Quick Answer
Once registered, an investment adviser (IA) can face minimum financial requirements and, with custody or discretion, a surety bond. It must keep prescribed records, answer examinations, disclose to clients, and promptly correct material filing errors. NASAA model rules add the detail: testimonials need disclosure, and gross performance requires equally prominent net performance.
Registration is not the end of an IA's obligations to the state. The Uniform Securities Act gives the Administrator ongoing authority over an IA's finances, records, and disclosures for as long as the registration stays active.
What Financial Requirements Can the Administrator Impose?
The Administrator may, by rule or order, establish minimum financial requirements for investment advisers. This authority is capped by the corresponding federal limitation on state regulation of a federal covered adviser's finances.
- Requirements may differ based on whether the IA has custody of client funds or securities, or discretionary authority over client accounts
- IAs with custody or discretion may face higher financial requirements than IAs without either
Exam Tip: Gotchas
Minimum financial requirements are not one-size-fits-all. Custody and discretionary authority are each independent triggers for a stricter standard; an IA can have one, both, or neither.
When Can the Administrator Require a Surety Bond?
The Administrator may require an IA who has custody of or discretionary authority over client funds or securities to post a surety bond.
| Rule | Detail |
|---|---|
| Who can be required to bond | IAs with custody or discretionary authority over client funds or securities |
| Bond alternative | An appropriate deposit of cash or securities must be accepted in lieu of a bond |
| Bond exemption | No bond may be required if the IA's minimum financial requirements already exceed the amount the Administrator sets |
| Required claim coverage | Every bond must allow suit by any person with a cause of action arising under the Uniform Securities Act |
| Optional claim coverage | The Administrator may also require the bond to cover suits by a person with a cause of action not arising under the Act |
| Suit deadline | No suit on the bond may be brought after the Act's own civil-liability time limit has run |
Exam Tip: Gotchas
An IA whose net worth or minimum financial requirement already exceeds the Administrator's bonding threshold cannot be forced to post a bond on top of it. The bond is a substitute safeguard, not a stacked one.
What Books and Records Must a Registered IA Keep?
Every registered IA must make and keep the accounts, correspondence, memoranda, papers, books, and other records the Administrator prescribes by rule or order, for the period the Administrator sets.
The statute sets the authority; a NASAA model rule supplies the detail on which records to keep and for how long. The section below lists the model rules that fill in this framework.
Which NASAA Model Rules Apply to a Registered IA?
The Uniform Securities Act gives the Administrator authority over a registered IA's records, custody, contracts, and conduct. NASAA model rules supply the detail. NASAA names five of them as testable on this exam.
| Model Rule | What It Governs |
|---|---|
| Unethical Business Practices of Investment Advisers, IARs, and Federal Covered Advisers | Prohibited conduct, including advertising |
| Recordkeeping Requirements for Investment Advisers | Which records to keep, and for how long |
| Contents of Investment Advisory Contract | Terms an advisory contract must include |
| Custody Requirements for Investment Advisers | Safekeeping of client funds and securities |
| Investment Adviser Information and Security Privacy | Protection of client information |
Remember that a NASAA model rule has no legal force by itself. Each state decides whether to adopt it.
What Does the Unethical Business Practices Rule Say About Advertising?
An advertisement may not include an untrue statement of a material fact, and it may not omit a material fact needed to keep a statement from being misleading. Two conditions go further than that general standard, and both are testable.
Testimonials and endorsements are permitted, but only with disclosure. The adviser must clearly and prominently disclose, at the time the testimonial or endorsement goes out:
- Whether the person is a current client or investor (a testimonial) or is not one (an endorsement)
- Whether the person received cash or non-cash compensation
- Any material conflict of interest arising from the adviser's relationship with that person
The adviser must also have a written agreement with the person that describes the scope of the activities and the compensation terms.
Gross performance may not stand alone. An advertisement that presents gross performance must also present net performance, and the net figure must be:
- Given at least equal prominence, and formatted so a reader can compare the two
- Calculated over the same time period, using the same type of return and the same methodology
Exam Tip: Gotchas
"Testimonials are always prohibited" is a wrong answer. They are conditional, not banned. Watch for the same trap with gross performance: accurate gross numbers and a clear description of the calculation method still fail the rule if net performance is missing or is buried in smaller type.
What Client Disclosure Can the Administrator Require?
The Administrator may require an IA to furnish or disseminate information to clients or prospective clients as necessary or appropriate in the public interest or for the protection of investors and advisory clients.
Compliance with the federal brochure rule (delivering Form ADV Part 2A and Part 2B) may satisfy this state disclosure requirement in whole or in part, so a state-registered IA that already complies with the brochure rule is not necessarily filing a separate disclosure document.
What Happens When a Filing Becomes Inaccurate?
If information in any document filed with the Administrator becomes inaccurate or incomplete in any material respect, the registrant must file a correcting amendment promptly.
For a federal covered adviser, the correcting amendment is due when the amendment is required to be filed with the SEC, not on a separate state clock.
Exam Tip: Gotchas
The correcting-amendment duty is triggered by materiality, not by any fixed calendar deadline. A minor, immaterial change does not require an amendment; a material inaccuracy must be corrected promptly.
What Examination Authority Does the Administrator Have?
All records an IA maintains are subject to reasonable periodic, special, or other examinations by the Administrator's representatives, conducted within or outside the state.
To avoid duplicating effort, the Administrator may cooperate with other state Administrators, the SEC, and national securities exchanges or associations when conducting examinations.
Are There IA-Specific Qualification Standards for Denial of Registration?
The full grounds for denying, suspending, revoking, cancelling, or withdrawing a registration are the same statutory grounds that apply to broker-dealers, agents, and IA representatives, and are covered in detail in the Administrator powers unit. A few qualification rules apply specifically to IAs:
- The Administrator may deny an IA's registration for lack of qualifications based only on the qualifications of the IA itself (if an individual) or the individuals who represent the IA in advisory activities, not on unrelated personnel
- An IA is not necessarily qualified solely on the basis of experience as a broker-dealer or agent; IA qualifications are evaluated on their own terms, and the Administrator may condition a BD applicant's registration on not also transacting business as an unqualified IA
- The Administrator may not deny solely for lack of experience if the applicant is qualified by training or knowledge
- The Administrator may by rule provide for an examination (such as the Series 65 or Series 66) to be taken by applicants, and may waive the requirement for a person or class of persons if the exam is unnecessary for the protection of advisory clients
Exam Tip: Gotchas
"This person was a successful broker-dealer agent for 20 years, so they're automatically qualified to be an IA" is a wrong answer. BD experience does not by itself establish IA qualification.
What Should You Check on Exam Day?
- Custody or discretionary authority is the trigger for both stricter minimum financial requirements and a possible surety bond; an IA with neither does not face either enhancement automatically.
- A bond is not required on top of minimum financial requirements that already exceed the Administrator's threshold, and cash or securities can substitute for a bond.
- The correcting-amendment duty turns on materiality, and a federal covered adviser's amendment clock follows its SEC filing obligation rather than a separate state deadline.
- IA-specific qualification denials can rest only on the IA's own qualifications or those of the individuals who represent it; broker-dealer or agent experience does not automatically transfer.
- Testimonials and endorsements in an IA advertisement are conditional, not prohibited. The conditions are disclosure of client status, of compensation, and of any material conflict, plus a written agreement.
- Gross performance in an IA advertisement requires net performance at least equally prominent, over the same period and by the same methodology.