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Legal and Disciplinary Disclosure Requirements for Registered Investment Advisers

By: Jonah A. Toleno, Esq., Shustak Reynolds & Partners, P.C., California and New York July, 2011       

Introduction

The U.S. Securities and Exchange Commission (SEC) defines an investment adviser as “an individual or firm that is in the business of giving advice about securities to clients.” 2Investment advisers are required to register either with the SEC or the securities agency for the state in which the investment adviser’s principal place of business is located. Investment advisers who manage $30 million or more in client assets are required to register with the SEC, using a form called Form ADV. Investment advisers who manage $25 million or more may register with the SEC, but are not required to do so unless their assets under management total $30 million or more. Advisers whose client asset management is under $25 million must register with their home state securities agency. 3

Legal and Disciplinary Disclosure Requirements for SEC-Registered RIAs

A registered investment adviser often is referred to as an “RIA.” SEC-registered RIA’s must file annual reports with the SEC. State-registered RIA’s must file updated reports in accordance with the applicable state’s reporting requirements. Once registered, SEC-registered RIAs are required to report on an ongoing basis to the SEC and the public certain legal and disciplinary events, including the following:

  • Criminal or civil actions, where the adviser or a management person of the adviser was convicted, pleaded guilty or ‘no contest’, or was subject to certain disciplinary actions with respect to conduct involving investment-related businesses, statutes, regulations, or activities; fraud, false statements, or omissions; wrongful taking of property; or bribery, forgery, counterfeiting, or extortion.
  • Administrative proceedings before the SEC, other federal regulatory agencies, or any state agency where the adviser’s or a management person’s activities were found to have caused an investment-related business to lose its authorization to do business or where such person was involved in a violation of an investment-related statute or regulation and was the subject of specific disciplinary actions taken by the agency.
  • Self-regulatory organization (SRO) proceedings in which the adviser or a management person was found to have caused and investment-related business to lose its authorization to do business; or was found to have been involved in a violation of the SRO’s rules and was the subject of specific disciplinary actions taken by the organization.
  • Court judgments pertaining to investment-related statutory and regulatory violations by the firm and its affiliated persons, for the last ten (10) years.

RIA’s registered with the SEC must disclose all of the above items on their annual report to the SEC, consisting of an updated Form ADV Part 1A.

Additional Legal Disclosures for State-Registered RIAs

In addition to the above items, RIAs registered with the state of their principal place of business must disclose information about surety bonds if required by the RIA home state, unsatisfied judgments and liens, investment-related judicial actions (court lawsuits) AND arbitrations filed against the RIA or its representatives. These additional disclosures are unique to state-registered RIA’s; SEC-registered RIA’s need not report these items on Form ADV, Part 1A. Those RIA’s registered with a state must disclose the criminal and regulatory items described in the previous paragraph on their Form ADV Part 1A, and the items in this section (surety bonds, unsatisfied judgments and liens, judicial actions, and arbitrations) onForm ADV Part 1B.

Public Access to Form ADV and Updates For RIA’s

The SEC encourages investors to research investment advisers and brokers before investing with them. To help investors with this process, the SEC makes publicly available SEC-registered RIA forms and filings in its Investment Advisor Registration Depository (IARD). The public can research any RIA currently registered with the SEC by searching the advisor at the SEC’s Investment Adviser Public Disclosure website (IAPD) at the SEC IAPD Home Page 4Investors also can search for each state’s regulator contact information at the North American Securities Administrators Association’s (NASAA’s) State Regulator Search Page, to research state-regulated RIAs. 5

Unlike broker-dealers (B-D’s), RIA’s are not required to report the above information to the Financial Industry Regulatory Authority (FINRA). FINRA maintains separate records and filings by registered B-D’s in its Central Registration Depository database, which the public can access through FINRA’s Broker Check program online. 6

For more information about investor education, visit the SEC’s retail investor information page at http://investor.gov/.

Schedule a free initial consultation by calling Shustak Reynolds & Partners, P.C. toll free at 888-748-8748, or contact us online.

Ms. Toleno is a partner in Shustak & Partner’s San Diego office specializing in securities litigations and arbitrations.

See http://sec.gov/investor/pubs/invadvisers.htm

Pursuant to SEC rule adopted in January, 2011, that amount is going to increase to $100 million but the effective date of the implementation of the rule has been delayed until July, 2011 and may be delayed even further. This is the current rule as of the time this article was written.

See http://www.adviserinfo.sec.gov/(S(nsvufniwzmr0r3fqtdjwixzx))/IAPD/Content/IapdMain/iapd_SiteMap.aspx.

See http://www.nasaa.org/QuickLinks/ContactYourRegulator.cfm.

See http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm.

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