Financial Requirements and Bonding

With registration requirements covered, the next layer of regulation concerns the financial safeguards the Administrator can impose on investment advisers, particularly those who handle client assets.

Minimum Financial Requirements

The Administrator may establish minimum financial requirements for investment advisers, subject to the limitations of Investment Advisers Act (IAA) Section 222 (which prevents states from imposing requirements on federal covered advisers).

Financial requirements may differ based on whether the investment adviser (IA):

• Has custody of client funds or securities, or
• Has discretionary authority over client accounts

IAs with custody or discretion typically face higher financial requirements than IAs that only provide advice without handling client money or making trading decisions.

Exam Tip: Gotchas

• Financial requirements and bonding authority apply to state-registered IAs only; IAA Section 222 prohibits states from imposing these requirements on federal covered advisers.
• Both custody and discretion are independent triggers; either one alone is enough to raise financial requirements.

Bonding Requirements

The Administrator may require IAs who have custody of or discretionary authority over client funds or securities to post a surety bond.

Key rules for bonding:

• No bond may be required if the IA's minimum financial requirements exceed the amounts set by the Administrator
• A deposit of cash or securities may be accepted in lieu of a bond
• Every bond must allow suit by any person who has a cause of action under Uniform Securities Act (USA) Section 410 (civil liabilities)

Exam Tip: Gotchas

• Cash or securities can substitute for a surety bond; you do not need an actual bond instrument.
• The bond must allow suit by anyone with a cause of action under the USA's civil liability provisions, not just the regulator.