Scaling Your Advisory Business - From State to SEC Registration

Transitioning from state to SEC registration is a big step for any advisory firm. But it’s not just about filling out forms and meeting criteria—it’s about understanding the real differences between state and SEC regulations and making sure your firm is ready for the change. Here are a few ideas that can assist your firm in deciding if, and when, to transition from state to SEC registration. 

Understanding Regulatory Jurisdictions

The first thing you need to know is that  state and SEC regulatory jurisdictions are not the same. Depending on the state in which you currently maintain your principal place of business, you may find SEC regulatory guidelines to be more, or less friendly to your firm’s operations. For example, some states do not permit firms to leverage the monthly retainer model for financial planning services. This has the effect of forcing firms into hourly financial planning engagements, which is not ideal from an operational perspective. To date, most SEC registered firms have continued to benefit from access to this financial planning model, so in this instance, a state registered Advisor may find SEC registration to be more compatible with firm operations. 

On the other hand, the SEC tends to have more resources to put towards targeted exams, designed to focus on specific areas of the firm’s compliance program. For firms that are deficient in certain categories of risk within their compliance program, SEC examinations that are focused on areas of risk that are exposed through the document review process can be more burdensome and intimidating. 

AUM Threshold and the 15 State Exemption

A majority of firms rely on the $100 million or more in Assets Under Management (AUM), as the registration basis for SEC registration. With this process, as long as the firm maintains adequate records that Assets Under Management have been calculated consistently with the traditional definition of AUM, the basis for SEC registration is secure. To ensure AUM calculations are accurate and remain current, firms are encouraged to use the same method for AUM calculation with each reporting instance. Additionally, firms are advised to review the software used for data reporting and be willing to make changes as necessary. 

From our perspective, the second most frequently relied on basis for registration is the 15-state exemption. To avoid a major pitfall that can be costly and laborious, firms are advised not to register with the SEC unless this basis for registration is firmly established. Being placed in a circumstance in which the firm is required to revert to state registration for 15 individual states due to the inability to establish  the registration basis can be supremely disruptive to the firm’s business operations.

Preparing for SEC Examinations

Once the firm is SEC-registered,  it’s time to begin preparing for SEC Examination. While SEC exam preparation is an ongoing process, there are a few key items the firm should execute to make this process a bit less burdensome. The SEC will usually announce a routine examination  via document request list. Most often, the list will request two reports that create the most time consuming element of the exam; The Client List, and the Securities Holding List. 

The client list is exactly as it sounds: a list of the firm’s clients, with a variety of categorizations to be assigned at the client level. These include but are not limited to,  the account name, account number, custodian, inception date, investment strategy, account affiliation and account portfolio manager. Therefore, the single most important exercise an RIA can conduct to be prepared for SEC Examination, is to maintain firm data such that that this report can be produced promptly and remains readily accessible for regulatory review. The inability to access the core data requested by the SEC for examination, introduces reporting inefficiencies, and exposes compliance program disorganization by inferring the lack of availability of books and records. 

The same is true of the Securities Holdings List. In most examinations, the firm will need to run reporting to display at minimum, the name, ticker symbol, and CUSIP for all securities in client portfolios, along with client account number, number of shares, cost basis and the total fair market value of the position. Any RIA that does not have a plan of action for running this report will start the examination in a less than desirable position. 

Finally, as simple as it may sound…the firm is advised to read the Written Supervisory Procedures. Some Chief Compliance Officers shy away from reading the policies and procedures documents, either for fear that they will discover that something is out of alignment within the firm compliance program, or perhaps out of the uncertainty involved in the lack of understanding of critical terms and concepts. Regardless, the SEC will hod the firm accountable for adherence to policies and procedures, and it is neither appropriate nor advantageous for the Chief Compliance Officer to be surprised by concepts contained within the document during the regulatory examination interviews. 

Final Thoughts

 Transitioning your advisory business from state to SEC registration can be a game-changer, but it’s not something you want to wing. Understand the rules, be confident in your basis for registration, and prep for SEC exams to make it a smooth transition.

These materials have not been reviewed or approved by any regulatory agency, and represent solely the interpretative opinions of Synergy Compliance Education (“Synergy”). To the fullest extent permissible pursuant to applicable laws, Synergy disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. In no event shall Synergy have any liability for damages, losses, and causes of action for accessing these materials.