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Compliance Q & A for Registered Investment Advisors

by Tiffany L. Chamberlain, CIDA

In today’s rapidly changing regulatory environment, compliance can be both confusing and overwhelming, but is a required necessity.  We are addressing the most commonly asked compliance-related questions to assist advisors that may be thinking of going independent.

Q:  What is the difference between a Registered Investment Advisor (“RIA”) and an Investment Advisor Representative (“IAR”)?

A:  A Registered Investment Advisor (“RIA”) is an entity that is registered with the appropriate regulatory authorities of the State(s) and/or Securities and Exchange Commission (“SEC”).  An Investment Advisor Representative (“IAR”) as defined by most States, is a person who (1) makes any recommendations regarding securities; (2) manages accounts of clients; (3) determines which recommendation or advice should be given; (4) solicits or sells investment advisory services; or (5) supervises employees who perform any of the foregoing.  An IAR is an individual that is properly licensed in the advisory capacity, and the associated licenses are registered with an RIA.

Q:  Should I start my own RIA or join one as an IAR?

A:  That depends on your particular situation.  From a compliance standpoint, if you have your own RIA, you are responsible for your compliance program.  If you join an existing RIA as an IAR, then you are subject to their compliance requirements, but not responsible for overseeing their program.  When analyzing the two options, there is a cost-benefit to consider; there are costs involved in maintaining a compliance program if you have your own RIA, however you do not split your payouts.  On the other hand, when you join an RIA you have the benefits of compliance and back office support in most cases, however the cost associated with that comes from splitting your revenues with the associated corporate RIA.

Q:  If I want to start my own RIA, how long does it usually take to get set up?

A:  That depends on a variety of factors, including whether you are registering with the State(s) and/or SEC.  Each State has a different time frame depending on how backlogged they are, but typically the States and SEC are able to review an application in 4-8 weeks.  When they review an application they will most likely have questions, and the response time can further delay an application if it’s not promptly submitted.  In total, the average time to gather the information for an application, submit it for review to the appropriate regulatory authority, and respond to any regulatory inquiries, generally takes anywhere from 8-12 weeks from beginning to end.

Q:  What types of license(s) is required in order to become an independent RIA or an IAR affiliated with an RIA?

A:  Whether you wish to start your own RIA or wish to become an IAR affiliated with an established firm, you need to be properly licensed in order to conduct advisory, or fee-based business.  Most state securities regulators require the individual to successfully complete the Series 65 Examination (Uniform Investment Advisor Law Examination).  Some states have exceptions to this, such as if the advisor is also going to be registered with a broker-dealer, then the Series 7 and Series 63 examinations combined can substitute for the Series 65.  Additionally, certain professional credentials (the Certified Financial Planner designation, for example) may provide an exception to obtaining the Series 65.  There are no pre-requisites for taking the Series 65 examination, and you do not need to be registered with, or associated with a firm in order to take the examination.  However, if you take and pass the examination on your own without currently being registered with a firm, it is important to keep in mind that you must affiliate with a firm within 2 years or you must re-take the test due to expiration.

Q:  I have some events in my background that I’m concerned could possibly hinder me from being approved for having my own independent RIA, such as credit problems, bankruptcies, disclosures, etc.

A:  Generally speaking for the most part, in my experience, advisors feel an event or events in their background are much worse than in reality, and they fear denial when that is not necessarily the case.  The best thing to do is discuss your particular situation with a compliance professional to obtain feedback on what your potential obstacles may be in registering with regulatory authorities, and what types of disclosures are required.

Q:  If I start my own RIA, how often will I be examined by the regulators?

A:  There is no definite answer to this question.  It depends on so many different factors such as staffing of examiners, state by state examination programs, risk assessment programs for each regulatory authority, etc.  For example, an RIA may conduct a type of business in one state that may be considered higher risk, therefore the RIA will be examined more often, whereas in a different state that may not be the case.

Q:  What are the costs associated with starting my own RIA and maintaining a compliance program?

A:  If you start your own RIA register yourself, it takes a lot of time but the only costs involved are registration fees.  However during the registration process you may be asked for documents that will be a part of your compliance program, such as written policies and procedures.  If you do not already have certain documents or are not sure what to include, then you may want to consider hiring a compliance consultant to handle the registration process and compliance program/documents.  Although the costs vary from compliance consulting firm to firm, generally speaking an RIA can get registered for as little as $3,000, and a compliance program can be maintained for as little as $500 per month.  Some consulting firms charge their services by the hour, while others charge flat fees.  These costs can go up depending on the complexity and level of customization involved.

Tiffany Chamberlain, Managing Director of Polaris Compliance Consulting, LLC, advises State and SEC Registered Investment Advisors on regulatory compliance requirements.  She assists advisors wanting to start their own RIA, in addition to advising established RIAs with their on-going compliance requirements.  To learn more about Tiffany and the services of Polaris Compliance Consulting, please visit www.polariscompliance.com.


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