The ultimate guide to transitioning from state to SEC RIA registration

Growing your registered investment adviser (RIA) firm is an exciting accomplishment. And one which will come with significant milestones: hiring more team members, getting a bigger office, creating new processes…

One of the most important milestones for every RIA firm? Reaching $100 million assets under management (AUM) and registering with the Securities and Exchange Commission (SEC). That is, if your RIA firm hasn’t already done so by that point.

To clarify, if you started out as a small- or mid-sized firm, you may have initially registered with your state’s regulators. But as you grow, there comes a time when you may be required to register with the SEC instead.

Here’s a look at when that may be and what the SEC RIA registration requirements are.

When should you file with the SEC?

Generally, RIA firms are required to register with state(s) regulators if they manage less than $100 million in assets. It’s possible state registered firms are required to register in multiple states if they:

• Open an office (or have a representative) in another state.
• Work with more than five clients out of state.
• Are actively marketing to clients in another state.

Once your firm hits $100 million in AUM, you will likely be required to register with the SEC. There are, however, other ways for firms to meet SEC registration requirements as discussed below.

SEC RIA registration requirements

According to Section 203(A)(a) of the Advisers Act, advisers are prohibited from registering at the federal level (with the SEC), with a few exceptions. The most common exemption is, as discussed earlier, the accumulation of $100 million in assets under management.

There are several other exemptions that can help advisers achieve eligibility without meeting the minimum AUM requirements. For example, advisers who need to be registered in at least fifteen (15) states may simplify the regulatory process by registering with the SEC, even if they don’t have $100 million in AUM. Similarly, advisers who operate online-only firms (sometimes referred to as “roboadvisers”) may be able to register with the SEC instead of individual states. The SEC also offers a 120-day exemption for firms who believe they will qualify for SEC registration within 120 days of registering.

While this is an abbreviated description of state registration exemptions, your firm may find it helpful to review the full exemption list outlined in Rule 203A-2 of the Advisers Act.

Factors to consider when transitioning from state to SEC registration

While many states model their regulatory standards from the SEC’s rulings, there are still variances from state to state. For advisers registered in multiple states, this can pose an added challenge. Becoming SEC-registered, however, may help reduce the burden on advisers to appease multiple state regulatory bodies, since SEC-registered firms are subject primarily to the rules and regulations as determined in the Investment Advisers Act of 1940.

If you think your firm may qualify for registration with the SEC, there are several changes and considerations to keep in mind as you begin the transition process.

Firm net worth requirements

While your RIA firm may have been subject to your state’s specific net capital requirements, the SEC does not have specific firm net worth requirements. However, an SEC-registered RIA may have financial reporting requirements; specifically, firms are generally required to disclose any financial condition reasonably likely to impair the RIA’s ability to meet contractual commitments to clients.

IAR registration

Individual investment adviser representatives (IARs) are not registered directly with the SEC, only the RIA firm itself. IARs are still required to register with state regulators, though they follow a different set of rules once their firm is SEC-registered. Specifically, most states only require an IAR of an SEC firm to register if the individual is physically operating in that state. By comparison, IARs of a state-regulated firm typically must register in any state where their clients are located (once the firm is required to be registered in the state). This means that transitioning to SEC registration could also save your RIA certain IAR fees as compared to being registered at the state level.

Form ADV updates

Unique to SEC-registered RIAs, those firms serving retail investors are required to file a Form CRS. This document focuses primarily on fees, conflicts of interest and a firm’s standards of conduct. RIAs must file this form, which is considered Part 3 of their Form ADV, via the Investment Adviser Registration Depository system. Additionally, Form ADV Part 2A (the “Firm Brochure”) should also be amended to reflect certain SEC requirements and notice filings via Form ADV Part 1A must be submitted to applicable states.

Additional documentation

SEC RIAs are subject to Rule 206(4)-7, which requires that the firm conduct an annual review, as well as other mandates of the Investment Advisers Act of 1940. Moreover, RIAs with $100+ million in AUM may also need to submit additional documents, such as filing Form 13F every quarter via EDGAR if the firm falls under the category of institutional investment manager. There may be other documents and filings required as well, though some of them may be the same as what was required when state-registered.

Ready to start the SEC RIA registration process?

Whether you’re registered with state regulators or the SEC, your firm is expected to follow a strict set of compliance requirements and processes. As you get ready to make this important change in registration, you’ll want to be sure your CCO is equipped with everything they need to execute a seamless transition.

If you think your firm could benefit from a review of your current compliance program, don’t hesitate to reach out and schedule a complimentary consultation.