The purpose of this article is to provide a framework for analysis and a summary overview of the application of U.S. investment adviser laws for foreign financial advisors who offer their services in the U.S. The following 10 questions will help foreign advisors through an analysis of the regulatory restrictions that may apply to their operations in the U.S.

1. Will you be an "investment adviser" under U.S. law?

The federal Investment Advisers Act of 1940 (Advisers Act) and the rules and regulations of the Securities and Exchange Commission (SEC) are the principal source of regulation for financial advisors in the U.S. An analysis of the application of U.S. regulation to financial advisors begins with the meaning of the term "investment adviser" as it is defined under the Advisers Act.

An investment adviser is any person who:

  • for compensation engages in the business of
  • advising others, either directly or through publications or writings,
  • as to the value of securities or as to the advisability of investing in, purchasing and selling securities.

The term also includes any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

Generally, the SEC broadly interprets the concept of "engaging in the business" of advising, and if the adviser gives advice on a basis that constitutes a business activity and provides the advice with some regularity, then the adviser is "engaging in the business." The frequency of the activity is viewed as a factor but is not determinative. The staff of the SEC has also determined that for the purpose of determining investment adviser status, it is sufficient if the adviser gives general advice about the value or securities, such as market timing advice; the advice does not have to be about specific securities.

References: Advisers Act section 202(a)(11); Investment Advisers Act Release No. 1092 (October 8, 1987).

2. Will you be you acting as an investment adviser in the U.S.?

Under the literal wording of the requirement for investment advisers to register that is contained in the Advisers Act, the requirement would apply even to foreign investment advisers serving their foreign clients if they make use of any U.S. jurisdictional means (i.e., the U.S. mail or any means or instrumentality of interstate commerce) in connection with giving investment advice. Nevertheless, the staff of the SEC has interpreted the Advisers Act so as to regulate the activity of foreign advisers only where advisory conduct occurs within the U.S. or where the activity outside the U.S. produces substantial effects within the U.S. The U.S. is not viewed as having a significant regulatory interest in a relationship that involves neither clients nor advisory services within its borders.

Under this "conduct and effects" theory, the Advisers Act does not govern the relationship between a foreign adviser and its clients that reside outside the U.S. The staff of the SEC has also generally taken the position that registration is not required where a foreign adviser uses a jurisdictional means solely to obtain research or to place orders for securities with U.S. registered brokers but does not use a jurisdictional means to solicit clients or give investment advice.

Of course, under this approach if a foreign investment adviser uses a jurisdictional means to give investment advice from within the U.S. to foreign clients, or if a foreign investment adviser uses a jurisdictional means to give investment advice to clients within the U.S., then the Advisers Act will apply.

References: Advisers Act section 203; Division of Investment Management, U.S. Securities and Exchange Commission, Protecting Investors, a Half Century of Investment Company Regulation, 227 (1992); Forty Four Management, Ltd., CCH Fed. Sec. L. Rep., ¶77,373 (Dec. 30, 1982).

3. Will you be exempted or excluded from U.S. federal investment adviser registration requirements?

The Advisers Act provides that unless an investment adviser is registered, or unless the adviser is exempted or excluded from registration, it is unlawful for the adviser to use any jurisdictional means in connection with its business as an investment adviser.

For foreign investment advisers who act as investment advisers in the U.S., the principal exemption that may apply is the exemption for private investment advisers, which generally exempts any investment adviser that had fewer than 15 clients during the course of the preceding 12 months and that does not holds itself out to the public as an investment adviser. If the adviser has its principal office and place of business outside of the U.S., the 15-clients provision only requires counting of U.S. resident clients against the exemption limit.

For domestic U.S. investment advisers, a principal exclusion from registration is a provision of the Advisers Act that prohibits federal registration by any investment adviser that is regulated as an investment adviser in the state where its principal office and place of business is located, unless the investment adviser has not less than $25 million of assets under management. This provision has the effect of dividing the regulatory requirements for U.S. investment advisers between the SEC, which registers larger investment advisers, and the individual States, which register smaller investment advisers. Foreign investment advisers are not affected by this division since a foreign investment adviser will have a foreign headquarters and thus will not be regulated as an investment adviser in a state where it has its principal office and place of business. Accordingly, all foreign investment advisers who are not otherwise exempt must register federally with the SEC.

There are also exclusions from the registration requirements of the Advisers Act where the provision of investment advice is solely incidental to the performance of professional services by certain persons, such as lawyers, accountants, and brokers or dealers in securities. Generally, for investment advisory services to be considered solely incidental to these other activities, the provider may not charge a separate fee for the investment advisory services provided.

With regard to advisers who may be investment advisers because they publish analyses or reports regarding securities, there is an exclusion from the investment adviser definition for persons who are publishers of a bona fide newspaper, newsmagazine or business or financial publication of general and regular circulation. This basis for the exclusion has generally been interpreted to require that the publication only provide impersonalized advice, that it provide disinterested commentary (i.e. not promotional material), and that it be of general and regular circulation (i.e., not timed to activity in the securities market).

References: Advisers Act sections 2(a)(11), 203, and 203A; Rule 203(b)(3)-1; Lowe v. SEC, 472 U.S. 181 (1985).

4. If you are subject to U.S. federal registration, what kinds of regulatory burdens will apply to your investment advisory activities?

If a foreign financial advisor will act as an investment adviser in the U.S. and if it is not exempted or excluded form registration, then it must register by filing a Form ADV with the SEC. Form ADV is filed over the Internet through the IARD electronic registration system. Form ADV requires information about the adviser's business, the persons who own and control the adviser, its business practices, fees, and the potential conflicts of interest that the adviser may have with its clients. A description of the registration and filing process is available on the SEC's Internet website at www.sec.gov/divisions/investment/iard/register.html.

Generally, the SEC must either declare an investment adviser registration effective within 45 days after the Form ADV is filed, or it must take affirmative action to prevent the registration from becoming effective. The adviser may check through the IARD system to determine when the registration has become effective, and the SEC will deliver an Effective Order to the adviser by regular mail when registration is complete.

After the registration becomes effective, the adviser will be subject to a range of substantive regulatory requirements including requirements concerning amending and updating the Form ADV, advertising and referral fee limitations, providing disclosure documents to clients, using appropriate written investment advisory contracts with clients, maintenance of certain books and records, limitations on performance based fees, custody requirements, restrictions on trading in securities including principal and agency cross limitations, a code of ethics, privacy policies, and the establishment of a compliance program that includes written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act. A general overview of these requirements is provided by an SEC staff memorandum titled "Information for Newly-Registered Investment Advisers," which can be found at www.sec.gov/divisions/investment/adoverview.com.

The SEC undertakes periodic, special and other examinations of the books and records of federally registered investment advisers. The SEC's goal is to complete an initial inspection during the first year of the adviser's registration and to make at least one inspection during each four-year period thereafter. Generally, the timing and frequency of inspections is related to the degree of risk associated with the kinds of operations that the adviser engages in. In the case of registered investment advisers that maintain their offices outside of the U.S., the adviser must be prepared to deliver complete copies of its required books and records to the SEC upon demand.

The Advisers Act preempts state registration of federally registered investment advisers by prohibiting any state or political subdivision of a state from requiring the registration, licensing, or qualification of an investment adviser or supervised person of an investment adviser that is registered with the SEC.

References: Advisers Act sections 203 and 203A; Rules 203-1, 203A-1.

5. If you are subject to U.S. federal registration, what kinds of regulatory provisions will apply to the persons who act as your advisory representatives?

Although the Advisers Act generally preempts state registration, qualification, or licensing of the supervised persons of federally registered investment advisers, the states are permitted to regulate those persons who come within the definition of "investment adviser representatives." Generally, an "investment adviser representative" is a supervised person of an investment adviser who has an office within the state if the representative has as clients more than 5 natural persons within the state, and if more than 10% of the representative's clients are natural persons (in each case, any natural person who has at least $750,000 under management or who has more than $1.5 in net worth is not counted). The SEC has excluded from investment adviser representative status those supervised persons who do not on a regular basis solicit, meet with, or otherwise communicate with clients of the investment adviser and those supervised persons who provide only impersonal investment advice.

Some States, such as New York, do not have separate qualification requirements for investment adviser representatives of federally registered investment advisers. Many States do have separate requirements for investment adviser representatives of federally registered investment advisers, typically including requirements for the investment adviser representatives to:

  • Pass either the Uniform Investment Adviser Law Exam (Series 65), or pass both the General Securities Representative Examination (Series 7) and the Uniform Combined State Law Examination (Series 66), or be exempt from the examination requirement by being a member of a recognized, credentialed professional organization such as a Certified Financial Planner (CFP), Chartered Investment Counselor (CIC), Chartered Financial Consultant (ChFC), Personal Financial Specialist (PFS), or Chartered Financial Analyst (CFA).
  • File a Form U-4 representative application; and
  • pay required filing fees.

References: Advisers Act Section 203A and Rule 203A-3.

6. If you are not subject to registration under U.S. federal investment adviser registration, are you subject to registration by individual states within the U.S.?

As discussed above, the Advisers Act generally requires foreign investment advisers to register federally if they have 15 or more clients within the U.S. during any 12-month period or if they hold themselves out to the public as offering investment advisory services. The Adviser's Act also contains a "National De Minimis Standard," which prohibits the states from requiring investment advisers to register or comply with qualification or licensing requirements (other than provisions prohibiting fraudulent conduct) if they do not have a place of business within the state and if during the preceding 12-month period they had fewer than 6 clients who are residents of the state.

Thus, foreign investment advisers who provide advisory services in the U.S. become subject to state registration requirements if their activities place them within the narrow window between the lower limit for federal registration -- having fewer than 15 clients within a 12-month period and not holding themselves out to the public as investment advisers -- and the National De Minimis Standard for state registration requirements -- having more than 5 clients within a 12-month period and having an office within the state.

States have the right to require federally registered investment advisers to provide them, for notice purposes, with copies of any filings made with the SEC and the right to receive filing and licensing fees. Generally, these notice requirements can be accomplished through checking the appropriate boxes on Forms ADV filed through the federal IARD electronic filing system.

References: Advisers Act sections 304(b)(3) and 222(d). National Securities Markets Improvements Act of 1996, Title III, Investment Advisers Supervision Coordination Act, Section 307.

7. If you are subject to state registration as an investment adviser, what kinds of regulatory provisions will apply to your investment advisory activities?

Each of the states (except Wyoming), the District of Columbia, and Puerto Rico, have registration or licensing requirements for investment advisers, which apply to any investment adviser that acts as an investment adviser within its jurisdiction and is not exempted by the National De Minimis Standard. Generally, registration within a state is accomplished by:

  • Filing a Form ADV with the state;
  • Providing any state-specific forms required; and
  • Paying required registration fees.

In most cases, filing is accomplished through the IARD electronic filing system that is used for federal registration filings. For an overview of substantive requirements applicable to state registered investment advisers, see www.nasaa.org/industry_regulatory_resources/investment_advisers/456.cfm#

Many states have regulations relating to one or more of the following topics: required disclosures to clients, custody, maintenance of books and records, advertising, bonding, and minimum net capital. If an investment adviser is registered in the state in which it maintains its principal office, the National De Minimis Standard prevents any other state from imposing registration or qualification standards on the state registered adviser that are more restrictive than the requirements of the adviser's state of registration with respect to: the maintenance of books and records, net capital requirements, or bonding requirements.

Although the Advisers Act relegates to the states the primary responsibility for investment advisers who are not required to register federally, it nevertheless includes a number of provisions that apply to all investment advisers including those that are state registered. These provisions include:

  • Requirements for advisers to maintain procedures reasonably designed to prevent misuse of material non public information by the adviser and its associated persons in violation of the Securities Exchange Act;
  • Requirements governing the provisions contained in advisory contracts with clients relating to performance fees, assignment of the contract, and notification of change in the membership of the adviser if it is organized as a partnership;
  • Restrictions on the collection of performance fees; and
  • Prohibitions on fraud and restricting agency cross and principal transactions.

References: Advisers Act section 222 and Rules 222-1 and 2; section 204A; section 205; section 205(b)(1) and Rules 205-1, 2 and 3.

8. If you are subject to state registration as an investment adviser, what kinds of regulatory provisions will apply to persons who act as your investment adviser representatives?

Except where they are subject to federal preemption (see question 4 above), the individual states may impose licensing and qualification requirements not only on investment advisers but also on their investment adviser representatives. Generally, where States require registration or qualification of investment adviser representatives of state registered investment advisers, they require the investment adviser representatives to :

  • Pass either the Uniform Investment Adviser Law Exam (Series 65), OR pass both the General Securities Representative Examination (Series 7) and the Uniform Combined State Law Examination (Series 66), OR be exempt from the examination requirement by being a member of a recognized, credentialed professional organization such as a Certified Financial Planner (CFP), Chartered Investment Counselor (CIC), Chartered Financial Consultant (ChFC), Personal Financial Specialist (PFS), or Chartered Financial Analyst (CFA);
  • File a Form U-4 representative application in conjunction with adviser's Form ADV; and
  • Pay required filing fees.

References: For an overview of substantive requirements applicable to state registered investment advisers, see www.nasaa.org/industry_regulatory_resources/investment_advisers/456.cfm#

9. If you are not subject to registration under U.S. federal or state investment advisers laws, what regulations will apply to your investment advisory activities in the U.S.?

In those situations where the states are preempted from imposing registration and qualification standards on investment advisers, the National De Minimis Standard contained in the Advisers Act nevertheless permits the states to prohibit fraudulent conduct. The Advisers Act also imposes certain requirements on all investment advisers, whether or not they are required to be registered or qualified by the SEC or any state. These requirements include:

  • Requirements for advisers to maintain procedures reasonably designed to prevent misuse of material non public information by the adviser and its associated persons in violation of the Securities Exchange Act;
  • Requirements governing the provisions contained in advisory contracts with clients relating to performance fees, assignment of the contract, and notification of
  • change in the membership of the adviser if it is organized as a partnership;
  • Restrictions on the collection of performance fees; and
  • Prohibitions on fraud and restricting agency cross and principal transactions.

References: Advisers Act section 222 and Rules 222-1 and 2; section 204A; section 205; section 205(b)(1) and Rules 205-1, 2 and 3.

10. If you are considering the commencement of investment advisory activities in the U.S., what is the next step?

The foregoing discussion should enable a foreign investment adviser to form a general understanding of the level of regulatory oversight that applies to foreign investment advisers and to their supervised persons depending upon whether they will be required to register federally with the SEC, register with a state in which they will maintain an office, or operate below the threshold of the National De Minimus Standard. If the adviser determines to proceed with its proposed U.S. activities, the next step would be to work with appropriate legal counsel to develop a comprehensive compliance program tailored to the specific operations that the adviser will undertake.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.