By Robert R. Boeche II

On February 1, 2021, a new amendment to the New York Investment Advisory Act went into effect, now requiring investment advisor representatives (“IARs”) doing business in the state of New York to register themselves with the New York Attorney General. Registration is accomplished by filing a Form U4 application with state regulators via the Investment Adviser Registration Depository (“IARD”) after completing any required examinations.

Any individual that represents a Registered Investment Advisor (“RIA”) in New York in performing investment advisory duties will now be deemed a “NY IAR” if he or she “for compensation, engages in the business of advising members of the public, either directly or through publications or writings within or from the State of New York as to the value of securities or as to the advisability of investing in, purchasing, or selling or holding securities, or who, for compensation and as a part of a regular business issues or promulgates analyses or reports concerning securities to members of the public within or from the State of New York.” [1]

All new NY IARs will be required to meet examination and registration requirements with the state. Individuals seeking registration must (i) file a Form U4 application with state regulators via IARD, and (ii) complete either the Series 65 examination, or all three of the Securities Industry Essentials Examination, the Series 7 examination, and the Series 66 examination. However, several exceptions may permit experienced advisers to avoid the examination requirement if he or she has operated continuously for two years [2], or holds certain other professional designations. [3]

Additionally, New York-based supervised persons of an SEC RIA will now be required to register with state regulators if he or she meets the definition of “Federal IAR,” [4] meaning he or she: (i) has more than five clients that are natural persons; and (ii) has a client base more than 10 percent of which is comprised of natural persons [5]. However, since advisory personnel must serve natural person clients to be considered a Federal IAR, the new requirements may not apply to advisory personnel that only manage private funds and/or managed accounts for institutional clients. [6]

Solicitors are individuals whose regular business it is to “provide investment advice to the limited extent that such person receives compensation for introducing a prospective investor” [7] to an SEC Registered Adviser or a NY State Registered Adviser. Under the new regulations, solicitors are included in the definition of, and are now required to register as, a NY IAR if they have six or more clients in New York, excluding financial institutions and institutional buyers. [8]

Existing advisory personnel that must register under the new rules have until December 2, 2021 to pass the required examinations. However, because the New York Attorney General expects a high volume of new Form U4 applications, it has set a hard deadline of August 31, 2021 for application submissions. Consider submitting applications, especially those including requests for an examination waiver, as soon as possible to prevent the expected delays in processing from negatively impacting your business.

The new rules bring New York in line with other states, which have long required separate registration by RIAs and IARs. Many previously unregistered investment advisory professionals will need to sit for examinations and register with the state during the relatively short implementation period. If you are unsure whether or how the new rules apply to you, do not wait to consult a securities attorney.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney Robert R. Boeche, II can be reached in the firm’s San Diego office at (619) 696-9500. 

[2] Exemptions for existing IARs who (1) have operated “permissibly” for two years prior to February 1, 2021, and from a place of business in the state of New York; or (2) have been continuously registered for at least two years in another jurisdiction, and who have no pending or recent regulatory or civil action against them in the last 10 years. See 13 N.Y.C.R.R. § 11.7(b).

[3] Accepted professional designations include: Certified Financial Planner (CFP); Chartered Financial Consultant (ChFC); Personal Financial Specialist (PFS); Chartered Financial Analyst (CFA); and Chartered Investment Counselor (CIC). See 13 N.Y.C.R.R. § 11.7.

[4] Here, the term “federal investment adviser representative” is used as defined under the Investment Advisers Act of 1940 (the “Advisers Act”). Note that under the revised rules, the term is not defined the same way with respect to individuals associated with SEC Registered Advisers versus NY State Registered Advisers.

[5] A “natural person” is a human being, as distinguished from a person (such as a corporation) created by operation of law.

[7] The definition of “solicitor” is intended by the OAG to be consistent with the SEC’s definition in the Solicitation Rule under Investment Adviser Act Rule 206(4)-3. See 13 N.Y.C.R.R. § 11.12(k).

By Keith C. Collins

You are forming a corporation, great! Corporations offer many protections and benefits for entrepreneurs. But corporations are also closely regulated and subject to many restrictions. So, what happens when you want to form a corporation that is based on your passion, and your passion includes more than just profit? You may need a special type of corporation.

A simplistic, and somewhat cynical view of corporations is that they function only to create shareholder wealth. You start a corporation, shareholders invest through the purchase of shares, and, ideally, everyone gets rich. That perspective is reinforced by regulations that require a company to make decisions based on the best interests of shareholders and that interest is often profit. But what happens when you start a corporation with a purpose bigger than profit? For entrepreneurs that want profit with purpose there is a special type of corporation, the benefit corporation.

A benefit corporation differs from a traditional corporation in several significant ways. Notably, a benefit corporation is specifically designed to allow a company to pursue a profit and a public benefit. Investors purchase shares in a benefit corporation with the knowledge that the corporation will consider its stated public benefit when making corporate decisions. Thus, giving the corporation the freedom to enjoy the benefits of a profitable company, while also providing a public good. This unique corporate structure protects the corporation from derivative lawsuits, encourages investment from individuals and groups aligned with the corporation’s public benefit, and provides a unique way to generate revenue while giving back to the community.

If you have a vision for a corporation driven by profit and purpose, contact Shustak Reynolds and Partners for help organizing a corporation appropriate for your specific circumstances.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney Keith C. Collins can be reached in the firm’s San Diego office at (619) 696-9500. 

By George C. Miller

As Wells Fargo continues to reorganize its Wealth Management division, the firm recently dealt a major blow to its 330+ international financial advisors by announcing it will be exiting the international wealth management space altogether by September 2021.  According to Jim Hays, head of Wells Fargo Advisors, the firm is exiting the international space because it wants to “focus on [its] core business, which is serving clients who primarily reside in the United States….” He cited the additional processes, approaches, and infrastructure necessary to support the firm’s international advisory business as justification for the move. Enhanced anti-money laundering (AML) and compliance and supervisory obligations have contributed to other wealth management firms exiting the international wealth management market. RBC Wealth Management, once known for its international platform, abruptly exited the international space in late 2014, due in part to the stringent AML and supervisory obligations imposed by regulators.

In mid-January 2021, Wells Fargo began prohibiting the opening of new international wealth management accounts. The firm has now started an “exit process” for existing international wealth management clients. And while Wells Fargo pledges to work with its 330+ international financial advisors through the transition, details of what, if anything, the firm plans to offer those advisors are unknown. The negative impact on those advisors, most of whom reside in California, New York, and Florida, will be significant. In addition to lost clients and revenues, and losses associated with transitioning to a new firm, many international advisors may be handcuffed to Wells Fargo through up-front bonuses paid in the form of forgivable promissory notes. Wells Fargo will likely take the position those notes must be repaid when an advisor moves firms, despite the firm’s abrupt shift away from the international wealth management business.

It is critical for any financial advisor dealing with an employment or transition issue to seek sound advice from experienced counsel. Our FINRA employment and promissory note attorneys are highly experienced in counseling financial advisors through employment and promissory note disputes. Contact us today for a confidential consultation.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.