SPOTLIGHT ON - Interactive Brokers LLC

SPOTLIGHT ON

Registration Requirements and Filings for

Investment Advisors and Their Employees

The contents of this Spotlight have been prepared for informational purposes only, and should

not be construed as legal or compliance advice.

Advisors are generally required to register with the Securities and Exchange Commission

(¡°SEC¡±) or the states in which they do business unless the advisor only manages certain types of

clients or has a limited number of clients and assets under management (¡°AUM¡±). In addition,

states (but not the SEC) require some individual employees of registered advisory firms to get

registered as Investment Advisor Representatives (¡°IARs¡±) in their own right.

Which advisory firms must get registered.

What is an ¡°investment adviser¡±?

The Investment Advisor Act of 1940 (¡°the Act¡±) defines an ¡°investment adviser¡± as any person or

firm that:

¡°for compensation, engages in the business of advising others, either directly or

indirectly or through publications or writings, as to the value of securities or as

to the advisability of investing in, purchasing, or selling securities or who, for

compensation and as part of a regular business, issues or promulgates analyses

or reports concerning securities.¡±

Certain entities are not considered to be an ¡°investment adviser¡± including:

? U.S. banks and bank holding companies;

? Lawyers, accountants, engineers, and teachers who only offer investment advice that is incidental

to the practice of their profession;

? SEC-registered broker/dealers if the investment advice they provide is solely incidental to

their broker or dealer business, and they do not receive any special compensation for

providing that advice;

? Government securities advisors who only provide advice concerning certain securities issued

by or guaranteed by the U.S. government;

? Credit rating agencies that are regulated as national recognized statistical rating

organizations; and

? Family office advisors.

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Which advisory firms must get registered (cont.)

Because these entities are not advisors under the Act, they are not subject to any of the

Act¡¯s requirements.

A firm falling within the Act¡¯s definition of an ¡°investment adviser¡± must register with the SEC

unless it:

? Qualifies for one of the exclusions discussed above;

? Qualifies for an exemption from the Act¡¯s registration requirement (which we discuss below); or

? Is prohibited from registering with the SEC because it is a smaller firm regulated by one or more

of the states.

Categories of advisors who must register.

Large Advisors: Generally speaking, securities advisors must register with the SEC if they have

more than $100 million in assets under management (¡°AUM¡±). These advisors are deemed ¡°large¡±

advisors and state laws are preempted for them. The Act defines ¡°assets under management¡± as

the securities portfolios over which the advisor has discretion or provides continuous advisory

services.

Mid-Sized Advisors: Advisors with between $25 million and $100 million AUM ¨C commonly

referred to as ¡°mid-sized¡± advisors ¨C are required under federal law to register with the state(s) in

which they are located or in which they have more than the state¡¯s de minimis number of clients. A

few categories of mid-sized advisors may or must register with the SEC:

? Advisors who would be required to register in 15 or more states may instead choose to register

with the SEC.

? Mid-sized advisors whose home state does not have securities regulators that conduct

examinations of advisors (i.e., Minnesota, New York, and Wyoming) must register with the SEC.

Small Advisors: Advisors with less than $25 million AUM ¨C commonly referred to as ¡°small¡±

advisors ¨C and who are not SEC-registered must get registered with the state(s) in which they do

business only if they are required to under state law. (I.e., the SEC does not require small

advisors to be registered and leaves that to the states.)

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Categories of advisors who must register (cont.)

States generally require that advisors who are not SEC-registered but have more than a certain

number of clients must get registered with the state. The state rules vary substantially but the

following general rules may help advisors get started in determining whether they need to register

with their state(s):

? The number of clients from each state that an advisor can have before needing to be registered

with that state ranges from 0 to 15 but most states set the limit at 0 or 5.

? State rules apply to all advisors who have an office in that state (even if that office is the

advisor¡¯s home) and who have clients from that state. Therefore, registering in the state where

the advisor has its principal office and place of business may not be sufficient if the advisor does

business in other states.

? States often allow advisors located in another state (i.e., out-of-state advisors) to have a higher

number of clients before needing to get registered than unregistered in-state advisors can have.

? States may have exemptions for advisors who only have certain types of clients, such as advisors

who only manage funds for accredited investors.

? Most states apply these rules to advisors located in the state as well as out-of-state advisors

with clients in or actively soliciting clients in the state, although many states allow out-of-state

advisors to have more clients before needing to get registered.

Advisors must compute their AUM annually to confirm which category (large, mid-sized or small)

the advisor fits and include that AUM on the firm¡¯s Form ADV. The SEC has built in cushions on

either side of these thresholds so SEC-registered advisors whose AUM temporarily falls less than

$10 million below the $100 million threshold do not have to register with a state instead and stateregistered advisors whose AUM rises only temporarily $10 million or less above the $100 million

threshold do not need to register with the SEC.

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Entities exempt from SEC registration.

Under the Act, advisory firms with certain, narrow categories of clients are generally exempt from

SEC registration.

The following types of advisors are exempt from registration with the SEC but must still make

filings with the SEC, are subject to some SEC regulation and oversight, and so are referred

to as ¡°exempt reporting advisors.¡± Among other things, these advisors are required to file an

abbreviated Part 1A of Form ADV and at least annual updating amendments and are subject to

SEC examinations.

? Private fund advisors whose only clients are private funds like hedge funds, and who have less

than $150 million AUM in the United States.

? These advisors may be:

? U.S. advisors that act as investment advisers solely to private funds, and have less

than $150 million AUM; or

? Non-U.S. advisors whose only U.S. clients are private funds and manage less than

$150 million in private fund assets from a place of business in the U.S.

? When calculating their AUM each year to make sure they qualify for this exemption,

advisors must include the market or fair value of all the private funds managed, including

any uncalled capital commitments on a gross basis, i.e., without deducting any liabilities.

? Venture capital advisors that only advise one or more venture capital firms, no matter how large.

States may still require exempt reporting advisors to register or submit certain reports.

The following types of advisors are exempt from SEC registration, are not exempt reporting

advisors, and therefore do not have to make the filings described above:

? Commodity trading advisors registered with the U.S. Commodity Futures Trading Commission

are exempt from registration if:

? Their business does not consist primarily of acting as an investment advisor; and

? They do not advise a registered investment company or a business development company.

? Insurance company advisors whose only clients are insurance companies;

? Small business investment company advisors who solely advise small business investment

companies;

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Entities exempt from SEC registration (cont.)

? Intrastate advisors:

? Whose clients are all residents of the state where the advisors maintain their principal

office and place of business; and

? Do not provide advice about securities on any national exchange;

? Foreign private advisors:

? With no place of business in the United States;

? With fewer than 15 clients in the United States and investors in the United States in private

funds advised by the advisors;

? Who manage less than $25 million for U.S. clients or investors in U.S. private funds; and

? Who do not hold themselves generally to the public in the United States as investment

advisors.

Advisors who fall within these exemptions but would otherwise qualify for SEC registration may

nonetheless choose to register with the SEC.

Although many of the Act¡¯s requirements apply to advisors that are registered or required to be

registered with the SEC, other provisions, including antifraud provisions, apply to all firms meeting

the ¡°investment adviser¡± definition above. This includes exempt reporting advisors, foreign private

advisors, and other advisors exempt from SEC registration.

The ¡°family office¡± exclusion.

Family offices are excluded altogether from the definition of an investment advisor so do not

have to register for that reason.

A ¡°family office¡± is defined as a company that: (a) provides investment advice only to family

clients; (b) is wholly owned and controlled by family members; and (c) does not hold itself out

to the public as an investment advisor. A ¡°family client¡± includes any member of the advisor¡¯s

household, other direct relatives (e.g., children and parents), employees of the family office and

their direct relatives and any trusts, estates or investment vehicles composed of these

people¡¯s assets.

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