Securities and investment advisory services offered through . . . .

That phrase is ubiquitous among small and “independent” financial services firms, regularly appearing in 6-point or smaller font at the foot of business cards and websites. It stands as a glaring testament to the pervasive misunderstanding regarding fundamental broker-dealer and investment adviser registration and regulatory requirements, even among firms actively involved in rendering financial services.

One website’s home page states: “Smith Financial Group is a boutique investment management and financial services firm.” (This is not the actual name of the firm.) Another firm, “Jones Wealth Management” (again, not the actual name), uses the tagline “Financially Empowering” and proudly states on its website that “as an independent financial advisory firm we are brand-neutral and free to evaluate and recommend the financial products we believe are best for you. Unlike captive firms, we are not limited to a proprietary product line . . . .” Both Smith and Jones each disclose, on their respective home pages, that phrase: “Securities and advisory services offered through XYZ Advisors LLC, member FINRA/SIPC.”

It is almost as if certain independent financial services professionals believe, mistakenly, that registration as an investment adviser or as a broker-dealer is an asset which can be leased or licensed by a registered firm to one that is not registered. 

In a December 8, 2005 letter addressed to the American Bar Association’s Subcommittee on Private Investment Entities, the staff of the SEC’s Division of Investment Management outlined certain conditions which must be present to enable one firm to “rely upon” the registration of another firm and thereby avoid the need to separately register as an investment adviser. See that letter here. This position was reinforced in a January 18, 2012 Staff letter to the ABA Subcommittee on Hedge Funds, which may be seen here.

The SEC Staff noted that Form ADV (the primary form used to apply for registration as an investment adviser) “was not designed to combine information about separately formed advisers that conduct different advisory businesses, even if those advisers are related to each other because of a control relationship.” The Staff, however, recognized that in certain specific and narrowly construed circumstances, it may be appropriate for certain advisers to use a single registration (i.e., to register on a single Form ADV), rather than separately register. The crux, however, is that the registered firm and the “relying firm” must be conducting a “single advisory business.”

In the 2005 and 2012 Letters, the Staff laid out the conditions under which a non-registrant, such as a “special purpose vehicle” or “SPV” could “rely upon” the registration of an SEC-registered investment adviser:

  1. the investment adviser to a private fund establishes the SPV to act as the private fund’s general partner or managing member 
  2. the SPV’s formation documents designate the investment adviser to manage the private fund’s assets
  3. all of the investment advisory activities of the SPV are subject to the Investment Advisers Act and the rules thereunder, and the SPV is subject to examination by the SEC and 
  4. the registered adviser subjects the SPV, its employees and persons acting on its behalf to the registered adviser’s supervision and control and, therefore, the SPV, all of its employees and the persons acting on its behalf are “persons associated with” the registered adviser (as defined in Section 202(a)(17) of the Investment Advisers Act).

The last condition, of course, is the most problematic for both the registered firm and the non-registered firm hoping to “rely upon” the other’s registration. Often, the registered firm allowing its “licenses” or “registration” to be borrowed or utilized by independent firms has little, if any, ability to supervise and control the activities of persons associated with the non-registered firm, who may be geographically remote from the supervisory personnel of the registered firm.

To be clear, we are not suggesting that the SEC Staff rescind or cut back on the relief granted to relying advisers or any similar relief granted in practice by SEC or FINRA Staff to independent non-registered firms conducting securities services “through” a registered broker-dealer, and we are not endorsing increased regulation or enforcement of independent firms which desperately try to minimize the often substantial costs associated with regulatory compliance by “affiliating” with a registrant instead of obtaining separate registration. We would, however, advise firms which hold themselves out as independent providers of financial services while relying upon the registration of another entity to consult with their legal and regulatory advisers about the nature and extent of the risks associated with not being independently registered.