Filing Instructions For
Federally Covered Investment Advisers
What is a Federally Covered Investment Adviser?
Public Law 104-290, The National Securities Markets Improvement Act of 1996 ("NSMIA") dramatically changed the way the states and the federal government regulate investment advisers. Effective July 8, 1997, NSMIA split the universe of investment advisers into those advisers regulated solely by the Securities and Exchange Commission ("SEC") and those regulated solely by the states. A Federally Covered Investment Adviser or "FCA" is regulated by the SEC. Congress preempted the states from requiring FCAs to be licensed.
Generally, the following advisers are considered FCAs and fall within the SEC's jurisdiction: 1) advisers with $30 million or more in assets under management (advisers having between $25 million and $30 million in assets under management may choose to be regulated by the SEC or by the states); 2) advisers to SEC-registered investment companies; 3) advisers excepted from the federal definition in Section 202(a)(11) of the Investment Advisers Act of 1940; 4) nationally recognized statistical rating organizations; 5) pension consultants; 6) affiliates of SEC-registered advisers sharing the same principal office and place of business; 7) advisers expecting to be eligible for federal registration within 120 days; and 8) advisers not regulated or required to be regulated in the state where they have their principal office and place of business.
Although Congress preempted the states from requiring FCAs to be licensed, NSMIA did allow the states to require "the filing of any documents filed with the ... [SEC] pursuant to the securities laws solely for notice purposes, together with a consent to service of process and any required fee."
Effective July 21, 2011, advisers having less than $100 million in assets under management will be subject to state registration as a result of The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
Does Connecticut Require FCAs to File a Notice as Permitted by NSMIA?
Connecticut exempts FCAs from the registration requirements under the Connecticut Uniform Securities Act. However, most FCAs must file a notice with the department if they wish to transact business in or from Connecticut. The notice is valid until December 31st of the calendar year in which it is first filed, and is renewable annually. Renewal notice filings expire on December 31st of the calendar year in which they are filed. The initial notice fee is $275, and the renewal fee is $175.
What FCAs Do Not Have to File a Notice?
Certain FCAs do not have to file a notice with the department.
Out-of-State FCAs Transacting Business on a De Minimis Basis
Under Section 36b-6(e) of the Connecticut Uniform Securities Act, an FCA need not file a notice if it: 1) has no place of business in Connecticut; and 2) during the preceding twelve months the FCA has had no more than five clients who are residents of Connecticut.
Section 36b-6(e) does not limit the number of prospective clients an FCA may solicit through advertising. Even though the FCA may be excused from filing a notice, the FCA must still consider whether it is engaging investment adviser agents who would have to be registered in Connecticut. (See below). FCAs relying on the de minimis exemption are encouraged to advise the department of that fact.
How Are Clients Counted for Purposes of the State De Minimis Exemption?
By Order dated March 4, 1999, the Commissioner stated that, for purposes of Section 36b-6(e)(3) of the Connecticut Uniform Securities Act, the term "client" would be determined in accordance with SEC Rule 203(b)(3)-1, as amended. According to the Order, the following would be considered a single client:
"(a) A natural person, and:
|(1)||Any minor child of the natural person;|
|(2)||Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;|
|(3)||All accounts of which the natural person and/or the persons referred to in this paragraph (a) are the only primary beneficiaries; and|
|(4)||All trusts of which the natural person and/or the persons referred to in this paragraph (a) are the only primary beneficiaries;|
The Order added that:
|1.||An owner must be counted as a client if the investment adviser provides investment advisory services to the owner separate and apart from the investment advisory services provided to the legal organization;|
|2.||An owner need not be counted as a client of an investment adviser solely because the investment adviser, on behalf of the legal organization, offers, promotes, or sells interests in the legal organization to the owner, or reports periodically to the owners as a group solely with respect to the performance of or plans for the legal organization's assets or similar matters;|
|3.||A limited partnership would be considered a client of any general partner or other person acting as investment adviser to the partnership;|
|4.||Any person for whom an investment adviser provides investment advisory services without compensation need not be counted as a client; and|
|5.||While an investment adviser having its principal office and place of business outside of the United States must count only clients that are United States residents, an investment adviser having its principal office and place of business in the United States must count all clients.|
FCAs Otherwise Excluded from the State Definition of "Investment Adviser Under Section 36b-3(10) of the Connecticut Uniform Securities Act
Following are examples of FCAs that would not be required to file a notice with the department:
- A bank, as defined in Section 202(a)(2) of the Investment Advisers Act of 1940, that is excepted from the definition of "investment adviser" in Section 202(a)(11) of the Investment Advisers Act of 1940.
- A bank holding company, as defined in the Bank Holding Company Act of 1956, that is excepted from the definition of "investment adviser" in Section 202(a)(11) of the Investment Advisers Act of 1940.
- Broker-dealers whose performance of investment advisory services is solely incidental to the conduct of their broker-dealer business and who receive no special compensation for the advisory services.
- Persons whose advice, analyses or reports related only to securities exempt from registration under Section 36b-21(a)(1) [i.e. governmental securities].
- Insurance companies (or their affiliates, as defined in Section 38a-129 of the Connecticut General Statutes) that are under the supervision of the Connecticut Insurance Commissioner when providing services to separate accounts of the insurance company or registered investment companies all of whose shares are owned by the insurance company or its insurance company affiliates or by the separate accounts of the insurance company or its insurance company affiliates.
Bear in mind that the burden of proving that an FCA is otherwise excluded under Section 36b-3(10) of the Connecticut Uniform Securities Act falls on the FCA. Individuals conducting solicitation or advisory activities on behalf of FCAs otherwise excluded under Section 36b-3(10) of the Connecticut Uniform Securities Act need not register as investment adviser agents in Connecticut since their employing firm is not an "investment adviser" as defined under state law.
What if an Investment Adviser Need Not Register With the SEC Because it is Exempted from Federal Registration Under Section 203(b)(3) of the Investment Advisers Act of 1940?
Caution: The following analysis is subject to further review and change following July 21, 2011 effectiveness of The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
Investment advisers that are neither registered with the SEC nor excepted from the federal definition of "investment adviser" in Section 202(a)(11) of the Investment Advisers would technically be subject to state registration requirements. However, where such an investment adviser would be subject to SEC registration but-for the federal exemption in Section 203(b)(3) of the Investment Advisers Act of 1940, neither a Connecticut registration nor a Connecticut notice would be required.
Investment advisers having less than $25 million in assets under management are not eligible to rely on Section 203(b)(3) of the Investment Advisers Act of 1940 since their advisory activities are regulated by state law.
Section 203(b)(3) of the Investment Advisers Act of 1940 exempts from federal registration: "any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under ... [the Investment Company Act of 1940], or a company which has elected to be a business development company pursuant to section 54 of title I of this Act and has not withdrawn its election. For purposes of determining the number of clients of an investment adviser under this paragraph, no shareholder, partner, or beneficial owner of a business development company, as defined in this title, shall be deemed to be a client of such investment adviser unless such person is a client of such investment adviser separate and apart from his status as a shareholder, partner, or beneficial owner."
By Order dated October 14, 1997, the Connecticut Banking Commissioner excluded investment advisers relying on the federal exemption in Section 203(b)(3) from the state definition of "investment adviser" in Section 36b-3(10) of the Connecticut Uniform Securities Act. The Commissioner also acknowledged that it would be appropriate for advisers relying on Section 203(b)(3) to use the SEC's non-exclusive safe harbor in Rule 203(b)(3)-1 in counting clients. Rule 203(b)(3)-1 defines "client" to include non-US residents as well as clients nationwide.
Since advisers relying on the federal exemption in Section 203(b)(3) are not considered "investment advisers" under the Connecticut Uniform Securities Act, individuals representing them in performing advisory or solicitation functions would not be "investment adviser agents" and would not have to register as such in Connecticut.
What Type of Notice Must an FCA File?
FCAs must file with Connecticut: 1) Part 1 of Form ADV; 2) amendments to Part 1 of Form ADV; and 3) an initial notice fee of $275 or a renewal notice fee of $175.
The following are NOT required:
1. Part II of Form ADV. Part II of Form ADV need only be filed if the Commissioner specifically requests it.
2. Financial Statements
3. Connecticut Branch Office Registration/Notice.
How Must FCAs Make Their Notice Filing and Remit Payment for Notice Filing Fees?
Effective January 1, 2001, FCAs must make their Connecticut notice filings, including amendments and related payments, electronically through the Investment Adviser Registration Depository ("IARD"). IARD participation by FCAs is mandatory for both initial and renewal notice filings in Connecticut. In addition, federal law requires that FCAs register with the SEC via the IARD system. The IARD is an Internet-based filing depository operated by FINRA under contracts with the SEC and the North American Securities Administrators Association ("NASAA"). The IARD was designed to accept filings made electronically by SEC-and state registered investment advisers as well as their investment adviser agents; collect associated regulatory filing fees on behalf of affected jurisdictions; and provide the investing public with Internet-based access to background information on state and federally regulated investment advisory personnel.
IARD is capable of accepting Part 1 of Form ADV, Part 2 of Form ADV and investment adviser agent registration filings.
FINRA requires that IARD filers pay participation fees separate and apart from notice filing fees required by the State of Connecticut, and that an account be established to fund state notice filing fee payments. In addition, users must be entitled to access the database. For additional information on filing through IARD, see www.iard.com. FCAs should bear in mind that, unless they have previously made a paper notice filing with Connecticut, their IARD filing would be treated as an initial rather than a "transition" filing.
When Must an FCA Register its Investment Adviser Agents With Connecticut?
Whether an FCA must register its investment adviser agents in Connecticut turns on an interpretation of federal law. While the department will not opine on whether a specific individual qualifies, the following summary provides general guidance. Investment adviser agent registration procedures can be found on the department's web site.
Section 36b-3(11) of the Connecticut Uniform Securities Act defines the term "investment adviser agent" as follows. "Investment adviser agents", as defined by state law, must be registered with the Connecticut Department of Banking.
(A) 'Investment adviser agent' includes (i) any individual, including an officer, partner or director of an investment adviser, or an individual occupying a similar status or performing similar functions, employed, appointed or authorized by or associated with an investment adviser to solicit business from any person for such investment adviser, within or from this state, and who receives compensation or other remuneration, directly or indirectly, for such solicitation; or (ii) any partner, officer, or director of an investment adviser, or an individual occupying a similar status or performing similar functions, or other individual employed, appointed, or authorized by or associated with an investment adviser, who makes any recommendation or otherwise renders advice regarding securities to clients and who receives compensation or other remuneration, directly or indirectly, for such advisory services.
(B) 'Investment adviser agent' does not include an individual employed, appointed or authorized by, associated with or acting on behalf of an investment adviser exempt from registration under subdivision (1) or (2) of subsection (e) of section 36b-6 [i.e. an SEC-regulated investment adviser], who is a "supervised person", as defined in Section 202(a)(25) of the Investment Advisers Act of 1940, unless such supervised person is an 'investment adviser representative', as defined in Securities and Exchange Commission Rule 203A-3, 17 CFR 275.203A-3. (Emphasis added)
Section 202(a)(25) of the Investment Advisers Act of 1940, as amended by NSMIA, divides "supervised persons" into three classes: 1) partners, officers or directors of an SEC-registered investment adviser; 2) employees of an SEC-registered investment adviser; and 3) other persons who provide investment advice on behalf of the investment adviser and are subject to the investment adviser's supervision and control. Section 203A(b)(1) of the Investment Advisers Act of 1940 provides that: "No law of any State or political subdivision thereof requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person- (A) that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State;" The SEC defined the term "investment adviser representative" in Rule 203A-3. Under SEC Rule 203A-3, an "investment adviser representative:
- Has more than five clients who are natural persons. In deciding whether a client is a "natural person" the rule would not count a) natural persons that, immediately after entering into the contract have at least $750,000 under the management of the investment adviser; b) natural persons whom the investment adviser reasonably believes, immediately before entering into the contract, either have a net worth (together with assets held jointly with a spouse) of more than $1.5 million at the time the contract is executed or are "qualified purchasers" under Section 2(a)(51)(A) of the Investment Company Act of 1940; and c) natural persons who, immediately before entering into the contract are either executive officers, directors, trustees or general partners of the investment adviser or are investment advisory employees (other than employees
performing solely clerical, secretarial or administrative functions) who, in connection with their regular functions or duties, have participated in the investment activities of the investment adviser for at least 12 months.
- In addition to having more than five clients who are natural persons, more than 10% of the investment adviser representative's clients must be natural persons for the representative to still be considered an "investment adviser representative" (and subject to state registration). Here, the rule would not count the sophisticated natural clients described in the preceding paragraph.
- Even if more than 10% of a representative's client base consists of natural persons and the representative services more than 5 natural persons, the representative would not be considered an "investment adviser representative" under federal law (and subject to state registration if 1) the representative does not, on a regular basis, solicit, meet with or otherwise communicate with advisory clients; or 2) the representative only provides impersonal investment advice.
Federal law defines "impersonal investment advice" to mean "investment advisory services provided by means of written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts."
If the individuals are unaffiliated third party solicitors who do not qualify as "supervised persons" of the firm under federal law, those solicitors would have to be registered with our department.