New RIA business. Are you wondering if you need to register as a new RIA business? If so, it is important to understand the definition of a Registered Investment Advisor (RIA) to help answer your question. The Investment Advisers Act of 1940, Section 202(a)(11) defines an investment advisor as any person or firm that:
- For compensation;
- Is engaged in the business of;
- Providing advice to others or issuing reports or analyses regarding securities.
An individual must satisfy all three elements mentioned above, to fall within the definition of an investment advisor. If your business model easily falls within these three elements, then your question is answered and you need to register your new RIA business.
However, if you are still unclear on your firm’s RIA registration requirements, the Division of Investment Management published a release (No. 1092) in 1987 to help provide guidance to these three elements. I’ll share some of the information from that release for clarity:
Compensation-This term has been broadly construed. Generally, the receipt of any economic benefit, whether in the form of an advisory fee, some other fee relating to the total services rendered, a commission, or some combination, satisfies this element.
Engaged in the Business-A person must be engaged in the business of providing advice. This does not have to be the sole or even the primary activity of the person. Factors used to evaluate whether a person is engaged are:
- whether the person holds himself/herself out as an investment adviser;
- whether the person receives compensation that represents a clearly definable charge for providing investment advice; and
- the frequency and specificity of the investment advice provided. Generally, a person providing advice about specific securities will be “engaged in the business” unless specific advice is rendered only on a rare or isolated occasion.
Advising Others about Securities
- Advice about Securities. A person clearly meets the third element of the statutory test if he/she provides advice to others about specific securities, such as stocks, bonds, mutual funds, limited partnerships, and commodity pools. The SEC staff has stated that advice about real estate, coins, precious metals, or commodities is not advice about securities. The more difficult questions arise with less specific advice, or advice that is only indirectly about securities. The SEC staff has stated in this regard:
(i) advice about market trends is advice about securities;
(ii) advice about the selection and retention of other advisers is advice about securities;
(iii) advice about the advantages of investing in securities versus other types of investments (e.g., coins or real estate) is advice about securities;
(iv) providing a selective list of securities is advice about securities even if no advice is provided as to any one security; and
(v) asset allocation advice is advice about securities.
As you consider this information and contemplate whether to register a new RIA business, contact Registered Advisor Services today for help and guidance on the RIA registration process.
