As you may remember from our earlier blogs on registered investment advisers (RIAs), whether a firm should be registered as an investment adviser with the U.S. Securities and Exchange Commission (SEC) or with a state is typically determined by the amount of regulatory assets the firm has that receive continuous and regular supervision or management (collectively known as a firm’s “regulatory assets under management” or “regulatory AUM”); with some exceptions, firms that have over $100 million of regulatory AUM must register with the SEC, while smaller advisers must register with state securities authorities instead. But, what if a new investment adviser doesn’t currently have over $100 million of regulatory AUM, but expects to soon? Is the firm required to wait until it has over $100 million of regulatory AUM to register with the SEC?

Rule 203 A-2(c)

In light of this question, the SEC added exemption (c) to Section 203 A-2 (Exemptions From Prohibition On Commission Registration) of the Investment Advisers Act of 1940 (the “Act”). Per this exemption, a newly formed investment adviser may register with the SEC at the time of its formation if there is a “reasonable expectation” that the investment adviser will become eligible for SEC registration within 120 days. More completely, an investment adviser is exempt from the prohibition on SEC registration if:

  1. at the time of registration, the adviser is not registered (nor required to be registered) with the SEC or any state and has a reasonable expectation that it will be eligible for SEC registration within 120 days after the date its registration becomes effective;
  2. the adviser indicates on Schedule D of its Form ADV that it will withdraw from registration with the SEC if the investment adviser is still not eligible for SEC registration on the 120th day after the date the registration becomes effective.

This is particularly relevant because, as a general rule, an investment adviser cannot register with the SEC until it reaches $100 million in regulatory AUM. Thus, Rule 203 A-2(c) allows a new firm to immediately register with the SEC instead of initially registering with the relevant state(s) before shortly thereafter deregistering with the state(s) and transitioning to SEC registration once it reaches $100 million in regulatory AUM.

Before the conclusion of the 120-day exemption period, the investment adviser must file an amendment to update the firm’s response to Item 2.A. of the Form ADV Part 1A to either:

  1. indicate the firm’s new qualification to remain SEC-registered; or
  2. acknowledge that the firm is no longer eligible for federal registration.

If the firm is no longer eligible for registration with the SEC, it must also file an accompanying Form ADV-W to withdraw the firm’s registration with the SEC.

If you have more questions on starting an RIA or the RIA registration process, please see our previous posts on the subject.