It can be difficult navigating the regulatory landscape as a state-registered firm. The lack of consistency regarding regulatory interpretations and guidelines between one state and another can create confusion and uncertainty for firms that are attempting to operate in multiple states. While it is usually seen as a safe haven to rely on SEC regulatory statutes, as firms grow, the need will inevitably arise for considering compliance regulations across multiple states. Particularly with the rise of virtual firms, there is an expectation to see more and more advisors that are relocating their advisory business across state lines. Here are some items to consider for RIA firms when transitioning from one state to another.
There are Multiple States Involved in the Transition
Many advisers, when dealing with compliance, tend to start evaluating issues at the granular level instead of looking at the big picture first. The “big picture” item as it pertains to this subject: there are multiple states involved in the transition. That means the first step in this process is to contact the regulators in each state to explain what the firm is trying to accomplish. Rather contacting the regulators via phone or email, be sure to include as many details as possible in your inquiry so that they can provide tailored advice. Details may include the timing of the firm’s move, the number of clients the firm has in each location, and any other items of relevance. Also, be prepared to explain how the firm’s business operates virtually, and how this differs from the traditional office location. Be sure to document your conversations in the event there is a need to communicate what one regulator advised to another regulator. This process may be necessary to get them on the same page and to create a coherent transition plan for the firm.
Understanding de Minimus
Most states operate under the de minimus clause for investment advisers, which stipulates that an investment adviser is exempt from registration in a state if it has five or fewer clients in a 12-month period in a state where it has no physical address. If the firm has five or more clients in the state that the firm is moving to, then presumably the firm should have already been registered there. Therefore, the compliance officer of the firm will want to make sure the firm is properly registered in the state it is moving to, before contacting the regulator.
If the firm is already registered in the state that it is moving to, but the firm is currently only registered there as an additional state, then the compliance officer is simply asking the regulator if there are any additional requirements to establish the new state as the firm’s principal place of business.
If the firm has fewer than five clients in the state that it is moving from, then you may be able to drop that registration, and simply notice file with that state after the firm moves. Notice filing is the process by which the firm notifies a state that it will be doing business there, but that the firm does not intend to fully register because there are fewer than five clients there. Each State may have different procedures for this, but if full registration can be dropped, then it may save the firm money on future renewal fees.
Regulations are Drafted for “Principal Place of Business”
As previously mentioned, compliance officers will need to be prepared to discuss “virtual firms” when they contact regulators regarding this transition. Securities regulations were drafted and adopted prior to the existence of virtual firms, so there will rarely be any specific mention of procedures for this. The best way to handle this is to focus on the methods by which the firm is handling compliance matters in ways that most closely resemble a traditional physical location firm structure, to assist the regulator in being able to comprehend the similarities sufficiently enough to provide adequate guidance. In other words, review your ADV and compliance manual and use the language in those documents as diligently as possible, so the regulator doesn’t feel like he/she is dealing with a unicorn. Also, don’t be alarmed if the regulator starts talking about branch locations, because this may be a logical progression for them in this conversation. Just listen closely, take notes, and ask questions.
Plan for the ADV Update
In a vast majority of cases, the firm will be required to register in the state it is moving to. In that process, an ADV will be filed to initiate the registration. After the ADV is filed, the state will come back with changes they wish to request prior to granting approval. One of these changes will be the change in address on the ADV Parts 1 & 2. This constitutes a material change on the ADV, which will trigger the requirement of client notification. If there is any uncertainty about additional state registration, or ADV filing, be sure to contact a compliance professional to assist you with this process.
Finishing the Job
After all registrations are completed, and clients have been notified and adequately transitioned, finish the job by preparing for the probability that your new state will now operate as your examiner. Reach out to the regulator to ask if they have any sample documentation requests for audits and examinations, so that you can be aware of what audit items they may inquire about down the line. Ask them for the online location for their regulatory guidelines, and spend a few minutes browsing through to make comparisons to your compliance documents. The more time spent on the front end of the relocation, the less time that will be needed on the back end, in preparation for audits and future contact with regulators.
Growing businesses need flexibility, which may at some point require relocation. The compliance considerations for relocation across state lines will most certainly vary by state, but by executing the items discussed here, the transition should be straightforward, with minimal inconvenience to complete.
About Scott Gill
Scott is a licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC. Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting, in Charlotte NC. He’s a graduate of The University of North Carolina at Chapel Hill and holds FINRA Series 63, 65, 24, 4 and 53 Licenses. Scott lives in Charlotte NC with his wife Meredith, and their two Sons Tyson and Jackson. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.