Post-Effective Requirements

Once your application for an investment adviser is complete, you will receive an email indicating that you are approved to conduct investment advisory business in California. Your approval will remain in effect until being surrendered by you or suspended or revoked by order of the Commissioner of the Department of Financial Protection and Innovation (“Commissioner”). (Note: The Department no longer issues paper certificates).

LAW & RULES

As a registered investment adviser, you must familiarize yourself with the applicable sections of the California Corporate Securities Law of 1968 (“Law”) and the rules under this law.  The Commissioner may examine your books and records for compliance with the Law and its rules.

The Law may be found in the California Corporations Code (“Code”) and the rules in Title 10, Chapter 3, Subchapter 2 of the California Code of Regulations (“CCR”). The sections of the Law that relate specifically to broker-dealers and investment advisers begin at Code §25200.  The other sections of the Law relate to general securities law.  The rules for broker-dealers and investment advisers begin at CCR §260.200. The Code and the CCR may be found through links on our website.

ADV AMENDMENTS [CCR § 260.241.4]*

Each year you must file an annual updating amendment to your Form ADV.  This annual updating amendment should be filed with IARD within 90 days of your fiscal year end.  You must also amend Form ADV (Parts 1 and 2) whenever the information in your Form ADV becomes inaccurate.  The instructions (Item 4) to Form ADV list the items that must be promptly updated.  These instructions may be found on NASAA web site.

It is substantial that Form ADV contains current and accurate information.  Also, as we communicate with you regarding your registration electronically, you must ensure that your email address filed on Form ADV is up-to-date.

ANNUAL RENEWAL [Code Section 25608(q)]

An annual renewal fee of $125 is due in December of each year to ensure that your registration remains in effect in the next calendar year.  This fee must be paid directly to IARD in accordance with its instructions. The annual renewal program begins in November with the annual renewal payment due to IARD in early December.   More information on the renewal program and key dates may be found under IARD’s Renewal Program.

The annual renewal fee does not apply if you are also licensed as a broker-dealer under Code §25210.

INVESTMENT ADVISER REPRESENTATIVES/ASSOCIATED PERSONS (“IAR”)  [Code Section 25009.5(a)]

You must report each individual who meets the definition of an investment adviser representative (“IAR”), as defined under Code Section 25009.5(a), to the Commissioner by filing Form U-4 with and paying the $25 reporting fee to the Central Registration Depository (“CRD”).  An IAR may also be referred to as a Registered Adviser (“RA”).  IMPORTANT NOTE: An officer, director or partner exercising executive responsibility (or persons occupying a similar status or performing similar functions) or each person who owns 25% or more is presumed to be acting as an IAR and must be reported as an IAR and meet the qualification requirements.

You should also be aware of the qualification requirements as found in CCR §260.236 and the employment and filing requirements as found in CCR §260.236.1(a).  These requirements are as follows:

Qualification Requirements [CCR § 260.236]*

Each IAR, except those employed or engaged by an investment adviser solely to offer or negotiate for the sale of investment adviser services, must qualify by passing the examination(s) as specified in CCR §260.236(a).  The examination requirements are the Uniform Investment Adviser Law Examination (“Series 65”) passed on or after January 1, 2000 or the General Securities Representative Examination (“Series 7”) and Uniform Combined State Law Examination (“Series 66”).  Effective October 1, 2018, FINRA has restructured Series 7 to be Series 7TO. Prior to taking S7TO, individuals must take and pass Securities Industry Essentials (SIE) exam. Waivers and exemptions to the examination requirements may be found in subsection (b) and (c) of CCR §260.236.  Individuals holding in good standing an approved professional designation meet the exemption found in (c)(3) of CCR §260.236.

Individuals who must satisfy the qualification requirements, and who are not registered in CRD, can enroll for the Series 65 examination via Test Enrollment Services System (TESS) with Financial Industry Regulatory Authority (“FINRA”).

Employment Requirements [CCR § 260.236.1(a)]*

Upon employment of an IAR, you must obtain a properly executed Form U-4, evidence that the IAR meets the qualification requirements of CCR §260.236, and have the responsibility and duty to ascertain by reasonable investigation the good character, business reputation, qualifications, and experience of an individual upon employment or engagement as an IAR.

Filing Requirements [CCR § 260.236.1(a)]*

  1. Employment – Upon employment of an IAR, Form U-4 including any Disclosure Reporting Page(s) should be completed in accordance with the form instructions. The form is to be filed with and the reporting fee paid to CRD in accordance with its procedures.  The filing of Form U-4 with CRD does not constitute an automatic approval of the filing by the Commissioner. The investment adviser should not consider an IAR “registration” approved until approved by the Commissioner and notification of the approval has been received through CRD.
  2. Changes – Within 30 days of any changes to Form U-4, an amendment to Form U-4 is to be filed.  The amendment is to be filed directly with CRD in accordance with its procedures.
  3. Termination – Within 30 days of termination of an IAR, Form U-5 is to be filed in accordance with the form instructions. Form U-5 is to clearly state the reason(s) for termination. This form is to be filed directly with CRD in accordance with its procedures.

Fees

The filing fee for each IAR is $25. This fee is to be paid directly to CRD.  An annual renewal fee of $35 is due in December of each year and the payment of this fee will keep the IAR registration in effect in the next calendar year.

Fingerprints

At this time, there is no requirement to provide fingerprint cards.

FAIR, EQUITABLE AND ETHICAL PRINCIPLES [CCR § 260.238]*

As a registered investment adviser, you and your investment adviser representatives are fiduciaries and have a duty to act in your client’s best interest.  As a fiduciary, you should act in good faith and exercise the highest standard of care.  You are expected to be loyal to your clients and to avoid any conflict of interest that could impair the advice given to your clients.  You also have the duty and responsibility to only engage in activities that promote fair, equitable, and ethical principles.  Activities that do not promote fair, equitable, and ethical principles are found in CCR §260.238.

FINANCIAL REQUIREMENTS  [CCR §260.237.2]*

If you have custody of client funds or securities, you must maintain, at all times, a minimum net worth of $35,000.   If you have discretionary authority over client funds or securities but do not have custody of client funds or securities, you must maintain, at all times, a minimum net worth of $10,000.  If you accept prepayment of more than $500 per client and six or more months in advance, you must maintain, at all times, a positive net worth.

If your principal place of business is in a state other than California, you should maintain such minimum capital as required by the state in which you maintain your principal place of business, provided that you are licensed or registered in such state and are in compliance with such state’s minimum capital requirements.  If you are not licensed or registered in the state where you maintain your principal place of business, you are subject to the Commissioner’s minimum financial requirements.

The minimum financial requirements do not apply if you are Licensed as a broker-dealer under Code §25210.

FINANCIAL FILING REQUIREMENTS

  1. Upon Discovery [CCR § 260.237.2(c)]*

    Unless otherwise exempted, as a condition of the right to continue to transact business in this state, you must, by the close of business on the next business day following the discovery that your net worth is less than the minimum required, notify the Commissioner.  After transmitting such notice, you will file by the close of business on the next business day a report with the Commissioner of your financial condition.  This report should include the items described in CCR § 260.237(c).

  2. Interim Reports [CCR § 260.241.2(d)]*

    If you are subject to the minimum financial requirements (CCR § 260.237.2), you must file monthly reports with the Commissioner within 15 days after your net worth is reduced to less than 120% of your required minimum net worth.  Your interim report should include a balance sheet, income statement, supporting schedule containing the minimum financial requirements required under CCR §260.237.2 and verification form.  The verification form (a) must affirmatively state, to the best knowledge and belief of the person making the verification, that the financial statements and supporting schedules are true and correct and (b) must be signed under penalty of perjury.  You may use the Verification Form Pursuant to CCR 260.241.2(b) form for this purpose.   You will need to file the interim report until you have filed three consecutive reports showing net worth greater than 120% of your required minimum net worth.

  3. Annual Reports [CCR § 260.241.2]*

    If you are subject to the minimum financial requirements as found under CCR § 260.237.2, you must file with the Commissioner, not more than 90 days after its fiscal year-end, an annual financial report that reflects your financial condition. The annual financial report is to contain a balance sheet and income statement prepared in accordance with generally accepted accounting principles.  The annual report should also include a supporting schedule containing the minimum financial requirements required under CCR §260.237.2.

    If you have held or accepted custody of funds and/or securities for or owe money or securities to customers or clients during the period covered, you must file audited financial statements prepared by an independent certified public accountant or independent public accountant.   If you only have discretionary authority over client funds or securities, the financial statements need not be audited.

    A verification form must accompany the financial statements. The verification form (a) must affirmatively state, to the best knowledge and belief of the person making the verification, that the financial statements and supporting schedules are true and correct and (b) must be signed under penalty of perjury.  You may use the Verification Form Pursuant to CCR 260.241.2(b) form for this purpose.

ADVERTISEMENTS[CCR § 260.235]*

You may advertise your advisory services under certain conditions.  Your advertisement must be true and accurate and must not contain any material misstatement of a fact.  You may advertise your past performance only if the advertisement discloses all material facts necessary to avoid any unwarranted inference.  Refer to CCR §260.235 for requirements related to advertisements.

ADVISORY CONTRACT [Code §25234 and CCR § 260.238(n)]*

Your advisory contract with a client must be in writing and disclose the services to be provided, the term of the contract, the advisory fee or the formula for computing the fee the amount or the manner of calculation of the amount of the prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the adviser or its representatives and that the contract will not be assigned by you without the consent of the client.

If you do not have discretionary authority to place trade orders with a broker-dealer pursuant to a third-party trading agreement, the contract should acknowledge that you must secure client permission prior to effecting securities transactions for the client in the client’s broker-dealer account(s).

BOOKS AND RECORDS [CCR § 260.241.3]*

You are required to make and keep true, accurate, and current books, ledgers, and records relating to your investment advisory business.  The types of books and records that must be maintained are found in CCR §260.241.3.

CUSTODY OR POSSESSION OF CLIENTS FUNDS OR SECURITIES [CCR § 260.237] *

If you have custody or possession of client funds or securities, you must take safekeeping measures to protect your client funds and securities. CCR §260.237 describes the safeguarding procedures you must follow. Some of which requires that all funds and securities of your clients are verified by actual examination at least once during each calendar year by an independent certified public accountant or public accountant at a time which shall be chosen by the accountant without prior notice to you. A certificate of the accountant stating that such person has made an examination of the funds and securities, and describing the nature and extent of the examination, shall be filed with the Commissioner promptly after each examination.  You are also required to maintain minimum net worth of $35,000 (CCR § 260.237.2) and are required to file annual financial reports (CCR § 260.241.2).

SURRENDER OF CERTIFICATE [CCR § 260.242]*

You may surrender your certificate by completing Form ADV-W in accordance with the instructions for Form ADV-W.  Form ADV-W is to be filed directly with IARD in accordance with its procedures.

SWITCHING FROM STATE TO SEC REGISTRATION

If you report on your annual updating amendment assets under management of $100 million or more, you must register with the SEC within 90 days after your annual updating amendment is filed.  Upon registration with the SEC, you should file Form ADV-W with IARD in accordance with instructions in Form ADV-W, and if applicable, make a notice filing.

Note: On this web page, references are made to the Rules as found in Title 10, Chapter 3, California Code of Regulations (“CCR”).  For information concerning the CCR and accessing sections of the CCR referenced on these web pages, please visit CCR Access Assistance.