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Registered investment advisor: Be proactive, compliance matters

Jul 28, 2021

A good number of talented, young investment advisors emerge each year to attract attention in the investment world because of their outsized investment returns. Emerging asset managers might invest between $5 million and $10 million of client wealth. Operating as private funds of that size, they aren’t subject to much regulation. Their focus is on the investment strategy and making money for their clients.

Life can get a lot more complicated in a hurry when you experience significant asset growth and a substantial increase in regulation — which is why you should be proactive and engage a compliance professional sooner rather than later.

Growth in the wealth management industry is almost never linear. When big-money investors come calling, they will often push a fund over $150 million — an important threshold that activates many of the more complicated regulations promulgated by the Securities and Exchange Commission (SEC), including an annual private fund audit. Managers who have successful transitions to a higher level of regulation do so because they learned about the regulatory requirements that were about to hit and enlisted help for compliance reporting proactively.

The regulatory landscape

The SEC is the government entity that is primarily responsible for market integrity and investor protection. It requires public corporations to file annual reports and engage in annual audits. It also regulates investment advisors, establishing rules for custody of client assets and advisor authority to withdraw funds or securities on behalf of clients.

Its regulations are considered demanding, strict and thorough. It has broad authority to pursue professional investment advisors at the civil, criminal, federal, state, regulatory and non-regulatory levels. Advisors generally must register with the SEC when assets under management (AUM) exceed $110 million.

State regulators operate in most, but not all, states. Advisors with less than $100 million in AUM or who maintain discretion over a certain amount of investor assets must register with the state regulator where the advisor has its principal place of business.

The regulatory authority advisors register with depends mostly on the value of the assets they manage. In general, advisors who have at least $25 million in assets under management or provide advice to investment companies are required to register with the SEC. Advisors managing smaller amounts typically register with state securities authorities.

Becoming an RIA

The Investment Advisers Act of 1940 defines a Registered Investment Adviser (RIA) as a "person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications.”

As a professional providing advice to investment advisors, I always suggest that they progress toward RIA status as soon as possible. We see quite often that the institutional money comes in and all of a sudden, the advisor is over the SEC’s compliance threshold. Their assets just jump. Becoming an RIA means the advisor must provide investors with audited fund financial statements within 120 days of year end.

By being proactive and getting an early start, the advisor knows what the regulations are before having a chance to run afoul of them. The advisor is prepared to line up either audits or inspections. Asset custody is established with a qualified custodian. Contact an auditor and an attorney for a conversation about the business and a look at the accounts. Then, let them take care of compliance matters.

Harsh penalties for noncompliance

The SEC has the authority to revoke an advisor’s license. The advisor could no longer trade on behalf of clients, which is effectively a loss of livelihood. The SEC can also levy fines for serious offenses.

For a lesser transgression, the SEC sends a deficiency letter outlining a violation. The advisor has a chance to respond and correct any errors made in a submission. We also suggest the advisor get an attorney involved to draft a response letter and make sure there is a clear understanding of the regulation going forward. If the action is taken in accordance with guidelines, the matter is closed and the advisor continues operations. However, less leeway will be granted for subsequent offenses.

The bottom line: Most advisors don’t care to spend time worrying about regulations and responding to notices of likely infractions. When they spend less time on compliance issues, they have more time to earn money for their investors.  

How Wipfli can help

At Wipfli, we are committed to helping wealth management and asset management firms succeed and grow with compelling and powerful insights, resources and solutions. Our team provides practical solutions that support and monitor regulatory compliance issues and helps develop policies and train employees. Visit our web page to learn more about our services.


Rusty A. Planert, CPA
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