Even though your firm may be registered with the SEC, a state can impose licensing requirements on individuals associated with your firm who (i) have a “place of business” within the state and (ii) fall within the state’s definition of “investment adviser representative” (or “IA Rep”). These requirements should be met before any individuals begin to engage in activities that require licensing. We’ll talk about those activities shortly.

First, let’s tackle what a “place of business” is. It’s actually pretty easy. States normally interpret the term to mean a physical location (like an office) where the IA Rep regularly provides advisory services or otherwise solicits or communicates with clients.

By contrast, determining who falls within a state’s definition of IA Rep is more complicated, and states generally take one of two approaches to do this.

Many states simply adopt the definition of “investment adviser representative” found in Advisers Act Rule 203A-3(a), which provides that an individual associated with an investment adviser will be an IA Rep if:

  • he or she is a “supervised person,” meaning a partner, officer, director, employee, or other individual who provides advice and is subject to the adviser’s supervision and control;
  • at least six of his or her clients are natural persons (excluding certain wealthy clients);
  • at least 10 percent of his or her clients are natural persons (again, excluding certain wealthy clients); and
  • he or she regularly solicits, meets with, or otherwise communicates with clients.

However, a number of states do not use the federal definition, choosing instead to use their own. In these states, even though the definition will vary from state to state, an individual typically will be an IA Rep if he or she is a partner, officer, director, employee or other individual associated with an investment adviser who:

  • renders investment advice or manages portfolios;
  • solicits, offers or negotiates for the sale of investment advisory services; or
  • supervises employees who do the above activities.

If you’re dealing with a state that uses the federal definition, then it’s unlikely that, as a robo-adviser, you’ll have any personnel who will qualify as an IA Rep. That’s because as a robo-adviser providing automated investment advice, you probably don’t have any individuals who regularly meet with or communicate with clients (unless you employ solicitors).

If you’re dealing with a state that does not use the federal definition, the analysis is a bit harder. As you’ll recall from our last post, determining who is rendering advice can be more difficult for a robo-adviser than for a traditional adviser because in the case of traditional advisers, advice is communicated directly from advisory personnel to the client. By contrast, robo-advisers utilize automated algorithms (not people) to formulate investment advice for clients and select investments for their portfolios. As a result, similar to picking individuals for inclusion in the brochure supplement, robo-adviser firms will generally have to license as IA Reps those individuals who (i) employ or contract with individuals who design, test, and maintain algorithms that create the advice provided to clients, (ii) solicit advisory business for the firm, or (iii) supervise individuals that do (i) or (ii).

Once you’ve determined who qualifies as an IA Rep, the licensing process tends to be similar among all states. For each person who must be licensed, a state will generally require that the firm submit electronically through IARD:

  • a completed Form U4, which provides information about the individual’s background;
  • evidence that the individual has passed the relevant securities exam (usually a Series 65 or a combination of the Series 7 and 66), unless the individual has received certain industry certifications, such as a certified financial planner (CFP) or chartered financial analyst (CFA); and
  • the filing fee (both initially and on an annual basis).

Once the forms and fee are submitted, the processing time tends to be relatively short, often just a few days. Once a license is effective, the individual can start to design and manage algorithms, solicit clients, or conduct any other activities that required licensing in the first place.

Thanks for taking the time to check out our blog today. In our next post, Josh will discuss how involving your compliance team in the initial build-out of your robo-advisory firm can save you time and headaches in the long run. We hope you’ll check it out!

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