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Also available as podcast (Episode #2)
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Do I need to register my RIA with the SEC or with my state?
As to whether you need to register your Registered Investment Advisor (“RIA”) with the SEC or state is primarily driven by the amount of Assets Under Management (“AUM”) you have. Generally speaking, if you have more than $100mm in assets, you will need to register with the SEC. Below $100mm, your state. However, there are a number of additional nuances to be aware of relating to factors such as the number of states you have clients in, when you surpass / fall below the $100mm threshold, etc. that could potentially have an impact on your filing status as well.
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Full Transcript:
Do I need to register my RIA with the SEC or with the state? That is the topic of today’s question, which is question #2 on the Transition To RIA video series.
Hi, I’m Brad Wales with Transition to RIA, where I help advisors just like you learn everything they want to know about the RIA model. What are the economics of it? What are the pros and cons of it? Why might you consider going RIA versus what your current affiliation option is?
Understanding all these variables is what I help advisors with. And then to the degree, an advisor decides, maybe this is a path that I want to pursue, I then also explain what are the steps involved with actually transitioning to the model. So I’m happy to have that conversation with you. Head on over to TransitionToRIA.com if you’re not already there, all kinds of information, and easy contact information of how to get ahold of me for a conversation.
So today’s question, do I need to register my RIA with the SEC or with the state?
Now this is a good question. It seems like a short, quick answer but there are some nuances with it that I wanted to go through in this video just so you understand exactly how it works.
The short answer is, do I need to register my RIA with the state or SEC, the mark that draws the conclusion on that initially is $100 million. So if you have more than $100 million under management, you would be registered with the SEC. If you have under $100 million under management, you’d be registered with your state.
Now interesting enough that number used to be $30 million was that over/under line. And the SEC, this is a number of years ago, the SEC basically said, no, we’re going to increase that to $100. And effectively what that did is that pushed the oversight of a lot of RIAs down on the state. So if you were previously say $70 or $80 million, and at the time that was above the $30, that had you at SEC registration, when they changed that to $100 that pushed that down to the state.
What the difference is, and I’ll do a future video on this, is basically who’s responsible for the oversight of your firm, the SEC or your state? Who would do an examination of your firm, those sorts of things.
So it is important to understand….“would I be SEC, or would I be state?” So again, the initial look at that is that $100 million point. Above $100 million you’re SEC, below you’re state.
Now a couple of nuances to go with that. When you set up your new RIA, which is a legal entity unto itself and there’s a whole process for how you go about setting up an RIA which is part of what I explain to advisors and help them understand that process. But on that day that the RIA figuratively goes live from a legal regulatory perspective, your RIA technically has zero assets, you have not yet moved any clients under that RIA.
Now you might have, let’s say $300 million in your current firm and your goal, of course, at this point is you’re establishing your own RIA, you’re transitioning to the RIA model. And so certainly you have more than $100 million, you have $300 million and you intend to take as much or all of it as you can with you to the RIA. So you’re going to be above the $100 million. But on that day one, you technically have zero, you haven’t moved any assets underneath the RIA.
So how are we supposed to be SEC-registered if we have zero assets? And so the regulators certainly understand this scenario. So what they do is they give you 120 days, if you’re going to be SEC-registered from the time you launch the firm to get to that $100 million mark. Now if you have $300 million, there’s no obligation that you move all 300 by that 120 days. Obviously, you have an incentive to do that, personally, but from a regulatory standpoint, within that 120 days you need to move at least $100 million by that point. So basically you essentially self-declare ahead of time and say….“I know I will be SEC, I know I will have more than $100 million, I just need to move the assets” and they give you that 120-day buffer window to get there.
Now if you know you’re going to be state all long, or maybe your intention is to grow to the point, and I’ll get to that in a second where one day you pass that $100 million mark and you become SEC, but if you have $70 million now wherever you are located and you want to start your own RIA and move that $70 million, you’re going be state regardless. So there is no 120-day window under the state registration because technically you don’t need any assets to be registered at the state level. You can have zero, you can have $5 million, $20 million, whatever. So as you work to move your $70 million over, whether you’ve moved over $5 million, or $30 million or $70 million, you’re going to be state-registered either way. So you’re not, figuratively “on the clock”, as far as moving your assets when you know, you’re going to be state-registered, kind of from the start at that point. So that’s the initial setup.
Now, let’s fast forward, you’ve done the transition, you’ve reached the point in assets you’re going to be at. Now what happens over time, and so there’s two scenarios, there’s two paths you can take here. We’ll take the first one that’s generally more seen because someone’s growing as opposed to the opposite, you’ll see what I mean.
If you start out as state-registered, like we just talked about, and let’s say you have that $70 million, most advisors want to grow their firm, bring on assets. So the question is, okay, when you reach that $100 million mark, the minute you jump over $100 million, do you now have to re-register with the SEC?
And to be clear, there’s a process for doing this, for moving from state to SEC. The compliance consultants, I talk about this a lot and…or will talk about a lot in videos, help you with all these details, they help you set up the RIA. We’ll go over that in a future video. I’m always willing to have that conversation if you ever like, if you want to reach out in the interim.
But the idea is okay, you’ve set up as a state-registered, now what happens as you grow your firm, you’ve passed the $100 million mark? Well, the challenge there is when you get right to $100 million the market that day could go up and push you above $100 million and then the next day, the market could go down, and push you right back below the $100 million. So what is exactly supposed to happen when you cross this line?
Again, the regulators understand this predicament. They don’t want people needlessly moving back and forth. So what happens is on your way up going from state to SEC when you cross that $100 million mark, you have the option at that point, to re-register with the SEC, the option. When you reach $110 million, you have the requirement to do it. So at that point, you no longer have an option or not. But again, that’s a good problem because that means you’re growing, and hopefully not only passing the $110 but well exceeding it long term. So again, just the numbers as you grow to keep in mind.
Now the opposite, and this is rare, but if someone starts out as SEC, in theory, they could shrink or decrease in size. Now, that’s generally rare because if someone is perhaps reaching a point in their career where they’re kind of winding the practice down, or they’re going to enter into some sort of succession or sale process, that’s generally what happens and the assets are kind of maintained.
Generally, you don’t see advisors just kind of slowly bleeding out assets and losing clients and slowly whittling down the book. But in theory that could happen. So if you were SEC-registered, the way it works is when you drop below that $100, again, you have the option at that point to move down to state and then when you reach $90 million, if you do fall below $90 million, you are then obligated to re-register with the state at that point. Again, you don’t really see this too much SEC to state but you definitely see people that start out as state and eventually achieve SEC status.
The only other kind of variable I’d point out, again don’t see too much of this, but it’s worth pointing out, the only other kind of carve-out is if you are state-registered RIA, and you have clients in more than 15 states or a physical presence of your business in 15 or more states. Which would be tremendously rare that any RIA would have a physical footprint in 15 or more states and not be at $100 million and above and already be SEC. So it’s more likely you would achieve this at the client level. So if you are state-registered because of your asset level but you have clients in 15 or more states, the SEC says okay, considering your broad reach, you can go ahead and register at the SEC level as well. So kind of unique scenario, worth pointing out nonetheless because it does exist as an option if you will.
And then last thing I’d say, I kind of mentioned this, don’t feel overwhelmed by any of this, this is what compliance consultants do for you. And again, I’ll do a video on this but part of running your RIA is being responsible for your compliance. No RIA tries to do that on their own, you work with experienced compliance consultant firms that this is what they do and so you engage with them and this is easy stuff for them to take care of. They understand all these numbers, they understand the filings, they understand when you might be at some point, they will notify you of all that. You won’t have to remember and effectively be responsible for “oh I need to do this”, they will bring that to your attention
So don’t fret the details, but it is worth understanding why one RIA might be SEC, why one RIA might be state. And you can kind of mentally think through what would that mean for your practice considering your current size.
So with that, like I said, I’m Brad Wales with Transition to RIA. This is exactly what I do for advisors, I help advisors understand everything they want to know about the RIA model. Everything from what are the benefits, what are the pros and cons, how do the economics work, what are the responsibilities, why might I do this, what are the options with how to do it? And then if you do feel it’s a good fit for you, what are the steps for that actual transition process? So I help advisors with all of that
So jump on over to TransitionToRIA.com, if you’re not already watching this on there. You can see all of my resources and would love to have a conversation with you to see if I can help you. Just look for the contact link at the top of the page. You can instantly schedule a Zoom call with me. And we can certainly have this sort of dialogue to go over any questions you might have.
But for the time being, I hope you found this helpful, and I look forward to seeing you in the next video.
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