What’s the difference between being regulated by your state and being regulated by the Securities and Exchange Commission (SEC)? For starters, there is a much higher entry barrier when it comes to getting SEC-registered. In order to register with the SEC, your firm must have an AUM of $100 million.
Of course, there are other qualifications, such as:
Being a multi-state advisor, which requires that you have five or more clients or a place of business in 15 or more states
Tagging on to another related firm’s SEC registration as a related advisor
A lower threshold of $25 million for firms whose primary place of business is in the state of New York
But for many firms, that $100 million AUM benchmark is the only path to becoming SEC-registered.
But wait—what’s the big deal? Is there any real benefit to becoming federally registered versus state registered? Let’s dive into some key differences.
Advantages of SEC registration
One set of rules and regulations that govern the firm
For the most part, the main advantage is being subject to one set of rules and regulations (the Advisors Act of 1940) rather than potentially many different sets of state rules and regulations based on the number of states you are registered in. When the firm is SEC-registered, it is governed primarily by the Advisors Act. The Advisors Act is easily accessible through Cornell Law School’s website, with plenty of interpretive guidance, no-action letters, and FAQs on the SEC’s website to assist with interpreting the rules.
As firms that have been registered in multiple states may attest to, it can be challenging to keep track of each state’s specific applicable regulations and their interpretation(s) of those regulations. It’s especially difficult at times when state-level rules or regulations conflict with each other.
Minimizing the impact of state by state variances and nuances
With many compliance questions, the answer many state-registered advisors receive is: “It depends on your state.” Each state has its specific rules, and these rules may or may not align with the SEC. When a firm becomes registered with the SEC, it generally does not need to rely on most of the state-level rules centered around governing registered investment advisors who operate in that jurisdiction. Below are examples of many requirements placed on many state-registered firms that once federally registered, are either no longer applicable or are simply less restrictive:
Invoices: Many state-registered firms, such as California, Colorado, Maryland, Florida, among others, require advisors to send an invoice to clients if fees are directly deducted from their brokerage accounts. Though this is recommended as a best practice for all firms, the SEC does not currently have this requirement.
Net worth requirement/surety bond: States such as Washington, Colorado, Oregon, California, among others, require that firms maintain a surety bond and/or have a certain net worth threshold. Once approved by the SEC, while the firm must remain solvent, these various financial reporting requirements are generally not applicable.
Fee arrangements: Many states, such as Washington, and others, frown upon certain fee arrangements that are uncommon in the industry. For example, some firms charge a recurring fixed fee for financial planning services. Certain states have taken the position that these arrangements are unreasonable and do not allow RIAs to structure their fees this way. The SEC has not publicly come out with a position on such arrangements. Thus, firms have more flexibility with these types of fee arrangements.
Notice filing vs. registration
Another advantage of being registered with the SEC includes the ease of notice filing versus going through an additional state registration. Though the cost is the same, if an SEC-registered firm has more than five clients or a place of business, it needs to notice-file in that state. Generally, notice filing is a relatively quick and painless process of merely paying the fee and marking a checkbox on your ADV Part 1. No additional information is requested, and for most states, approval can be as quick as the next business day. Conversely, a state-registered firm would need to file an additional state registration. With state registrations, the process can be anywhere from 4 to 6 weeks or more. Many states request a handful of documents to review and critique, such as a balance sheet and advisory agreements.
Representatives are still subject to state oversight
It is important to note that advisory firms are registered with the SEC; however, advisory representatives (IARs) are still registered at the state level. For the most part, representatives who are affiliated with an SEC-registered firm only need to register in states where they have a place of business. That being said, with states now adopting the new IAR continuing education requirement, representatives, even those registered on the federal level, still need to adhere to these continuing education requirements.
Potential Disadvantages of SEC Registration
Some firms might not have regulatory assets under management, such as financial planning-only firms. Thus SEC registration will not be an option. Though being SEC-registered has its advantages, some firms may prefer to be state-registered.
Knowing your state
Some firms, especially those who only have one state in which they are registered, may have already been through multiple state examinations/audits or have a positive relationship with their regulator. Many state securities divisions are relatively small, and some only employ a handful of examiners. In those instances, we always recommend retaining a positive relationship with regulators. In some cases, many advisors can simply pick up the phone or send a quick email to their state regulator. Obviously, the SEC is a much larger operation—thus, those lines of communication may not be as available at the federal level.
Additional paperwork, procedures, and costs
The SEC isn’t without its own nuances. To even register with the SEC, firms must create and maintain an additional disclosure document called Form CRS. This is a two-page summary with conversation starters that summarizes the firm’s services, fees, and conflicts of interest. The Form CRS has special delivery requirements that differ from the firm’s ADV Part 2A.
An additional annual fee is also required for SEC-registered firms that is submitted with the firm's annual ADV update filing. The fee can range from $150 to $225.
When and how does my firm transition?
The other less-common exemptions I mentioned in the beginning aside, once a firm reaches $100 million (or $25 million if in New York) of assets under management, then it can file an application to become SEC-registered. However, it is not required that a firm applies for SEC registration until their AUM is $110 million or more as of their fiscal year end. (Note: once approved, firms have a buffer to dip as low as $90 million before they need to begin applying for state registration again.)
Interested in exploring the SEC registration for your firm? XYPN’s Compliance Team is here to assist firms through this transition. Check out our services and get in touch with us here.
About the Author
Terria Heng has spent her career in financial regulatory compliance. She started out as a compliance consultant at a boutique compliance firm located in Beverly Hills, CA, where she assisted breakaway brokers in transitioning from wirehouses to the independent RIA space. Prior to joining XYPN, Terria was a financial examiner at the Texas State Securities Board for 6 years. Terria has extensive knowledge in state compliance examinations, including effectively communicating with regulators, responding to regulatory inquiries, and best practices in practice management. Currently living in Portland, Oregon, Terria enjoys hiking the Columbia Gorge with her dog Kuba or going on long road trips with her partner in their Sprinter van.
Subscribe by email
You May Also Like
These Related Stories