Investment Adviser Compliance Consultant on Form ADV Part 1A: Items 5.A. and 5.B.

As a RIA or registered investment adviser compliance consultant, MAH Advising plays a key role in  translating filing instructions and compliance regulations into simple, understandable guidance for our clients. The Employees section of Form ADV Part 1 stands out in this regard as being particularly interesting.

Item 5.A. of Form ADV Part 1A

As per securities regulation, what constitutes an employee? In accordance with instructions provided by the Securities and Exchange Commission (SEC), the definition differs from the IRS or Internal Revenue Service. The Form ADV filing by an advisory firm includes independent contractors as employees under the regulatory definition. Employees who are part-time are accounted for differently. Instead of calculating their hourly pay through a percentage, they should be treated as one employee on the Form ADV. Last but not least, not all employees fulfill the definition of working for an investment adviser: solely clerical employees are not considered employees.

Item 5.B.(1) of Form ADV Part 1A 

The specifics are provided in Item 5.B. Item 5.B.(1) inquires, of the employees listed in 5.A., how many employees “are engaged in investment advisory services (which includes research)”. Additionally, part 5.B.(3) asks for the number of employees who hold securities regulatory certifications from state securities regulators. It appears that these two questions are largely the same – obviously, anyone offering investment advice or any investment adviser compliance consultant needs to be registered. At any given time, not all investment adviser representatives (IARs) have investment advisory responsibilities. There may be a reason an individual is registered with the firm since previously he or she provided advice and research, but now serves solely as an advisor or as an investment adviser compliance consultant. Item 5.B.(1) is not applicable to this individual, but item 5.B.(3) is.

Item 5.B.(3) of Form ADV Part 1A 

Do the employees listed in item 5.B.(1) have to be part of the employees listed in item 5.B.(3)? There are times when it happens, however, not always. RIA firms are not required to register their individual representatives in many states, notably New York. A person performing investment advisory services or as an investment adviser compliance consultant solely in New York does not need to register with the securities commission, so this counts towards item 5.B.(1), but not toward item 5.B.(3).

Item 5.B.(6) of Form ADV Part 1A 

Item 5.B.(6) is a little unusual in that it is more involved than items 5.B.(2), (4), or (5). It is included under employees, however individual employees are not counted as part of item (6). “Rather, your RIA firm is expected to count “firms or persons” who ask for advisory clients on your behalf.” 

Note that the terms “person” and “accompanying entities” are not limited to actual living individuals, and also include corporations, trusts and partnerships. Regarding item 5.B.(6), the advisory firm should exclude not only its own employees, but also those of the RIA or investment adviser compliance consultant firms it may be approached by, because it can only count one firm per advisory firm that solicits.

You may contact us if you have any questions concerning any regulatory filings your RIA or investment adviser compliance consultant firm may need to make.

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