Frequently Asked Questions

FAQs- Creation

What is an LLC?

A limited liability company (LLC) is a company that offers corporate liability protection, but usually operates and is taxed as either a sole proprietorship or a partnership.

  • Owners of a LLC are referred to as members, and
  • the people who operate the LLC are called managers.

LLCs are either member managed or manager(s) managed.

  • A member managed LLC is one that is managed by all the members of the LLC, whereas
  • a Manager managed LLC is operated by one or more managers that may or may not be members.
How is an LLC formed?

The LLC is formed upon filing of the Articles of Organization with the Secretary of State and the members entering into either an oral or written Operating Agreement. To maximize corporate protection, it is important to seek legal advice as to:

  • whether an LLC is the best type of entity for your business,
  • how to properly form a LLC,
  • how to operate the LLC and
  • the on-going legal requirements once the LLC is formed
If I form an LLC am I protected from all the debts of the LLC?

Generally, members of an LLC are not personally liable for the debts of the LLC. This protection is limited, and you should consult with an attorney to understand what liabilities the members and/or the managers are protected from and when personal liability exists.

What is a corporation?

A corporation is a separate entity that is formed for the benefit of its shareholders.

  • Owners of the corporation are called Shareholders.
  • Board of Directors make the major decisions of the corporation, and are elected at least annually by the shareholders.
  • Officers are employees of the corporation appointed by the board of directors to operate the day-to-day operations of the corporation, namely the President or Chief Executive Officer, Secretary and Treasurer or Chief Financial Officer at a minimum.
How do you form a corporation?

The filing of the Articles of Incorporation with the Secretary of State begins the corporate formation. There are many more documents that an attorney can assist you to prepare and file to ensure the corporation is formed correct and complete.
To maximize corporate protection, it is important to seek legal advice as to:

  • whether a corporation is the best type of entity for your business,
  • how to properly form a corporation,
  • understanding the rights and responsibilities of the various roles in a corporation,
  • how to operate the corporation and
  • the on-going legal requirements once the corporation is formed
Does forming a corporation personally protect me from its debts?

The corporate protection granted for a corporation in general means that the shareholders, officers and directors are not personally liable for the debts of the corporation. This protection is limited, and you should consult with an attorney to understand what liabilities the shareholders, officers and directors are protected from and when personal liability exists.

FAQs- Registration

What is a registered investment adviser?

A Registered Investment Advisor (RIA) is an advisor or firm engaged in the investment advisory business and registered either with the Securities and Exchange Commission (SEC) or state securities authorities.

What is an investment adviser representative?

An investment advisor representative (often referred to as an “IAR”) generally is defined by most states as a person who, for compensation

  1. makes any recommendations regarding securities;
  2. manages accounts of clients;
  3. determines which recommendation or advice regarding securities should be given;
  4. solicits or sells investment advisory services, or
  5. supervises employees who perform any of the foregoing.

This term does not include an individual who

  1. performs only clerical or ministerial acts; or
  2. is an agent whose performance of investment advice is solely incidental to the individual acting as an agent, and who does not receive special compensation for investment advisory services.
When do I have to register with the Securities and Exchange Commission?

Generally, you are required to register with the SEC when you have at least $100 million in assets under regular and ongoing management and can also include:

  • Advisers to investment companies under the Investment Company Act of 1940;
  • Advisers that providing services in 15 or more states;
  • Advisers that are pension consultants providing investment advice to employee benefit plans, governmental plans and/or church plans with respect to assets of plans having an aggregate value of at least $200 million.
  • Advisers that operate almost exclusively through an interactive web site (“internet advisers”).
When do I have to register with a state?

You will have to register with a state regulatory agency if you have less than $100 million in assets under management.

What is a “mid-sized adviser”?

A “mid-sized adviser” is an investment adviser that has between $25 million and $100 million of assets under management.

Are mid-sized advisers required to register with the Securities and Exchange Commission?

After July 21, 2011, a mid-sized adviser must register with the Securities and Exchange Commission if it:

  1. is not required to be registered as an adviser with the state securities authority in the state where it maintains its principal office and place of business; or
  2. is not subject to examination as an adviser by the state where it maintains its principal office and place of business.

A mid-sized adviser that does not meet either one of these two requirements is prohibited from registering as an adviser with the Commission after July 21, 2011, but will have to register with the state securities authorities. There are a few exceptions to the general prohibition from SEC registration in rule 203A-2, such as for certain multi-state investment advisers and pension consultants. In addition, a mid-sized adviser that is required to register with the SEC, may elect to not register if it can rely on an exemption from registration, such as those for certain advisers to private funds.

In which states would a mid-sized adviser not be “subject to examination” by the state securities authority?

Only New York.

A mid-sized adviser with its principal office and place of business in New York is not “subject to examination” by the New York state securities authority and would have to register with the SEC. A mid-sized adviser with its principal office and place of business in any other state is “subject to examination.” This information will be updated promptly upon notification by a state securities authority of any change to examination status.

How does a mid-sized adviser determine if it is “required to be registered” in the state where it maintains its principal office and place of business?

This differs from state to state. If you have a place of business in the state, some states require registration before you take on your first client. Others require registration once you have more than a certain number of clients in that state. You should consult your attorney to get more information on your state’s requirements.

What other requirements can state regulators impose?
  • SEC registered advisers may need to make a notice filing of their Form ADV.
  • A passing score on a competency examination for each individual acting as an investment adviser representative or on behalf of a state-registered investment adviser firm.
  • Payment of a fee for processing the applications.
  • Certain disclosures to the state securities regulator and/or the public.
  • Registration of branch offices of the adviser.
  • A bond or minimum net capital.
What is included in my application for registration?

All applications for registration are submitted online through the Investment Adviser Registration Depository (“IARD”). You will need to request login credentials by submitting a Super Account Administrator Entitlement Form (“SAA Form”). The SAA Form may now be submitted online via DocuSign. Once you receive your login credentials, you will be able to submit the following required components of your application:

  • Form ADV- Part 1 is fill in the blank. Part 2 is a narrative brochure.
  • Filing a Form U4 application for each investment adviser representative who will provide services on behalf of the investment adviser
  • Passing score on a competency exam or qualified professional designation
  • Payment of any fees, including those for the adviser, IAR and any notice filing fees

In addition, states may ask that you submit certain state-specific forms and may have other requirements such as submission of a form investment advisory agreement or balance sheet.

When do I have to renew my registration?

Your registration is required to be renewed annually, usually within 90 days of the end of your fiscal year.

You may also have to submit what are called other-than-annual amendments to correct information that has become materially outdated.

FAQs- Integration

Am I required to have policies and procedures in place?

You are required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act. The SEC has said that it expects that these policies and procedures would be designed to prevent, detect, and correct violations of the Advisers Act. You must review those policies and procedures at least annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer (“CCO”) to be responsible for administering your policies and procedures (under the “Compliance Rule” — Rule 206(4)-7).

What should my policies and procedures cover?
  • Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, your disclosures to clients, and applicable regulatory restrictions;
  • The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
  • Proprietary trading by you and the personal trading activities of your supervised persons;
  • Safeguarding of client assets from conversion or inappropriate use by your personnel;
  • The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
  • Safeguards for the privacy protection of client records and information;
  • Trading practices, including procedures by which you satisfy your best execution obligation, use client brokerage to obtain research and other services (referred to as “soft dollar arrangements”), and allocate aggregated trades among clients;
  • Marketing advisory services, including the use of solicitors;
  • Processes to value client holdings and assess fees based on those valuations; and
  • Business continuity plans.
When do I have to prepare and file certain reports with the SEC?

You must file an annual updating amendment to your Form ADV within 90 days after the end of your fiscal year. In addition to making annual filings, you must promptly file an amendment to your Form ADV whenever certain information contained in your Form ADV becomes inaccurate (the Form ADV filing requirements are contained in Rule 204-1 of the Advisers Act, and in the instructions to the Form).

  • Make sure your Form ADV is complete and current. Inaccurate, misleading, or omitted Form ADV disclosure is the most frequently cited finding from SEC examinations of investment advisers.
  • Keep the e-mail address of your contact person current (Form ADV, Part 1A, Item 1J). The SEC uses this e-mail address to keep you apprised of important developments (including when it’s time to file an amendment to your Form ADV).
  • Accurately report the amount of assets that you have under management Advisers who have less than $25 million of assets under management, who are not otherwise eligible to maintain their registration with the SEC, or who stop doing business as an investment adviser, should file a Form ADV-W through IARD to withdraw their registration.
Are there any other policies I am required to have?

As a registered investment adviser, you are required to adopt a code of ethics (under the “Code of Ethics Rule” — Rule 204A-1 under the Advisers Act). Your code of ethics should set forth the standards of business conduct expected of your “supervised persons” (i.e., your employees, officers, directors and other people that you are required to supervise), and it must address personal securities trading by these people.

You are also required to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the misuse of material non-public information (under Section 204A of the Advisers Act). These policies and procedures must encompass your activities and those of your supervised persons. Advisers often include this prohibition on insider trading in their code of ethics.

What kinds of books and records am I required to keep?

You must make and keep true, accurate and current certain books and records relating to your investment advisory business (under “the Books and Records Rule” — Rule 204-2). The books and records that you must make and keep are quite specific, and are described below in part:

  • Advisory business financial and accounting records, including: cash receipts and disbursements journals; income and expense account ledgers; checkbooks; bank account statements; advisory business bills; and financial statements.
  • Records that pertain to providing investment advice and transactions in client accounts with respect to such advice, including: orders to trade in client accounts (referred to as “order memoranda”); trade confirmation statements received from broker-dealers; documentation of proxy vote decisions; written requests for withdrawals or documentation of deposits received from clients; and written correspondence you sent to or received from clients or potential clients discussing your recommendations or suggestions.
  • Records that document your authority to conduct business in client accounts, including: a list of accounts in which you have discretionary authority; documentation granting you discretionary authority; and written agreements with clients, such as advisory contracts.
  • Advertising and performance records, including: newsletters; articles; and computational worksheets demonstrating performance returns.
  • Records related to the Code of Ethics Rule, including those addressing personal securities transaction reporting by access persons.
  • Records regarding the maintenance and delivery of your written disclosure document and disclosure documents provided by certain solicitors who seek clients on your behalf.
  • Policies and procedures adopted and implemented under the Compliance Rule, including any documentation prepared in the course of your annual review.

For state registered investment advisers, additional requirements may be imposed by the state’s regulators.

Will I ever be audited?

Your firm will be subject to periodic, sometimes unannounced, audits by regulators. The purpose of an audit is to determine compliance with the regulator’s licensing, books and records, and anti-fraud requirements.

A 2015 survey of state securities regulators conducted by the North American Securities Administrators Association has revealed the top five problems noted in audits and examinations:

  1. Books and Records
  2. Contracts
  3. Registration
  4. Privacy
  5. Brochure delivery

A mock audit is a great way to catch any potential deficiencies before a regulator finds them. The mock audit should be thorough and conducted as if it is a real audit. It is best if you respond to the mock audit like you would an actual one. Practicing going through the process will better prepare you for one conducted by a regulator.