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Investment Adviser Registration: Is there a state that is optimal for registration purposes?

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Chris Lawton, Unsplash

At times, people ask me whether there is one state in particular that is optimal for investment adviser registration purposes. I am quick to point out that the requirement to register an investment adviser in a certain state depends on whether the investment adviser maintains its principal office and place of business (“popb”) in the state. The industry usually refers to the state in which the adviser maintains its popb, as its home state. There are other factors to consider as well, but let’s focus on the term “principal office and place of business.” The SEC’s definition of this term can be found in the Form ADV Glossary of Terms. A number of other terms relevant to investment advisers can also be found in the Glossary of Terms, but popb is defined as “Your firm’s executive office from which your firm’s officers, partners, or managers direct, control, and coordinate the activities of your firm.”   

Generally speaking, if an investment adviser firm is managed by its sole owner and the owner is also the sole portfolio manager, then the principal office and place of business would be the physical location from which that person renders investment advice. If that individual is conducting their advisory business from their home office in California, then the investment adviser firm’s home state would be California. 

If the firm’s executives are constantly on the move, working from remote locations, I tend to ask questions like:

  • “Where are the firm’s executives registered to vote?” 
  • “Is there at least one office from which the firm’s executives work for a majority of the year?” 
  • “Is the remote location different each time or is it a vacation home that belongs to the firm’s executive?”

Generally speaking, if the remote location is a vacation home that belongs to the firm’s owner/portfolio manager, then arguably the investment adviser would be required to also consider the registration requirements of the state in which the vacation home sits. This is because a state regulator will look past the fact that the home is primarily used for vacation purposes if investment advisory business is being conducted from the vacation home. Portfolio managers are almost never quite on “vacation” because even if the markets are closed, they are conducting research and speaking to their clients even outside of trading hours. You can see how a vacation home can quickly become at least one of the investment adviser’s branch offices. 

The State of Wisconsin defines a branch office of an investment adviser or federal covered adviser as a location other than the home office of the adviser that is held out to the public by any means as a place where advisory business is conducted. It is worth noting that states may have different definitions of this term. I am just using Wisconsin’s definition of the term “branch office” as an example. What stands out here is the portion of the definition that states “held out to the public by any means.” Generally speaking, if an investment adviser representative or executive is conducting advisory services from their vacation home in the State of Wisconsin, but that individual does not:

  • Invite clients over to the home to discuss performance in their client accounts;
  • Tell advisory prospects and clients that they are working from their vacation home in the state;
  • Put the vacation home’s address on letterhead, business cards, social media posts/pages or the firm’s website;

…or hold out the office to the public by any other means, then the adviser would not be required to register in the state where the vacation home is located because it would not be considered a branch office. Instead, the firm’s management would focus on the registration requirements of the state in which the principal office and place of business sits. 

This note does not explore all of the factors that investment adviser managers should consider when they are analyzing where they are required to register. Other factors include the de minimis exemptions and where clients reside, but I will leave those topics for future posts. The question “Which state is optimal for investment advisory business activities?” is irrelevant unless the investment adviser’s executive officers, partners, or managers are willing to relocate. However, I won’t elaborate on whether one state wins such a title. What may appear optimal to one person, may not be meaningful to another.