By: Ariana Monchick
In our November newsletter, we highlighted some important considerations and deadlines for Investment Adviser Representative (IAR) continuing education and registration renewals. In our second installment of our Adviser Registration Series, we will dive into how compliance officers can determine whether IAR registration is needed for a supervised person of an investment adviser, answer frequently asked questions related to adviser registration, and offer strategies for staying ahead of registration and licensing issues.
IAR Registration Requirements
Section 203A-3 of the Investment Advisers Act of 1940 defines an investment adviser representative of an SEC-registered investment adviser as “a supervised person of an investment adviser (i) who has more than five clients who are natural persons (other than excepted persons); and (ii) more than ten percent of whose clients are natural persons.” A supervised person is not an IAR if they do not regularly solicit, meet with, or otherwise communicate with clients of the investment adviser, or provide only impersonal investment advice. Natural person clients who are qualified clients are deemed excepted persons under the Advisers Act.
Once a firm has determined that a supervised person of the firm meets the definition of an IAR, they must look to the licensing and registration requirements of the state(s) where the investment adviser representative has a place of business. An IAR must have a place of business in each state where they are regularly soliciting, meeting with or otherwise servicing clients of an investment adviser, which could result in an IAR needing to be registered in more than one state. When determining whether more than one place of business is needed for an IAR, a firm should evaluate the location of the IAR’s residence(s) and, if an IAR has more than one residence, how much time is spent at each residence throughout the year. Fines for not being properly registered as an IAR with a state can be substantial, so when in doubt, it is best to reach out to your compliance consultant or the state securities division to inquire whether registration will be needed.
Frequently Asked IAR Registration Questions
Q: Does a supervised person of an SEC-registered investment adviser that meets the definition of an IAR need to have a Series 65 or 66 license?
A: While each state sets out the licensing requirements for IARs, most states generally require either a Series 65 license or a combination of the Series 7 and Series 66 licenses. Most states also offer exemptions from the Series 65/66 license requirement if the IAR holds a qualifying professional designation that is active and in good standing with the sponsoring organization, such as the CFP, CFA, ChFC, CIC and PFS designations (certain states also accept the CIMA designation in lieu of a Series 65/66 license).
Q: What types of advisory activities deem an individual as an IAR?
A: Activities that generally deem an individual to be an IAR include:
- Making recommendations or otherwise rendering advice regarding securities
- Managing accounts or portfolios for clients
- Determining which recommendations or advice regarding securities should be given
- Regularly soliciting, offering or negotiating the sale of investment advisory services
- Supervising employees who perform any of the foregoing activities
- Regularly and directly engage with clients regarding securities, such as conversations about investment opportunities or portfolio allocations.
Individuals who are not registered as an IAR should avoid acting in any capacity where clients may interpret their role as advisory in nature, such as fielding investment-related questions, directing clients on financial matters or preparing financial plans or other meeting materials that include investment recommendations.
Q: What types of activities can an individual perform without being deemed an IAR?
A: Examples of activities that typically do not rise to the level of investment advice include administrative and support tasks, such as note taking in client meetings with an IAR present, scheduling client calls, and conducting market research that is used by an IAR to formulate investment advice, so long as the research activities are supervised by an IAR and the individual conducting the research is not involved in advising clients regarding securities, taking discretion over client assets or making investment recommendations to clients.
Tips for Staying Ahead of IAR Registration and Licensing Issues
- Treat IAR registrations as an ongoing supervisory requirement rather than a one-time filing and annual renewal process.
- Create a system for monitoring state IAR registration requirements, such as examination requirements and waivers and any applicable CE requirements or engage a service provider for assistance with reviewing and monitoring IAR registration requirements.
- Sign up to receive notifications when updates are made to state securities statutes in those states where the firm has IARs.
- Consider whether IAR registration may be needed when an individual’s role at the firm changes, or new types of advisory services are offered by the firm.
IAR registration continues to be an area of focus for states, especially firms with advisory personnel across jurisdictions. Investment advisers that proactively track IAR registration requirements and reassess registration triggers as their operations and personnel roles change will be much better positioned to avoid registration enforcement issues.