Did You Know?
Note: On the web pages below, 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, visit Assistance page.
The following is a list of items that you should be familiar with when filing an application for an investment adviser certificate. Please take a moment to review these items. You will help us to efficiently process your application if your application includes the proper documentation and information. Please note that reference may be made to the California Code of Regulations (“CCR”) and California Corporations Code (“Code”). The CCR (rules) and the Code (law) may be found through links on our web site at www.dfpi.ca.gov. Note: Reference may be made to the rules as found in the CCR.
Advisory Contract(s):
A copy of your written investment advisory contract(s) should be filed directly with the Commissioner of the Department of Financial Protection and Innovation (“Commissioner”). 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).
Advisory Fee (CCR § 260.238(j)):
An advisory fee charged to your client(s) should be reasonable in light of the type of services to be provided, your experience and expertise, the sophistication and bargaining power of the client, and whether you have disclosed that lower fees for comparable services may be available from other sources. Disclosures should be made in the advisory contract and Part 2A of Form ADV showing that the advisory fee is reasonable in light of the above.
Application (Form ADV) and Filing Fee ($125):
The application for an investment adviser certificate consists of Form ADV and additional documentation based on your responses to the questions in Form ADV. Form ADV (Parts 1 and 2) and the $125 application fee should be filed directly with the Investment Adviser Registration Depository (“IARD”). To file with IARD, you will need to obtain, complete and return entitlement forms. These forms may be found on the IARD web site at www.iard.com. For further information, please visit the IARD web site. Part 2 of Form ADV (consists of Part 2A and Part 2B) should be completed in its entirety and should be filed directly with IARD. IARD system instructions for filing Part 2 of Form ADV can be found on the IARD web site at http://www.iard.com/part2instructions.asp. Part 2 of Form ADV must be a text-searchable PDF file before it can be submitted to the IARD system. Part 2A and Part 2B of Form ADV instructions are available on the North American Securities Administrators Association (“NASAA”) web site. IMPORTANT: When completing Part 2A of Form ADV, please make sure that the details to a particular item are fully described. Also, be aware that several items in Part 2 of Form ADV are also in Part 1 of Form ADV. Please make sure that if the item is in both Part 1 and Part 2 that the answers are the same.
California Corporation Securities Filing:
If you are a California – formed corporation, the offer and sale of securities in your corporation must be qualified, unless exempt, pursuant to California Corporations Code (“Code”) Section 25110. The definition of “security” is found in Code Section 25019. If exempt, the firm should file an appropriate limited offering exemption notice (“LOEN”) pursuant to either Code Section 25102(f).
Note: If the authority to offer and sell the securities is exempt, please file LOEN and pay the applicable fee electronically via DFPI Self-Service Portal DocQNet.
Should you have general filing questions, please contact our Customer Services Office at our toll-free number (1-866-275-2677). Note that the Department’s legal counsels are not allowed to provide legal advice or determine the applicability of any aforementioned laws or regulations. Please consult your private legal counsel regarding such matters.
Please be advised that any issuer that fails to file the notice as provided by the rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. Such fee will equal two hundred dollars ($200) plus one-fifth of one percent of the aggregate value of securities sought to be sold in California up to a maximum fee of two thousand five hundred dollars ($2,500) per Code Section 25608.
California Limited Liability Company (“LLC”) Securities Filing:
If you are a California-formed limited liability company, the offer and sale of securities in your limited liability company may need to be qualified, unless exempt, pursuant to California Corporations Code (“Code”) Section 25110. The definition of “security” is found in Code Section 25019. If exempt, the firm should file an appropriate limited offering exemption notice (“LOEN”) pursuant to either Code Section 25102(f).
Note: If the authority to offer and sell the securities is exempt, please file LOEN and pay the applicable fee electronically via DFPI Self-Service Portal DocQNet.
Should you have general filing questions, please contact our Customer Services Office at our toll-free number (1-866-275-2677). Note that the Department’s legal counsels are not allowed to provide legal advice or determine the applicability of any aforementioned laws or regulations. Please consult your private legal counsel regarding such matters.
Please be advised that any issuer that fails to file the notice as provided by the rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. Such fee will equal two hundred dollars ($200) plus one-fifth of one percent of the aggregate value of securities sought to be sold in California up to a maximum fee of two thousand five hundred dollars ($2,500) per Code Section 25608.
Foreign Business Entities Offering Securities Interests in California:
Pursuant to California Corporations Code (“Code”) Section 25110, the offer and sale of securities in California must be qualified, unless exempt. The definition of “security” is found in Code Section 25019. If exempt, the firm should file an appropriate limited offering exemption notice (“LOEN”) pursuant to either Code Section 25102(f).
Note: If the authority to offer and sell the securities is exempt, please file LOEN and pay the applicable fee electronically via DFPI Self-Service Portal DocQNet.
Should you have general filing questions, please contact our Customer Services Office at our toll-free number (1-866-275-2677). Note that the Department’s legal counsels are not allowed to provide legal advice or determine the applicability of any aforementioned laws or regulations. Please consult your private legal counsel regarding such matters.
Please be advised that any issuer that fails to file the notice as provided by the rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. Such fee will equal two hundred dollars ($200) plus one-fifth of one percent of the aggregate value of securities sought to be sold in California up to a maximum fee of two thousand five hundred dollars ($2,500) per Code Section 25608.
Conflict of Interest Disclosure (CCR § 260.238(k)):
Any material conflict of interest relating to you or your representatives and employees that could be reasonably expected to impair the rendering of unbiased or objective advice should be disclosed. Conflicts of interest may include, but are not limited to, (a) compensation arrangements connected with advisory services which are in addition to the advisory fees, (b) other financial industry activities or affiliations, or (c) participation of interest in client transactions. This disclosure should be made in the advisory contract and Part 2A of Form ADV.
Contact Us:
After reviewing the material on this page, and if you still have questions on filing your application, please contact our Consumer Services Office at our toll free number 1-866-275-2677.
Control Person:
Control person includes each of your firm’s officers, partners or directors exercising executive responsibility (or persons occupying a similar status or performing similar functions). A control person also includes any person that owns 25% of more of the firm.
Custody (General Partner, Managing Member or Trustee):
If you act as a general partner for a partnership, managing member for a limited liability company or trustee for a trust in which your advisory clients are either partners of the partnership, members of the limited liability company or beneficiaries of the trust, you have custody of client funds or other assets and must comply with the minimum financial requirements as found in CCR § 260.237.2(a). You will need to file the balance sheet and minimum financial requirements worksheet as described under “Financial Information (Principal Place of Business in California).” You will also need to file annual audited financial statements. Please note that if you follow the safeguards as found in Item 2I(2)(a), Part 1 of Form ADV you will not be considered to have custody of clients’ funds or securities.
Custody (Certified Public Accountant):
If you or your affiliated CPA firm has signatory authority for a client’s checking account, you have custody over that client’s funds and must comply with minimum financial requirements as found in CCR § 260.237.2(a). You will need to file the balance sheet and minimum financial requirements worksheet as described under “Financial Information (Principal Place of Business in California).” You will also need to file annual audited financial statements.
Custody (SLOA):
- You do not need to annually have a surprise examination (Cal. Code Regs., tit. 10, §260.237, subd. (a)(6));
- You do not need to maintain the minimum net worth for an adviser with custody, provided that you maintain the minimum net worth for an adviser with discretionary authority (Cal. Code Regs., tit. 10, § 260.237.2, subd. (a)); and
- You do not need have your financial statements included in the annual report audited (Cal. Code Regs., tit. 10, § 260.241.2, subd. (a)(3)).
Note that you must disclose the client funds for which you have custody solely as a result of an SLOA in Item 9 of Form ADV.
Customer Authorization of Disclosure of Financial Records (Form QR 500.261):
This form should be completed and provided to the Commissioner as part of your original application package. Pursuant to CCR Section 260.231 (i), the form must be typewritten and an original signature must be provided. The form should be mailed directly to the Department.
Fair, Equitable and Ethical Principles (CCR § 260.238):
As an investment adviser Licensed with the Commissioner, you and your investment adviser representatives are fiduciaries and have a duty to act primarily for the benefit of your clients. 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 or disclose 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 Information (Principal Place of Business in California):
If you have custody of client funds or securities, discretionary authority over client funds or securities, or accept prepayment of more than $500 per client and six or more months in advance, you must comply with the minimum financial requirements as found in CCR § 260.237.2. You will need to file directly with the Commissioner, a Statement of Financial Condition (Balance Sheet) and a worksheet that demonstrates compliance with the minimum financial requirements as found in CCR § 260.237.2. The balance sheet should be dated within 45 days prior to the filing of the application and prepared in accordance with generally accepted accounting principles. For the worksheet to demonstrate compliance with the minimum financial requirements, you may use the Minimum Financial Requirements Worksheet (Form 260.237.2). Note: This requirement does not apply if you are also Licensed as a broker-dealer in California.
Financial Information (Principal Place of Business other than California):
If you are Licensed or registered in your home state and are in compliance with your home state’s capital requirements (Item 2B(4), Part 1B of Form ADV should be checked “yes”), you are not subject to the minimum financial requirements. If you are not Licensed or registered in the state where you maintain your principal place of business, or if you are not in compliance with your home state’s capital requirement, you are subject to California’s minimum financial requirements and should file the balance sheet and worksheet as described above under “Financial Information (Principal Place of Business in California).”
Financial Planning Conflict of Interest Statement (CCR § 260.235.2):
If you provide financial planning services and receive compensation (e.g. commissions, fees) from the sale of securities, insurance, real estate or other products or services recommended in a financial plan, a copy of the conflict of interest statement should be filed directly with the Commissioner. This statement should include, at a minimum, that (a) a conflict exists between your interests and the interests of your client, (b) your client is under no obligation to act upon your recommendation, and (c) if the client elects to act on any of the recommendations, the client is under no obligation to effect the transaction through you. This statement should be included in the advisory contract and Part 2A of Form ADV.
Fingerprints:
At this time there is no fingerprint requirement for an investment adviser or their representatives.
Form ADV:
Form ADV is the uniform application for investment adviser registration used by the Securities and Exchange Commission (“SEC”) and all states to register investment advisers.
Form U-4 and Filing Fee ($25):
Form U-4 is the uniform application for securities industry registration and is used by all states to register investment adviser representatives, referred to as registered advisers. Form U-4 and the $25 reporting fee should be filed with the Central Registration Depository (“CRD”) for each investment adviser representative/associated person (“IAR”). Form U-4 should be filed directly with the Commissioner for each officer, director or partner or each person who owns 10% or more, as shown on Schedule A or B of Form ADV, that is not reported as an IAR.
TESS – Formerly Form U-10:
Test Enrollment Services System (TESS) went live April 2017 as a replacement for the Form U10 process. Individuals who are not registered in CRD enroll for FINRA, NASAA, MSRB, NFA, FDIC exams and CE sessions via TESS. Note: We do not need to sponsor you to take the Series 65 of 66 exam.
Information to Assist in Completing Your Application:
Information to assist you in completing your application may be found in the INFORMATION TO ASSIST PERSONS APPLYING FOR AN INVESTMENT ADVISER CERTIFICATE. You should carefully review the information prior to filing your application.
Instructions to Complete and File Your Application:
Instructions for completing and filing and application may be found in INSTRUCTIONS FOR COMPLETING AND FILING APPLICATION FOR INVESTMENT ADVISER CERTIFICATE ON FORM ADV. You should carefully review these instructions prior to filing your application.
Investment Adviser:
Investment adviser is defined in Code Section 25009.5 as any person who, for compensation, engages in the business of advising others, either directly or indirectly through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, publishes analyses or reports concerning securities. (This is not a complete definition. See Section 25009.5). If you are unable to make a determination as to whether you need to be Licensed as an investment adviser based upon the definition found in Section 25009.5, you will need to consult private legal counsel. The Commissioner cannot provide legal advice concerning your need to be Licensed as an investment adviser.
Investment Adviser Registration Depository (“IARD”):
IARD is an internet-based registration system for investment adviser firms. FINRA, The Financial Industry Regulatory Authority, developed the IARD system according to the requirements of the Securities and Exchange Commission (“SEC”) and the North American Securities Administrators Association (“NASAA”). IARD became operative in January 2001 and allows firms to satisfy filing obligations under state and federal laws through the electronic filing of Forms ADV and ADV-W. Effective January 1, 2005 all California-registered investment advisers were required to participate in IARD by filing all applications, amendments and fees with IARD. The IARD Firm User Manual may be found on the IARD web site at http://www.iard.com.
Investment Adviser Representative:
References to an investment adviser representative means both an investment adviser representative and an associated person of an investment adviser and is defined in Code Section 25009.5(a). This section defines an investment adviser representative as an individual who does any of the following:
- Makes any recommendations or otherwise renders advice regarding securities.
- Manages accounts or portfolios of clients.
- Determines which recommendation or advice regarding securities should be given.
- Solicits, offers, or negotiates for the sale or sells investment advisory services.
- Supervises employees who perform any of the foregoing.
For each investment adviser representative, Form U-4 and the $25 reporting fee should be filed with the Central Registration Depository (“CRD”). The filing of Form U-4 with CRD does not constitute an automatic approval of the filing by the Commissioner. You should not consider an IAR “registration” approved until approved by the Commissioner and you have been notified of the approval through CRD. You should also be aware of the employment and additional filing requirements for an IAR. These requirements are found in CCR § 260.236.1(a). Each IAR is subject to the qualification requirements found in CCR § 260.236. An individual that only offers or negotiates for the sale of your investment advisory services is exempt from the qualification requirements. Important: Each 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 investment adviser representative or associated person.
Law and Rules:
The law and rules governing investment advisers in California are found under the California Corporations Code (“Code”) and Title 10, Chapter 3, California Code of Regulations (“CCR”), respectively. The sections of the law that relate specifically to broker-dealers and investment advisers begin at §25200. The other sections of the law relate to general securities law. The rules for broker-dealers and investment advisers begin at §260.200. The law and rules may be found through links on our web site at www.dfpi.ca.gov. The rules are also available at the offices of County Clerks or County Law Libraries and 100 state depository libraries. The rules are also available in loose-leaf form from the publisher, West Group. For information, contact West Group at 1-800-888-3600.
Limited Partnership Securities Filing:
If you offer and sell interests in a limited partnership, the interests in the limited partnership should be qualified pursuant to Code Section 25110 or the appropriate limited/small offering exemption notice should be filed. If you have any questions concerning this item, please contact our Customer Services Office at our toll free number 1-866-275-2677.
Performance Fees Disclosure:
If you receive, or will receive, compensation based on capital gains or capital appreciation (performance fee), you need to comply with the provisions of CCR § 260.234. Disclosure should be made in the advisory contract and Part 2A of Form ADV that the performance fee will only be charged in accordance with the provisions of CCR §260.234.
Post-Effective Requirements:
Once your investment adviser certificate is issued, it remains in effect until suspended or revoked by order of the Commissioner or surrendered by the investment adviser. Some, but not all, post effective requirements may be found in the Investment Adviser Certificate – Post Effective Requirements. You should familiarize yourself with the information found on this page.
Proof of Compliance with Qualification Requirements:
If you are filing as a sole proprietor, proof of compliance with the qualification requirements found in CCR Section 260.236 should be filed directly with the Commissioner, if such information is not available on CRD.
Qualification Requirements (CCR § 260.236):
Each individual filing as a sole proprietor and each investment adviser representative (“IAR”) or associated person (as defined in Code Section 25009.5(a)) must qualify by passing, within two years prior to the date of filing your application for an investment adviser certificate or becoming engaged as an investment adviser representative, (1) the Series 65/Uniform Investment Adviser Law Examination, or (2) the Series 7/General Securities Representative Examination and the Series 66/Uniform Combined State Law Examination. There are waivers and exemptions to these exam requirements. Please refer to CCR § 260.236 subsections (b) and (c) for a list of waivers and exemptions.
Secretary of State Filings:
Most companies doing business in California are required to make filings with the California Secretary of State. Prior to conducting business as an investment adviser, you should contact the Secretary of State to determine their filing and reporting requirements. Their web site address is http://www.sos.ca.gov.
Solicitor:
If you pay a referral fee to another person (“solicitor”) for client solicitations, that individual should be reported as an investment adviser representative by filing Form U-4 and the $25 reporting fee with CRD. That individual should also provide the advisory client with a current copy of your written disclosure statement (Part 2 of Form ADV or brochure) and a copy of the solicitor’s written disclosure document. It should be noted that a solicitor does not need to pass a qualifying examination (CCR § 260.236(c)(2)).
Statement of Citizenship, Alienage, and Immigration Status:
If you are filing as a sole proprietor, the Statement of Citizenship, Alienage, and Immigration Status (Form 250.61) is to be completed. This form does not need to be filed with the Commissioner but should be maintained, along with any documents establishing proof thereof, as part of your books and records.For limitations on certificates to Aliens, please see CCR § 250.60.
Succession by Amendment:
If you change your form of organization (e.g. from a corporation to a limited liability company) or change your date or state of incorporation, a new organization has been created. If there has been no practical change of control or management, you may amend Form ADV to reflect these changes rather than file a new application. You must submit this amendment within 30 days after the change. When amending Form ADV, you should check “yes” to Item 4.A., enter the date of the succession in Item 4.B., and complete Section 4 of Schedule D.
Succession by Application:
If you are not Licensed as an investment adviser in California and you are acquiring or assuming substantially all of the assets and liabilities of the advisory business of a California Licensed adviser, you must file a new application for registration on Form ADV. You, as the successor adviser, may not rely on the registration of the predecessor adviser. You will need to obtain entitlement to IARD (new CRD number) and must file a new application and obtain an investment adviser certificate prior to conducting investment advisory activities. On Form ADV, you should check “yes” to Item 4.A., enter the date of the succession in Item 4.B., and complete Section 4 of Schedule D.
Third Party Money Manager (Adviser):
If you select other advisers for your clients or refer your clients to a third party money manager or adviser, you should make sure that the money manager or adviser is properly Licensed or registered as an investment adviser.
Third Party Trading Agreement (CCR § 260.237.2(f)):
If you are not exercising discretion when you place trade orders for your clients, the third party trading agreement executed between your client and your client’s broker-dealer should specifically limit your authority in your client’s account to the placement of trade orders and deduction of investment adviser fees.
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