sponsoring firm to open a test window or to sit for the Series 65. This differs from the requirements of taking the Series 7 exam.) These certifications include: Certified Financial Planner (CFP) Chartered Financial Analyst (CFA) Personal Financial Specialist (PFS) Charter Financial Consultant (ChFC) Other exceptions may include an individual s prior financial industry experience. State securities regulators may accept other professional designations, however for those designations; an individual must request a written waiver. This will then be reviewed by the applicable state regulators. (See the frequently asked questions specific to the Series 65 examination for more information relating to this topic.) How does the investment advisor registration/application process work? There are differences when registering with the SEC or within a particular state. If you will be registering with the SEC, a Form ADV Part 1A must be prepared including the applicable schedules and filed through the IARD system. Upon filing of the ADV Part 1A, the SEC will review and approve/deny the application/registration. The SEC usually only reviews the ADV Part 1A, however other documents relevant to the application process must be prepared upon approval. These documents include the Form ADV Part 2, any client agreements, and code of ethics, compliance documentation, and other regulatory documents. During the regulatory examinations by the SEC these will be reviewed. Applications filed with the SEC are usually reviewed and approved or denied within 45 days of the initial filing. If the application/registration is to be filed with state securities regulators, a Form ADV Part 1A and Part 1B and the applicable schedules must be filed through the IARD system. Additional documents that will need to be prepared and reviewed by the state regulators are Form ADV Part 2, any client agreements; and any other supplemental documents required by the particular state where registration is occurring. When applications are being reviewed by state regulators, it may take 30-45 days and sometimes longer for the approval/denial to take place. Many times upon initial filing, the application is deficient and the state requires additional documentation. Often times, state regulators will require that changes be made to particular client documents and/or request additional requirements which may include information regarding the firm s background and the services they will be providing. Once this has been thoroughly reviewed, and the regulator(s) is satisfied that all deficiencies and documentation is correct, the firm will be approved. Outlined above is the registration process, however how do I know if my firm should be registered with the SEC or with a particular state? Whether a firm should be registered with the SEC or within a particular state is typically determined by the amount of assets under management (AUM) that a firm deals with. To be SEC registered, at the time the application is filed or within 120 days of approval, a firm must have $100 million in AUM. If a firm has less than the $100 million required to be registered with the SEC and does not anticipate having that amount (or over) within 120 days of approval, the firm must register with state securities regulators. If the value of the AUM is $100 million or more, a firm must register with the SEC. There is a $10 million cushion, therefore firms with at least $90 million in assets under management may stay registered with the SEC. If a firm registers with the SEC and fails to obtain AUM in the amount of $90 million, that firm must transition their SEC registration to the applicable state level.

The SEC however has several exemptions and will allow a firm to register with them, having less than $100 million in AUM. Those exemptions include a firm that serves as an investment advisor to a mutual fund or an investment company; or provides services to clients in 15 or more states, has to register with the SEC. Additionally, a common exemption is a pension consultant who provides investment advice to plans with at least $50 million in assets. Asset amounts cannot be included when the investment advisor is only providing investment advice to plan participants. Are there any exemptions or exclusions that do not require me to register my firm with the SEC? Often times a firm provides investment advisory services as is defined by the SEC, however it does not mean that the firm has to register as an investment advisor. Some business professions, whose main business activity does not include investment advice, but may incidentally provide investment advice, are not required to register with the SEC. Those professions may include lawyers, accountants, bankers, engineers, broker-dealers, teachers, publishers, and advisors limited to U.S. government securities. It is advisable to consult with a compliance professional to make sure these exclusions are accepted and that the activities engaged in do not require registration. Is it within my best interest to establish my own corporation or Limited Liability Company before I register as an investment advisor? Yes, it is advisable to establish an entity such as a corporation or an LLC prior to submitting your application to be a Registered Investment Advisor (RIA). You will then be able to serve in an individual capacity as an Investment Advisor Representative (IAR). It is important to consult with legal counsel and a tax professional to find out what protection you are offered as an owner of an entity from general liability that does not protect a securities principal from liability under the applicable state and federal securities laws. Does my business entity have to be completed before I register to be an RIA? The process of setting up your business entity should be started first. Initially, you will need to check for name availability for your business (done through your state corporate name database) to establish a name for your company. Once that is determined, you can begin preparing the required documentation for the RIA application process. However, you may not file the application until your business entity has been established with the state corporations office and an employer identification number (EIN) is obtained from the Internal Revenue Service. When investment advisor applications are submitted and filed via the web IARD/CRD system, a number of states require that corporate documents, i.e. articles of incorporation, articles of organization, be included with the other documents at the time of filing. Prior to obtaining your corporate formation documents, and with an established entity name, you can submit the entitlement documents to initiate access to the IARD/CRD web system by filing the Super Account Administrator (SAA) with FINRA. The FINRA Entitlement Group establishes your individual account identification and a CRD number is appointed to the firm. This will then allow you to file your firm and individual investment advisor registration application via the IARD/CRD system. If I am an SEC registered firm, do I have to register in a state? As an SEC registered firm you do not have to register with the state securities regulators. An SEC registered firm is required, however, to notice file within each state where it conducts business or if the firm has more than 5 clients with whom it provides investment advice to or engages in a business relationship with. Some states require an SEC firm notice file with applicable state regulators even if there is only one client under the guidance of the firm, currently those states are Texas, Nebraska and New Hampshire. Notice filing can be done via the web IARD system by filing the ADV Part 1 and paying the applicable state filing fees.

What are the requirements for state registered RIAs and how is it determined what state the firm can be registered in? It is required that an RIA be registered with state regulators in the applicable state it conducts business and/or where the RIA firm has more than 5 clients with whom it provides investment advice to or engages in a business relationship with. Many states require you register in that particular state even if you have only one client, currently those states are Texas and Nebraska. The process for applying for approval has to be completed in its entirety, which is similar to that of the home state where the RIA was established. What specific forms have to be filed through the web IARD/CRD system? What type of information will be asked to be disclosed on the forms? A Form ADV Part 1 and Part 2A and 2B have to be completed and filed for the application to be processed for a firm to be approved an RIA. There are two main purposes to the completion of the two ADV forms. It has several sections that are required to be complete depending on if a firm is to be filed at the SEC level or the applicable state level. The ADV forms have two main purposes. First, the Part 1 is the official document of your application for investment advisor registration that is reviewed by securities regulators. Second, the Part 2A and 2B serve as a disclosure brochure that is to be provided to clients once your RIA is approved and up and running. On the Form ADV Part 2A an investment advisor must disclose the services that the firm intends to provide, the fee schedule and costs of the aforementioned services, third party associations and fees associated with that solicitation, the background of the principal(s) of the firm, other business activities of the firm s principal(s) and associates, any conflicts of interest, the code of ethics the firm will abide under, and the policy on proxy-voting. If the RIA will be involved with sponsoring a wrap-fee program, the Form ADV Appendix 1 (which provides specific information about the program) must be completed. It is required that all sections be completed with true and accurate information. After the ADV s have been completed entirely, they can be filed through the web IARD system for the state regulator(s) to review. It should be noted that the SEC only requires that the ADV Part 1A be completed, but state regulators require that the ADV Part 1A and Part 1B be completed as well. The ADV Part 2A is the supplemental narrative document that has to be provided to and approved by securities regulators. It serves as the client brochure which must be given to the client at the time the firm engages in a business relationship with them. This client brochure must be provided to the client on an annual basis. Firms may provide other separate disclosure materials to clients instead of using the ADV Part 2A as long as all the required information is included in the document. The ADV Part 2A and 2B (client brochure) is to be attached to the ADV Part 1 when filed electronically via the web IARD system. This allows the state securities regulators the opportunity to review the client brochure at the time of the initial filing. Note: It is required that you file an annual amendment to the ADV Part 1 through the IARD system within 90 days of the close of your fiscal year. Also, any material changes (i.e. address, phone number, email, etc.) must be amended on the ADV Part 2A and 2B and filed within 30 days of any changes made. If I am ready to begin the registration process, how long does it take to prepare the applicable documents and to get approved? Once the application is completed it can be submitted to the SEC or the applicable state for review by securities regulators. It can take up to four weeks for initial review of the application. Depending on the staffing and the volume each state receives, time can significantly differ from state to state. In some cases it can take up to 30

days and sometimes in excess of 45-60 days to get approval. Certain circumstances and/or deficiencies can delay the registration process. These may include, but may not be limited to, any disciplinary history and any past or pending regulatory investigations. This can significantly delay the review/approval process. What fees are associated with registering as an investment advisor? The SEC and state registered firms, as well as the IARs associated with the firm are subject to initial and annual state licensing fees. These fees can be viewed on the public IARD system at http://www.iard.com/fees.asp. Above it mentions annual renewal fees. How often are registrations of investment advisors renewed? Registrations expire each year and therefore have to be renewed annually. The renewal is based on the calendar year and all annual renewal fees are paid via the IARD system. The renewal process generally begins in early December of each calendar year. If the ADV Part 1 Annual Amendment is not filed in a timely fashion, the SEC or State(s) may withdraw the registration of that particular firm. What guidelines for compliance does my firm have to follow and maintain? Under SEC Rule 206(4)-7, all SEC registered firms require that RIAs have a written compliance program in place, and continually maintain said program. The compliance program should be developed in a written Compliance Manual form that outlines the policies to prevent any violations from occurring. Although the SEC does not specifically state what policies and procedures should be included in the written compliance program, it wants certain issues covered under the program. These can include, but are not limited to the following issues: Registration Requirements Disclosures Advisory Agreements Client Documentation Advisory Fees Books and Records Annual Reporting Requirements Financial Records Corporate Records Personal Securities Records Code of Ethics Insider Trading Anti-Money Laundering Customer Complaints Advertising Trading Custody Supervision Privacy Policy

Are there bonding requirements or net worth/capital requirements I am subject to as an RIA and an IAR? Firms that are registered at the state level are more than likely to be subject to these requirements. The level or amount of the net worth/capital or bond requirements is dependent on each individual firm s procedures and the state in which they are domiciled. If a firm is unable to meet the requirement(s), often times the state(s) will allow a surety bond to be purchased in lieu of the net capital requirement. Not all states have the same requirements. It is best to check with your home state regulators to determine what the state requirements are and if the firm is affected by such requirements. For firms that are SEC registered there are no net worth/capital or bonding requirements. The SEC will, however, look at the financial condition of the firm. It is important that the firm keep complete and accurate financial records. These should be kept as part of the investment advisor s books and records. Most states require similar financial records be kept. Is there help to start my own RIA firm and continued support for compliance? Yes, being independent does not mean being alone. RIA Registrar, LLC has a turn-key program for RIA registration at the SEC and state level. We customize your documents to accurately reflect your business model. Once your RIA is approved, we have a program for ongoing compliance support to assist with your all your compliance and regulatory needs. Sheri Mushel PRESIDENT smushel@riainfo.com riaregistrar.com t 800.441.1219 4570 Churchill Street, Suite 210 Shoreview, MN 55126