Business Continuity and Disaster Recovery | COVID-19 Pandemic | Regulatory Filings | State News

State Regulators Not Feeling So Graceful Now: Investment Adviser Representatives Who Relocated to Other States for Pandemic May Have to Register as Grace Periods End

State regulators recognize that the new “work from home” environment is here to stay.  Several have ended grace periods that allowed investment adviser representatives (IARs) to provide advisory services in a different state without registration if they relocated because of the COVID-19 pandemic.  Beyond IAR state registrations, firm office locations may have changed temporarily due to employees working outside the office, and now many firms are considering whether to make temporary changes more permanent going forward.  Even clients may have relocated to a new state due to the pandemic.  With annual renewal payments for investment advisers and investment adviser representatives coming due on December 14, 2020, now is the time to consider whether to make changes to state registrations and notice filings.

For example, Pennsylvania’s Department of Banking and Securities’ patience wore thin for investment adviser representatives (IARs) who relocated to the Keystone state to “shelter-in-place.”  The department sent an email to broker-dealers and advisory firms stating that as of August 31, 2020, the grace period will end for those individuals who have not yet registered as investment adviser representatives with Pennsylvania who are teleworking from their homes in the state during COVID-19.  But many advisers may not be aware that the grace period has ended since the department has not included an announcement on its website.

States Issued Temporary Waivers for Displaced Investment Adviser Representatives

Just to recap, shortly after states were issuing “stay at home” orders to prevent the further spread of COVID-19, states securities regulators recognized that broker-dealer and investment adviser representatives were displaced from their usual place of business.  Some were working from home in a jurisdiction where they were not registered.  Some states issued orders allowing these financial professionals to continue working from home without registering if they met certain conditions.  First, the financial professional had to be currently registered or notice filed with all required securities regulators as of March 1, 2020.  Second, the financial professional had to have been displaced as a result of COVID-19.  Third, the financial professional could not be the subject of an ongoing enforcement proceeding or in violation of that state’s securities laws.  Finally, the financial professional could only service existing customers or clients and could not be soliciting new clients in the state where they were working.

Grace Periods Coming to an End

States where grace periods have ended include Delaware (May 15, 2020), Alabama (July 31, 2020), and Pennsylvania.  Other states will be ending their grace periods soon, such as Texas (December 31, 2020).  New Hampshire is continuing its grace period until further notice.  Maine recently extended its grace period until January 29, 2021.  Idaho extended its relief “until such time as FINRA issues notice ending the relief.”

For some IARs, registration in a new state may require jumping some additional regulatory hurdles.  For example, an IAR who worked in an office in New York, where registration was not required, now works from home in Pennsylvania, where he will have to register.  While some states waive examination requirements for individuals currently registered in another state, Pennsylvania does not.  Therefore, the New York IAR now either has to (1) take the Series 65, Uniform Investment Adviser Law Examination, (2) take the Series 7, General Securities Representative Examination, combined with the Series 66, the Uniform Combined State Law Examination, or (3) apply for a waiver.  Waivers are granted to IARs with at least one of the following professional designations:

  • Chartered Financial Analyst (CFA)
  • Chartered Investment Counselor (CIC)
  • Certified Financial Planner (CFP)
  • Chartered Financial Consultant (ChFC)
  • Personal Financial Specialist (PFS)
  • Certified Public Accountant (CPA)
  • Attorneys

Similarly, IARs that worked from offices in Ohio and are now working from home in Pennsylvania may have to pass the Series 65 examination or apply for a waiver.

The North American Securities Administrators Association (NASAA) published a centralized chart on its website with state-level information about how states are handling COVID-19 related issues, but apparently, it didn’t get the memo from Pennsylvania.   NASAA has also compiled COVID-19 related updates from state regulators on its site.

The most reliable source of information is the state securities division where the IAR is located since websites are not always complete or updated promptly, and it can take time to wade through the regulations.  An IAR should call the securities department in the state where he or she is located to find out about temporary waivers and registration requirements.

Notice Filing versus State Registration

Although a registered investment adviser firm can be registered with, and subject to, the SEC’s jurisdiction, IARs are subject to state regulation.  Investment adviser firms with more than $100 million in assets under management are generally regulated by the SEC, and those firms with fewer assets under management are state-regulated.  States can, and most do, require federally registered investment advisers (RIAs) to make “notice” filings and pay filing fees in those states where they do business and have clients.  There are exemptions available for RIAs with five or fewer clients in a state, as long as they do not have a place of business in that state and serve only institutional clients.  There are a few states where an RIA must submit a notice filing before doing any business in that state, including Louisiana, Nebraska, New Hampshire, and Texas.

Conversely, the individuals responsible for providing investment advice (investment adviser representatives, or IARs) are regulated by the states where they do business and have clients. Each state has its own requirements for IAR registration.

File Firm Notice Filings First

SEC-registered investment advisers are allowed up to five clients in most states (as long as the adviser does not have a place of business in the state) before having to submit a notice filing in that state. Before taking on the sixth client, however, the adviser would need to submit a notice filing.  Most states also exempt firms from notice filings if their only clients are other investment advisers, broker-dealers, or institutional investors.  Check out this handy website from Thompson Hine that compiles the investment adviser notice filing laws for all 50 states.

Clients of advisory firms may have also relocated during COVID-19.  Review these changes to determine whether additional notice filings in new states might be required.

Four states require an SEC-registered adviser to submit a notice filing before taking on its first client:  Louisiana, Nebraska, New Hampshire, and Texas.  Conversely, Colorado requires a notice filing only if an SEC-registered investment adviser has a place of business in that state.

Making a notice filing is easy.  Most states require that investment advisers check the relevant state box on Form ADV Part 1A, Item 2.C., and pay a fee. Fees vary by state, ranging from $30 to $500. IARD’s website provides a fee schedule for all 50 states here.   The Investment Adviser Registration Depository’s (IARD) renewal program requires firms to pay annual fees for IARs and firm notice filings.  Preliminary payments are due by Monday, December 14. 2020.

When Does an IAR need to Register with a State?

IARs need to register in the state (or states) where they have a place of business.  In most states, IARs file a Form U-4, the Uniform Application for Securities Industry Registration, on the Central Registration Depository System (CRD).  In addition to the registration form, IARs must meet specific qualification requirements, as discussed above.  Many states require that IARs pass (1) the Series 65, Uniform Investment Adviser Law Examination, or (2) pass the Series 7, General Securities Representative Examination, combined with the Series 66, the Uniform Combined State Law Examination.  States may also grant waivers to these requirements for IARs with certain professional designations, including Chartered Financial Analyst (CFA), Chartered Investment Counselor (CIC), Certified Financial Planner (CFP), and Chartered Financial Consultant (ChFC).  States may also require IARs to submit a copy of their fingerprints to the licensing division to perform a criminal background check.

Many states waive examination and background checks for individuals currently registered in another state.  As discussed previously, Pennsylvania does not.  It is essential to check with the state securities regulator to determine what is required to register in that state.

What is a “place of business”?

Advisers Act Rule 203A-3 defines “Place of Business” for IARs as:

  • An office at which the investment adviser representative regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients; and
  • Any other location held out to the general public as a location at which the investment adviser representative provides investment advisory services, solicits, meets with, or otherwise communicates with clients.

Although IARs are probably not meeting with clients because of the COVID-19 pandemic, they are still communicating with clients and providing advice from home.  It is time to consider registration for IARs that will continue to work from home in a state where they were previously not registered.  As previously discussed, state waivers are coming to an end, and working from home may become the new normal for many.  Since each state has different requirements, IARs should talk to their state securities regulator about their situation.

Generally, a place of business is any location where investment advisory work is routinely being done.  If the firm’s employees and independent contractors affect transactions in securities or offer investment advice from their homes, then their homes are considered places of business.

Impact on Form ADV

Do I need to disclose employees’ homes as offices on Form ADV?

 Maybe.

Form ADV Part 1A, Item 5.F. of Schedule D requires disclosure about “each office, other than your principal office and place of business, at which you conduct investment advisory business.” The SEC posted an FAQ on March 16, 2020, stating that if firms have employees working from a temporary location (such as their homes), disclosing these new workplaces would not be required. However, this relief appears limited to situations where the employees are temporary teleworking as part of the firm’s business continuity plan.

If IARs will be working from home on a more permanent basis, firms should consider whether to list their home offices should be listed on Form ADV, Item 5.F., Schedule D, and check the box indicating that the address is a private residence.  Firms would not need to include the home addresses of employees performing only administrative work.

Steps to Take Now

Advisers should take inventory of office and IAR locations now, consider if state waivers have expired, and update filings as needed.  If employees and IARs will be working from home on a more permanent basis (as opposed to a temporary COVID situation) in different states, advisers should communicate any new exam or other hurdles to IARs so they can complete new state registrations. Advisers should also consider whether their clients have moved to new states and determine whether additional notice filings are required.

Even if your firm is not affected by states’ expiring grace periods, now is a good time to take an inventory of locations where advisory work is being performed and where your clients reside to update your state and federal registrations accordingly.

Partner with Hardin Compliance

Need help updating your Form ADV or have a question on IAR registration?  Hardin Compliance can help!  Call us today at 1.724.935.6770, or visit our website at www.hardincompliance.com for more information.

 

Photo by Charles Deluvio on Unsplash


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