Financial Requirements, Bonding, and Post-Registration Duties

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 state-registered investment advisers. If an adviser is registered or licensed and compliant in its principal-office state, another state may not impose a higher minimum net-capital requirement or an additional bond. That home-state ceiling is different from federal preemption, which bars states from requiring a federal covered adviser to register or qualify as an adviser.

• 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.

Exam Tip: Gotchas

Compare an IA's actual value under the rule-defined financial measure with the financial amount the Administrator requires. If the actual value is higher, the Act says no bond may be required. Do not compare an abstract minimum-requirement rule with the amount of the bond.

Two layers: the Act and NASAA's bonding model rule. The Act grants the bonding power: the Administrator may, by rule or order, require a bond of a custody or discretion adviser, but no bond may be required of a registrant whose rule-defined financial measure exceeds the required amount. NASAA's bonding model rule, which a state may adopt, sets bond amounts of its own.

The model rule's first sentence reads as if every custody or discretion adviser is bonded. The Act's own text says: "No bond may be required of any registrant whose net capital, or, in the case of an investment adviser whose minimum financial requirements, which may be defined by rule, exceeds the amounts required by the Administrator."

The bonding model rule is not on the study guide's list of testable model rules, so a question asking what the Act provides is answered from the Act's text.

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.

If an adviser is registered or licensed and compliant with its principal-office state's books-and-records requirements, another state may not require additional books or records. This is a home-state-compliance limit, not the federal-covered-adviser registration preemption.

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.

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 or omit a material fact needed to keep a statement from being misleading.

The NASAA advertising standard currently tested on the Series 63 prohibits client testimonials. Client consent, absence of compensation, or disclosure of compensation does not override that prohibition.

Performance claims must not mislead. For example, an accurate before-fee return cannot be described as the amount clients kept after advisory fees. Read what the advertisement actually represents and whether material information is missing.

Exam Tip: Gotchas

An unpaid client testimonial is still a testimonial under the tested NASAA standard. Separately, correct portfolio arithmetic does not cure a false claim about what clients received after fees.

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.

To the extent the Administrator determines in its discretion, client information that complies with the Investment Advisers Act of 1940 and its rules, such as federal brochure rule disclosure, 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, unless the correction has already been given by the notice the Act requires.

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. A minor, immaterial change does not require an amendment; a material inaccuracy must be corrected promptly. The NASAA model rule treats a Form ADV amendment filed within 30 days of the event as prompt.

What Examination Authority Does the Administrator Have?

Records prescribed under the Act are subject to reasonable periodic, special, or other examinations by the Administrator's representatives, conducted within or outside the state. This examination provision covers required records, rather than every incidental document an adviser happens to retain.

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 discretion can trigger stricter financial requirements and a possible bond. Under the Act, no bond may be required when the IA's actual rule-defined financial measure exceeds the required financial amount; 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.
• The NASAA advertising standard currently tested prohibits client testimonials; client consent and compensation disclosures do not create exceptions.
• An advertisement must not misstate returns or omit material qualifications. A before-fee figure cannot be labeled as what clients kept after fees.