Part of our job at RIA in a Box as registered investment adviser (RIA) compliance consultants is helping to interpret compliance regulations and filing instructions and translating these into understandable, simple guidance for our clients. One of the more interesting sections in the Form ADV Part 1 in this regard is the Employees section.
Form ADV Part 1A Item 5.A.
What is an employee, according to securities regulators? The definition is different from the Internal Revenue Service (IRS) definition; according to the Form ADV instructions provides by the Securities and Exchange Commission (SEC). Even an independent contractor is considered an employee by the regulatory definition as it relates to an advisory firm’s Form ADV filing. Part-time employees are also counted differently; on the Form ADV, each should be counted as one, rather than a percentage based on hours worked. Finally, not all “employees” are Form ADV employees: a solely clerical worker is not considered to be an employee under the investment adviser regulatory definition.
Form ADV Part 1A Item 5.B.(1)
Item 5.B. gets more specific. Item 5.B.(1) asks, of the total number listed in 5.A., how many employees “perform investment advisory functions (including research)”. Separately, item 5.B.(3) asks how many employees “are registered with one or more state securities authorities as investment adviser representatives”. At first blush, one might think these two questions are essentially the same – of course, anyone providing investment advice must be registered. However, not every investment adviser representative (IAR) may be performing investment advisory functions at any given time. Perhaps the individual is registered to the firm because he or she once provided advice or performed research, but is now serving in a solely administrative or even compliance role. This individual would be counted in item 5.B.(3), but not in 5.B.(1).
Form ADV Part 1A Item 5.B.(3)
So are the employees counted in item 5.B.(1) necessarily a subset of those in 5.B.(3)? Sometimes, but not always. Certain states, notably New York, do not register individual representatives of an RIA firm. Therefore, one such example is an employee performing investment advisory functions solely in New York need not be registered with a state securities authority and would therefore be counted in item 5.B.(1), but not in 5.B.(3).
Form ADV Part 1A Item 5.B.(6)
While items 5.B.(2), (4) and (5) are fairly straightforward, item 5.B.(6) is a bit unique. While it is part of the employees item, the actual number of individual employees should not be counted in (6). Instead, the RIA firm is instructed to count “firms or other persons” that solicit advisory clients on your firm’s behalf.” It’s important to note that the definition of person in the regulatory sense is not limited to actual living humans, but also includes companies, partnerships, corporations and trusts. Thus, in regards to item 5.B.(6), not only should the firm’s individual employees be excluded, but also the employees of the firms that may solicit on the advisory firm’s behalf as it is instructed to count each firm soliciting on its behalf only once.
Please feel free to contact us in regards to any questions that you may have in regards to your prospective or existing RIA firm’s regulatory filings.