Adviser Registration

Federal regulatory framework established by the Bank Secrecy Act (1970) and USA PATRIOT Act (2001) requiring financial institutions to detect and prevent money laundering. Requires broker-dealers to file Suspicious Activity Reports (SARs) on suspicious transactions involving or aggregating $5,000 or more, whether or not a suspect is identified, a Customer Identification Program (CIP) that collects identifying information before an account is opened and verifies identity within a reasonable time before or after opening, and complete AML compliance programs. FinCEN 2024 rule extends SAR filing requirements to most SEC-registered investment advisers and to exempt reporting advisers effective January 1, 2028; it excludes advisers registered with the SEC only as mid-sized advisers, multi-state advisers or pension consultants, and those reporting no assets under management.

Example: A broker-dealer notices a customer making multiple wire transfers of $4,800 each to offshore account...

The 1970 federal statute that is the foundation of American anti-money-laundering rules and requires financial institutions to keep records and file reports on certain currency and suspicious transactions. The BSA is administered by FinCEN and is the source of the Currency Transaction Report (CTR) for cash over $10,000 and the Suspicious Activity Report (SAR) for suspected illegal activity. The USA PATRIOT Act of 2001 expanded the BSA to require every broker-dealer to have a written anti-money-laundering compliance program and a Customer Identification Program (CIP).

Example: A broker-dealer's AML compliance officer traces every reporting duty back to the Bank Secrecy Act: t...

The requirement that investment advisers deliver Form ADV Part 2A (the "brochure") to clients before or at the time of entering an advisory contract. Under NASAA Model Rule 203(b)-1 (state-registered advisers), delivery must be at least 48 hours before entering the contract, or at contract signing if the client may terminate without penalty within five business days. SEC Rule 204-3 under the Investment Advisers Act of 1940 (SEC-registered advisers) requires delivery before or at the time of entering the contract and contains no 48-hour or cancellation provision.

Example: A state-registered adviser entering into a contract with a prospective client on Friday must deliver...

The Central Registration Depository (CRD) is the online registration and licensing system operated by FINRA in cooperation with the North American Securities Administrators Association (NASAA). It is the central repository for Form U4 and Form U5 filings, disciplinary history, employment records, and qualification exam history for every registered representative and broker-dealer in the United States. Each registered individual is identified by a unique CRD number assigned at first U4 filing.

Example: When a broker-dealer hires a new registered representative, the firm submits a Form U4 electronicall...

A report a financial institution files with FinCEN when a customer conducts a cash transaction of more than $10,000 in a single business day. The trigger is aggregated across a single day of related deposits or withdrawals, and the filing deadline is 15 calendar days after the day of the transaction. CTRs are not confidential in the way SARs are (FinCEN publishes a notice telling customers that cash transactions over $10,000 are reported), but if a customer breaks up cash transactions to stay under the $10,000 threshold, that is 'structuring,' and a broker-dealer must file a SAR when the transactions involve or aggregate at least $5,000.

Example: A client brings $11,500 in cash into a branch to open a securities account. The firm files a CTR wit...

Rule 206(4)-2 under the Investment Advisers Act of 1940 and corresponding state regulations governing investment advisers who have custody or possession of client funds or securities. Custody includes direct possession, any authority to withdraw funds/securities, or acting as trustee or general partner, or holding a general power of attorney that permits withdrawals. Advisers with custody must use qualified custodians, have a reasonable basis to believe the qualified custodian sends clients account statements at least quarterly, and, unless an exception applies (such as custody arising solely from deducting advisory fees), undergo an annual surprise examination by an independent public accountant.

Example: An investment adviser that has authority to automatically deduct advisory fees directly from client ...

A required part of every broker-dealer's anti-money-laundering compliance program, mandated by the USA PATRIOT Act, that verifies the identity of each customer who opens an account. Verification must happen within a reasonable time before or after the account is opened. Before opening the account, the CIP collects at least four pieces of identifying information: full legal name, date of birth (for an individual), an address (generally a residential or business street address, so a P.O. Box alone is not enough, though an individual with no street address may give an APO or FPO box number or a contact's street address), and an identification number (a taxpayer identification number, such as a Social Security number or an EIN, for a U.S. person; a non-U.S. person may instead give a passport or other government-issued ID number). The CIP must also check whether the customer appears on any list of known or suspected terrorists that Treasury designates for CIP purposes (screening against the Office of Foreign Assets Control (OFAC) sanctions lists is a separate obligation under OFAC's own regulations), and the firm keeps the identifying information for five years after the account closes (records of how identity was verified are kept five years after they are made).

Example: A new customer walks into a branch to open an account. Before the firm accepts business, it collects...

State registration exemption for out-of-state investment advisers who have no place of business in the state and 5 or fewer retail clients in that state during the preceding 12 months. Institutional clients are unlimited and do not count toward the 5-client threshold. Does not apply to broker-dealers or agents.

Example: An investment adviser based in California with no office in Nevada can advise 4 individual clients a...

An account where a broker-dealer, registered representative, investment adviser, or IAR has the client's authority to make trading decisions without obtaining prior client approval for each transaction, including selecting the security, number of shares or units, and whether to buy or sell. Investment advisers may accept oral discretionary authorization but must obtain written authorization within 10 business days of the first discretionary trade. Broker-dealers must obtain written authorization before exercising any discretion. Time and price discretion (deciding only when, or at what price, to execute an order for a security and amount the client chose) is not considered discretion; for a broker-dealer, FINRA limits it to the end of the business day on which the client granted it, absent a signed, dated written instruction.

Example: An adviser with written discretionary authority can decide to sell 500 shares of Apple and buy 300 s...

A bureau of the United States Department of the Treasury that administers the Bank Secrecy Act and receives anti-money-laundering reports from financial institutions. FinCEN is the direct filing recipient for Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs), and it publishes the forms and instructions firms use to file them. FinCEN gives authorized users access to filed reports, including agencies such as the FBI and the SEC and self-regulatory organizations such as FINRA, but firms file with FinCEN, not with those agencies.

Example: When a broker-dealer files a SAR after detecting structured deposits below the $10,000 cash threshol...

The uniform registration form used by investment advisers to register with the SEC or state regulators. Part 1 contains business information filed with regulators; Part 2A is the narrative disclosure brochure delivered to clients; Part 2B contains brochure supplements for individual advisory personnel. Part 1 must be filed with regulators within 90 days of fiscal year end; If there are material changes, an updated Part 2A (or a summary of material changes with an offer to provide it) must be delivered to clients within 120 days of fiscal year end. Material changes must be filed promptly when information changes.

Example: An investment adviser with a December 31 fiscal year end must file its annual Form ADV update by Mar...

Form U4 (Uniform Application for Securities Industry Registration or Transfer) is the form a sponsoring firm files to register an individual with FINRA, other self-regulatory organizations, and the states. The sponsoring firm can be a broker-dealer or an investment adviser. It is submitted electronically through the Central Registration Depository (CRD), or through the Investment Adviser Registration Depository (IARD) for an investment adviser representative, and discloses the registrant's employment history, education, residential history, criminal and regulatory history, and certain financial matters such as judgments and bankruptcies.

Example: A college graduate hired by a broker-dealer as a registered representative cannot start selling secu...

Federal privacy and data-security law requiring financial institutions to explain their information-sharing practices and safeguard customer information. In securities exams, GLBA usually appears through SEC Regulation S-P, which governs nonpublic personal information, initial and annual privacy notices, opt-out rights before certain sharing with nonaffiliated third parties, and written safeguards for customer records.

Example: An investment adviser sends a privacy notice at account opening explaining what nonpublic personal i...

Any person or firm that, for compensation, engages in the business of advising others about securities (the three-prong test: Advice, Business, Compensation). Must register with SEC if AUM ≥$110M, unless an exemption applies; may choose SEC or state if $100M-$110M AUM; generally must register with the state if <$100M (an adviser to a registered investment company may register with the SEC regardless of AUM). Owes clients fiduciary duties of care and loyalty.

Example: A financial planner charging fees for portfolio recommendations is an investment adviser....

An individual who provides investment advice or manages client accounts on behalf of a registered investment adviser (RIA). For an SEC-registered adviser, a supervised person is generally an IAR only if more than five clients, and more than 10% of clients, are natural persons (not counting natural persons who are qualified clients). IARs must generally pass the Series 65 exam (or Series 66 with Series 7, plus the Securities Industry Essentials exam), unless the exam requirement is waived (for example, for a current CFP, ChFC, CFA, PFS or CIMA designation) and register with state securities regulators, never with the SEC. IARs owe fiduciary duty to clients.

Example: A portfolio manager at an RIA firm who meets with clients to discuss investment strategies and make ...

Simplified state filing procedure under NSMIA for federal covered securities (primarily mutual funds, closed-end funds, and UITs) and federal covered advisers. Requires filing copies of SEC registration documents, consent to service of process, and payment of fees, but is not full registration. States retain anti-fraud authority but cannot impose merit review or deny the offering on its merits. Federal covered advisers must notice file in a state unless they have no place of business there and their only clients there are institutional clients (or, during the preceding 12 months, no more than five other clients).

Example: Vanguard Total Stock Market Index Fund is a mutual fund registered with the SEC under the Investment...

A third party (now termed "promoter" under the SEC's 2020 Marketing Rule) who provides testimonials or endorsements for an investment adviser in exchange for compensation. The Marketing Rule, effective May 4, 2021 with compliance required from November 4, 2022, requires a written agreement between the adviser and promoter (except for no or de minimis compensation, or the adviser's own personnel and affiliates), plus disclosure of the compensation arrangement and conflicts at the time the testimonial or endorsement is disseminated, with the fact of compensation and a brief conflicts statement made clearly and prominently. The adviser may not compensate a promoter it knows, or should know, is an ineligible person (this bar does not apply to no or de minimis compensation).

Example: A certified financial planner refers clients to an RIA in exchange for 20% of the first year's advis...

A confidential report a financial institution files with FinCEN when it detects transactions that look like money laundering, fraud, or other illegal activity. A broker-dealer must file a SAR within 30 calendar days of detecting the activity if a suspect is identified, and if no suspect is identified, it may delay filing an additional 30 calendar days to identify one, but never beyond 60 calendar days after detection. For a broker-dealer, the reporting trigger is a transaction that involves or aggregates $5,000 or more, whether or not a suspect is identified; a firm may also file voluntarily below that amount. The federal SAR confidentiality rule prohibits disclosing a SAR, or anything that would reveal one exists, to anyone outside narrow exceptions such as disclosures to FinCEN, law enforcement and regulators, and that includes the customer.

Example: A registered representative sees a client wire $4,500 to an offshore account on eight different days...

A bundled fee arrangement where investment advisory, brokerage, and custodial services are provided for a single all-inclusive fee, typically based on a percentage of assets under management. An investment adviser that sponsors a wrap fee program must provide its wrap fee clients with a wrap fee program brochure prepared under Form ADV Part 2A Appendix 1 (unless another sponsor delivers one), describing the program, fees, services, and conflicts of interest. The "wrap" fee covers transactions, advisory services, and often custody, eliminating separate commissions.

Example: An adviser offers a wrap fee program charging 1.50% annually on a $500,000 account ($7,500 per year)...