The Successor Rules in the Securities Exchange Act of 1934 allows for the legitimate transfer business between two or more entities. Succession can occur when one entity acquires substantially all of the assets and liabilities of an existing RIA, and is able to rely on a predecessor’s registration as an investment adviser with the SEC. In a guidance update, the SEC defines the instances where succession is applicable:
- A change of the state or territory in which a business is organized and/or a change in its form of organization;
- A change in control or a change in leadership at an investment adviser;
- An acquisition of a portion of an investment advisory business;
- A change in ownership of an investment adviser; and
- An internal reorganization at an investment adviser.
This can be accomplished in two ways: Succession by Application and Succession by Amendment. While both achieve a similar outcome, they are different processes for different situations.
Succession by Application: ADV item 4.a.(1)
If the successor is an unregistered entity and is acquiring or assuming substantially all of the assets and liabilities of the advisory business of an SEC-registered adviser (and the acquired adviser is no longer conducting advisory activities), the successor must file a new application for registration on Form ADV within 30 days after succession, and the successor may temporarily rely on the registration of the acquired adviser until the SEC declares the successor’s new registration effective. Succession by Application allows the unregistered entity to continue managing the acquired RIA’s accounts while they complete their own registration process.
Basically, this method allows the unregistered entity to acquire an RIA and continue operating without interruption using the RIA’s registration while theirs is being processed, assuming everything is promptly and correctly filed, and the RIA being acquired ceases to do business.
Succession by Amendment: ADV item 4.a.(2)
Alternatively, if the successor is a new investment adviser formed solely as a result of a change in form of organization, a reorganization, or a change in the composition of a partnership and there has been no “practical” change in control or management, the successor may amend the registration of the SEC-registered adviser by filing an amended Form ADV within 30 days after the change or reorganization to reflect such changes rather than file a new application.
Another situation where Succession by Amendment would apply is when an unregistered entity acquires or assumes substantially all of the assets and liabilities of another RIA that is owned, and continues to be owned, by the same parent company.
Basically, this method provides RIAs that technically change control without actually changing control with an easier way to keep their registration.
Exempt Reporting Advisers (ERA)
All successions involving an exempt reporting adviser may be addressed by an amendment to Form ADV. The ERA exemption only applies to Private Fund Advisers who qualify under rule 203(m)-1 and Venture Capital Advisers who qualify under section 203(l) of the Investment Advisors Act of 1940.
30-day filing period
An important part of the succession rule to pay attention to is the 30-day filing period in which the successor RIA has to file a new application for registration on Form ADV for Succession by Application and to file an amended Form ADV for Succession by Amendment. If you miss this deadline, the rule states that you will have to refile for registration, which will cost you a significant amount of time and money. You may be able to appeal with the SEC, but the outcome is not guaranteed.
When Does Succession Not Apply?
The SEC lists a few instances where the Succession Rules do not apply:
- When an unregistered entity does not assume substantially all assets and liabilities of the existing RIA. This provision was put in place to prevent entities from abusing the rule.
- Reorganizations that involve only registered entities. In this situation, the registered entities can just rely on their existing registrations
- If an entity acquires some or all shares of an RIA, or if a registered advisor purchases or otherwise assumes part or all of the business assets or personnel of another registered adviser.
- Situations in which the predecessor intends to continue to engage in advisory activities. This provision aims to prevent confusion of the identities and registration statuses of the entities involved.
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