Registration as an Investment Adviser or an Investment Adviser Representative under South Carolina Law

It is unlawful for a person to transact business as an investment adviser (“IA”) or an investment adviser representative (“IAR”) in South Carolina unless that person is registered as an IA or an IAR in South Carolina under the S.C. Uniform Securities Act of 2005, appropriately registered through the SEC, or exempt from registration. See S.C. Code Ann §§ 35-1-403(a), 35-1-404(a).


A person applying for registration as an IA or an IAR under South Carolina law may file an application through the CRD/IARD system or by filing the required paperwork and paying the required fees directly to the S.C. Securities Division. S.C. Reg. § 13-403B.

Regardless of the form in which a person applies for registration, to initially apply for registration as an IA under South Carolina law, an applicant must file an application and an appropriate consent to service of process and pay the applicable registration fee and any fee imposed by the CRD/IARD system. See S.C. Code Ann §§ 35-1-406(a). The application consists of “a uniform form” and “any other financial or other information or record that the Securities Commissioner determines is appropriate.” Id. Although South Carolina does not define “a uniform form,” the Securities Division requires that an applicant file Form ADV, Parts 1A and 1B and Form ADV, Part 2. The Securities Division also requires the following to be submitted: financial statements from an IA with a signed verification statement; a surety bond, if the IA does not meet its net worth and capital requirements, S.C. Reg. § 13-406; advisory contract(s) used; and a list of IARs with name, place of business in South Carolina, and CRD number.

To initially apply for registration as an IAR under South Carolina law, an applicant must file an application and an appropriate consent to service of process, pass one or more required exams (or hold one or more of several specific professional designations), and pay the applicable registration fee and any fee imposed by the CRD/IARD system. See S.C. Code Ann §§ 35-1-406(a), S.C. Reg. §§ 13-401B, C. Although South Carolina does not define “a uniform form,” the Securities Division requires that an applicant file Form U4.

Registration as an IA or an IAR under South Carolina law is on a calendar year basis. Once registered as an IA or an IAR in under South Carolina law, that registration expires on December 31 of the applicable year. S.C. Code Ann §§ 35-1-406(d).

To renew a registration as an IA or an IAR, the IA and IAR must pay the filing fee to renew, pay any fee imposed by the CRD/IARD system, pass the exam requirements (an IAR should have already satisfied this requirement at the time of initial registration as an IAR), and file any records required by rule adopted or order issued. Because no regulation currently exists imposing additional filing requirements and orders are generally specific to an individual applicant, most IAs and IARs who are renewing their registrations in South Carolina merely have to pay their South Carolina renewal fee by December 31 to renew their registration. (However, be aware that if a person is using the CRD/IARD system to apply for renewal registration, the applicable renewal fees must be in that person’s financial account at CRD/IARD weeks before December 31 – for example, for 2011 renewals, the renewal fees must be in the account by December 13, 2010).

If the South Carolina Securities Division asks a renewing IA or IAR for additional documentation at or near the time of renewal, the Securities Division is likely asking for that documentation under the applicable audit or inspection provisions of South Carolina law, see S.C. Code Ann. § 35-1-411(d), not as part of the renewal process.

The Securities Division has a web page that may provide some useful information.

SEC Recently Released its New Form ADV, Part 2

As you know by now, the SEC has adopted a new Form ADV, Part 2 – Uniform Requirements for Investment Adviser Brochure and Brochure Supplements. This new form generally must be used in 2011; however, some regulators may accept the new form in 2010. Part 2 is an important disclosure document, because it includes the information that must be provided to clients and prospective clients.


The new Part 2 and the related instructions can be found on the SEC website.

On October 17, 2010, Investment News published a good article on the new Part 2. It is titled, “New Form ADV-2 adding costs, confusion.”

The new Part 2 is not to be taken lightly. Every investment adviser should gather the resources needed to timely and completely prepare this disclosure document and should start the process of preparing its new Part 2 as early as possible.

Municipal Advisors Must Register with the SEC

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, Congress amended Section 15B(a) of the Securities Exchange Act of 1934 to, among other things, make it unlawful for municipal advisors to provide certain advice or solicit municipal entities or certain other persons without registering with the U.S. Securities and Exchange Commission. Accordingly, the SEC has adopted new Rule 15Ba2-6T under the Exchange Act as an interim final temporary rule. This new rule imposes a temporary registration process for municipal advisors and becomes effective on October 1, 2010, meaning that municipal advisors must be registered on that date in order to continue their municipal advisory services.


Section 15B(a)(1) of the Exchange Act, as amended by Section 975(a)(1)(B) of the Dodd-Frank Act, makes it unlawful for a municipal advisor to provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered with the SEC. Rule 15Ba2-6T provides a method for municipal advisors to temporarily satisfy the statutory registration requirement of Section 15B(a)(1) of the Exchange Act until the SEC has promulgated a final permanent registration program. The interim final temporary rule will expire on December 31, 2011.

A municipal advisor may temporarily satisfy the new registration requirement by submitting certain information electronically through the SEC’s public website on new Form MA-T. Because entry of information into Form MA-T will require establishing an account and securing access credentials (username and password), municipal advisors are advised to allow ample time to establish an account and obtain such credentials and complete the form before October 1, 2010.

On Form MA-T, a municipal advisor will indicate the purpose for which it is submitting the form (e.g., initial application for temporary registration), provide certain basic identifying and contact information concerning its business, indicate the nature of its municipal advisory activities, and supply information about its disciplinary history and the disciplinary history of its associated municipal advisor professionals.

SEC Requires Investment Advisers to Use a New Form ADV, Part II, in 2011

The U.S. Securities and Exchange Commission recently issued a final rule under the Investment Advisers Act of 1940 requiring investment advisers registered with the SEC to provide new and prospective clients with a brochure and brochure supplements that are written in plain English. Advisers must file their brochure electronically with the SEC, and the SEC will make these brochures available to the public through its website.


Investment advisers must prepare Part II of Form ADV and must provide it, or a brochure which contains substantially similar information, to each client or prospective client. Part II of Form ADV provides clients and prospective clients with a description of the adviser, the adviser’s services and fees, conflicts of interest, and the adviser’s business practices. Currently Part II is in a check-the-box format with a limited amount of narrative explanation.

Under the new final rule, the check-the-box format of Part II will be eliminated. The revised Part II will have to be written in plain English.

Preparing a proper brochure will require time, effort, and the making of a few decisions regarding presentation. For example, when preparing the new brochure an adviser must keep its fiduciary duty in mind so that all necessary disclosures are made and clients and prospective clients can understand such disclosures. The adviser also must properly draft the new brochure(s). For example, the SEC stated in the new final rule that advisers must “communicate clearly” by using “short sentences; definite, concrete, everyday words; and the active voice.” The brochure “should be succinct and readable.” To limit the length of the brochure, “advisers may create separate brochures for different types of advisory clients, each of which may be shorter, clearer, and contain less extraneous information than would a combined brochure.”

Components of the New Brochure

The revised Part II will be in two sub-parts: (1) 18 disclosure items about the advisory firm and (2) a supplement which includes information about advisory personnel on whom clients rely for investment advice.

The 18 disclosure items include the following:

1. On a cover page, an adviser shall include the name of the firm, its business address, contact information, website (if applicable), the date of the brochure, and a statement that the brochure has not been approved by any securities regulator. If the adviser refers to itself as a “registered investment adviser,” the cover page must also include a disclaimer that registration does not imply a certain level of skill or training.

2. An adviser shall identify and discuss material changes since the prior year’s brochure.

3. An adviser shall include a table of contents that is detailed enough to permit clients and prospective clients to locate information easily.

4. An adviser shall provide a description of its business that includes the types of advisory services offered, whether the adviser holds itself out as specializing in a particular type of advisory service, and the amount of client assets that it manages.

5. Regarding fees and compensation, an adviser shall describe how it is compensated for its advisory services; provide a fee schedule; and disclose whether fees are negotiable, its billing practices, and information about other costs to the client.

6. An adviser shall disclose whether the adviser charges performance-based fees or whether a supervised person manages an account that pays such a fee and, if so, the adviser shall discuss the conflicts of interest.

7. An adviser shall describe the types of advisory clients the firm generally has and the requirements (e.g., minimum account size) for opening or maintaining an account.

8. An adviser shall describe the methods of analysis and investment strategies used and the fact that investing in securities involves risk of loss. An adviser shall also disclose risks due to frequent trading and risks for each investment strategy or method of analysis and particular type of security it recommends.

9. An adviser shall disclose material facts about any legal or disciplinary event that is material to a client’s or prospective client’s evaluation of the adviser’s or its management’s integrity.

10. An adviser shall disclose material relationships or arrangements that the adviser has with related financial industry participants, related material conflicts of interest and how such conflicts are addressed, and information about selecting or recommending other advisers.

11. An adviser shall disclose its code of ethics and any participation or interest in client transactions and the conflicts of interest presented by such participation or interest.

12. An adviser shall disclose its brokerage practices.

13. An adviser shall disclose whether, and how often, it reviews clients’ accounts or financial plans, and identify who conducts the review.

14. An adviser shall disclose any arrangement under which it compensates another for a client referral and shall describe such compensation. An adviser shall also disclose any economic benefit (e.g., sales prizes) received from a person, who is not a client, for providing advisory services to clients.

15. An adviser with custody shall disclose that clients will receive account statements directly from a qualified custodian and that clients should carefully review these account statements. If the adviser also sends account statements, the adviser shall further disclose that clients should compare the account statements provided by the qualified custodian to the account statements provided by the adviser.

16. An adviser with discretionary authority over client accounts shall disclose its discretionary authority and any limitations clients may place on this authority.

17. An adviser shall disclose its proxy voting practices.

18. An adviser shall disclose certain material financial information about the adviser.

Advisers that sponsor a wrap fee program continue to be required to prepare a separate, specialized brochure for clients of the wrap fee program in lieu of the sponsor’s standard brochure.

The supplement to Part II shall include, among other things, information about the education, experience, and disciplinary history of the supervised person(s) who provides advisory services to the client.

Effective Date

Each adviser applying for initial registration with the SEC after January 1, 2011 must file a brochure pursuant to the new final rule.

Advisers who are already registered with the SEC must comply with the requirements of the new final rule when they file their first annual updating amendment to Form ADV for the fiscal year ending on or after December 31, 2010. Therefore, for advisers whose fiscal year ends on December 31, 2010, they must file a new brochure pursuant to the new final rule by March 31, 2011, and immediately begin to distribute the new brochure to new and prospective clients. Within 60 days of filing the new brochure, existing SEC-registrants must deliver the new brochure to existing clients.

Applicability to Advisers Registered with the South Carolina Securities Division

I am not aware of any statement by the Securities Division about whether it will require advisers to file Part II pursuant to the requirements of the SEC’s new final rule. In fact, South Carolina law is vague on what form an adviser must file at all.  S.C. Code Ann. § 35-1-406(a)(1) merely states that an applicant shall file “the information or record required for the filing of a uniform application,” but it does not define “uniform application.” The Securities Division historically has required the form required by the SEC. I expect that the Securities Division will want state-registered advisers to file Part II pursuant to the requirements of the SEC’s new final rule.

SEC Seeks Public Input on the Standard of Care for Brokers, Dealers, and Investment Advisers

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the U.S. Securities and Exchange Commission to conduct a study regarding the standard of care of brokers, dealers, and investment advisers. That process has already begun. The SEC has issued a request for comment in which it is seeking public input, comments, and data regarding the standard of care imposed or to be imposed upon these financial industry professionals. Comments are due by August 30, 2010.


Current law imposes a higher standard of care on investment advisers (i.e., a fiduciary duty) while imposing a lesser standard of care on brokers (i.e., a suitability standard). Regulators have long been concerned that retail customers do not understand the differences in these standards of care.

In announcing the SEC’s request for comments, Chairman Shapiro stated, “At the completion of this study, we will have the authority to write rules that would create a uniform standard of conduct for professionals who provide personalized investment advice to retail customers. And, the new law requires that this standard be ‘no less stringent’ than the standard applicable to investment advisers.” Therefore, this study is important because it likely will result in the SEC issuing new rules that will impose a greater standard of care on brokers and dealers.

In the study, the SEC will evaluate the effectiveness of the existing legal or regulatory standards of care for brokers, dealers, investment advisers, and persons associated with them for providing personalized investment advice and recommendations about securities to retail customers. The SEC will also evaluate whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers.

Specifically, the SEC requests comment on fourteen issues, including the following:

1. The effectiveness of the existing legal or regulatory standards of care for brokers, dealers, investment advisers, and associated persons.

2. Whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for brokers, dealers, investment advisers, and associated persons.

3. Whether retail customers understand that there are different standards of care applicable to brokers and investment advisers.

4. The regulatory, examination, and enforcement resources devoted to enforcement of the standards of care.

5. The potential impact on retail customers of imposing a higher standard of care on brokers, dealers, and their associated persons.

6. The varying level of services provided by brokers and investment advisers.

7. Potential additional costs and expenses to retail customers and to brokers, dealers, and investment advisers.

Some Changes Related to Accredited Investors under Dodd-Frank Are Already Applicable

Regulation D of the Securities Act of 1933 includes rules governing the limited offerings and sales of securities that are not registered under the 1933 Act. “Accredited investor” is an important term that is defined and used throughout Regulation D.


Since unregistered, Regulation D offerings and sales of securities are often used to raise funds, any change to the definition of an accredited investor is critical. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted on July 21, 2010, changed the definition of accredited investor and allows for subsequent changes to that definition.

First, Dodd-Frank immediately changed the definition of accredited investor. Effective on the date of enactment of Dodd-Frank, the net worth standard for a natural person remains at $1,000,000; however, the value of the investor’s primary residence now must be excluded from that person’s net worth. This change is effective from July 21, 2010, through July 21, 2014.

This amendment to the net worth standard for an accredited investor requires immediate attention. It impacts how an issuer or manager conducts its business. For example, a fund’s subscription agreement may need to be changed, and an adviser’s policies and procedures may need to be amended.

Second, within four years of July 21, 2010, the U.S. Securities and Exchange Commission may review and modify by regulation the definition of accredited investor as the term applies to a natural person. Any modification shall not affect the exclusion of the primary residence from the net worth of the individual. Also, every four years thereafter, the SEC shall review the definition of accredited investor and may make changes by regulation.

Third, by July 21, 2013, the Comptroller General of the United States shall study, and submit its report to Congress, the following: the appropriate financial thresholds or other criteria needed to qualify as an accredited investor and eligibility to invest in private funds. Congress could then enact additional legislation affecting Regulation D offerings and accredited investors.

Dodd-Frank Securities Reform Bill Affects Investment Advisers, Brokers, and Hedge Funds

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The public policy reasons for this bill were to control or reduce the systemic risk that exists in our financial system and to protect consumers. Although this bill significantly affects large banks and insurance companies, it also will affect many smaller, but important, players in the financial services industry here in South Carolina and around the country. Specifically, the Dodd-Frank bill directly affects investment advisers, broker-dealers, and hedge funds.

Regarding investment advisers, under the new legislation, more investment advisers will have to resister with State securities regulators instead of registering with the U.S. Securities and Exchange Commission. Previously, investment advisers with assets under management of less than $25,000,000 had to register with the applicable State securities regulator. The new legislation requires that by July 21, 2011, investment advisers with AUM of less than $100,000,000 register with the applicable State securities regulator. (Some exceptions apply.) Additionally, the new legislation eliminated the private fund exemption from registration and imposed a requirement on many advisers to private funds (e.g., hedge funds) to register as investment advisers with the SEC. The new legislation requires investment advisers who act solely as an adviser to private funds and who have AUM of $150,000,000 or more to register as investment advisers with the SEC. Under the Dodd-Frank bill, these hedge fund managers, whether registered or not, will have to keep records, make them available to the SEC or other regulators, and/or be subject to examination. The new legislation will also impose additional costs on investment advisers. These changes generally are effective on July 21, 2011.

The Dodd-Frank bill gives the SEC the ability to impose a fiduciary standard on broker-dealers. The fiduciary standard, which is currently applicable to investment advisers, means that investment advisers must always make decisions and recommendations that are in the best interests of their clients. This is a high standard of care. Broker-dealers have generally been held to a lesser standard of care when making recommendations to clients. If the SEC imposes this higher standard of care on broker-dealers, the potential liability of broker-dealers will increase.

The new consumer protection agency created in the Dodd-Frank bill will not directly oversee investment advisers and broker-dealers. Their existing regulators will retain this oversight jurisdiction.

The new legislation also affects private offerings of securities under Regulation D of federal securities laws. The Dodd-Frank bill changed the definition of “accredited investor” and “qualified client.” For example, for determining net worth, accredited investors under the new legislation should no longer include the fair market value of their primary residence. The new legislation also requires the Comptroller General of the United States to study whether private funds should be overseen by a newly formed self-regulatory organization.

Many of the burdens, restrictions, and costs imposed on the financial services industry by the Dodd-Frank bill are unknown. The SEC and other regulatory bodies will have to write and approve many pages of regulations that will define the true extent of the new legislation.