Investment Adviser Workshop
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Navigating the Dodd-Frank Act’s
New Regulatory Requirements for
Investment Advisers
Presented by
Texas State Securities Board
Workshop Topics
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 What Dodd-Frank Means for Investment Advisers
 IA Regulation in Texas
 What to Expect from State IA Inspections
Texas State Securities Board
DISCLAIMER
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This seminar and the accompanying materials are presented as
an educational experience, covering some of the changes
mandated by the Dodd-Frank Wall Street Reform and Consumer
Protection Act.
You may be subject to all relevant laws, regulations, rules and
orders whether or not they are included in this presentation. The
views expressed are those of the presenter, and the Texas State
Securities Board reserves the right to change its position.
Presenters believe all information is truthful and accurate;
however, mistakes can occur.
Texas State Securities Board
About Us
Our primary goal is to protect investors
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 The Texas State Securities Board (TSSB) regulates:
 Investment Advisers & Investment Adviser Representatives
 Broker-Dealers & their Agents
 Other responsibilities of the TSSB:
 Enforcement of the Texas Securities Act
 Inspections
 Securities Registration
 Investor Education
Texas State Securities Board
What Dodd-Frank Means For IAs
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Under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, state securities
regulators will have greater responsibility for the
regulation of investment advisers, by restoration
of authority over certain investment advisers.
Texas State Securities Board
What Dodd-Frank Means For IAs
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 Dodd-Frank establishes a threshold of $100 million assets under
management (AUM) for federally covered advisers.
 Law takes effect July 21, 2011.
 Approximately 4,000 advisers nationwide will be affected, including
about 1200 who will be seeking registration in Texas.
 Eliminates the private adviser exemption.
Texas State Securities Board
What Dodd-Frank Means For IAs
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 Private Fund Investment Advisers Registration Act of 2010
(Title 4 of Dodd-Frank) – Please reference final rule in SEC IA
Release 3222. Significant reforms to the regulation of advisers to
hedge funds and other private funds, including, among others:
 Eliminates the private fund adviser exemption at 203 (b) (3)
 Requires SEC registration for advisers to “private funds” with
AUM of at least $150 million
 Requires SEC reporting for advisers to “private funds” with AUM
of less than $150 million and for advisers to “venture capital
funds”
 Defines “foreign private adviser” & exempts from SEC
registration
Texas State Securities Board
What Dodd-Frank Means For IAs
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SEC’s PRIVATE FUND DEFINITION
 Private fund – An issuer that would be an investment company
under the Investment Company Act, but for the exceptions
contained in 3(c)(1) or 3(c)(7) of that Act.
Texas State Securities Board
What Dodd-Frank Means For IAs
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 3(c)(1)
 securities are not publicly offered and are owned by not more
than 100 persons
 interests typically offered pursuant to Reg D, Rule 506.
 generally held by accredited investors
 3(c)(7)
 Securities are not publicly offered and generally not owned by
more than 499 persons
 Investors must be qualified purchasers (individuals with
investments of $5,000,000/institutions with $25,000,000 of
investments)
Texas State Securities Board
What Dodd-Frank Means For IAs
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Advisers to Private Funds:
Registration and Reporting Requirements
 Advisers solely to private funds with AUM of less than $150
million
 Exempt from registration with the SEC
 Reporting requirement with SEC
 State registration required, unless exempt under Texas Rule 109.6.
 Advisers solely to private funds with AUM of $150 million or more
 Register with the SEC
 States are preempted – Notice Filing Requirement
Texas State Securities Board
What Dodd-Frank Means For IAs
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 In Texas, all advisers with $100 million or less under management will
be required to register with the state unless:
 They fall between $25 million and $100 million and are required to be
registered in 15 or more states, or
 The investment adviser qualifies for an exemption under Rule 203A-2
of the Investment Advisers Act of 1940 (i.e, pension consultant).
Texas State Securities Board
What Dodd-Frank Means For IAs
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 The SEC has POSTPONED the effective date of the Switch.
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On June 22, 2011, the SEC issued final rules implementing the Dodd-Frank Act’s required
changes. Among other things, these final rules detail the deadlines for investment advisers
to submit their Form ADV and, as applicable, withdraw their registration with the SEC.
These rules establish March 30, 2012, as the date by which each adviser must:
1) determine whether it is eligible for SEC registration; and
2) file an amended Form ADV.
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The rules also provide an additional ninety days for advisers no longer eligible for SEC
registration to register with the appropriate state(s) and withdraw SEC registration by June
28, 2012.
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Although the state of Texas is cooperating with the SEC’s extension, we urge you to pursue
dual registration to avoid the potential bottleneck during the 1st and 2nd quarters of 2012.
Texas State Securities Board
What Dodd-Frank Means For IAs
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About State Regulation:
 Switching is not new. Regulatory switches regularly happen when the
asset levels of IA firms rise above or fall below mandated thresholds.
 States are preparing to handle the switch. State securities
regulators are working to ensure a seamless, comprehensive and
effective switching process.
 States conduct a thorough review of adviser applications. State
reviews will not change with the migration of IAs with up to $100
million in assets under management.
Texas State Securities Board
What Dodd-Frank Means For IAs
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About State Regulation:
 Firms switching to state regulation for the first time can expect
thorough inspections generally on a more frequent basis than they
may have experienced before.
 The goal of our inspections is to ensure compliance with the Texas
Securities Act and regulations.
Texas State Securities Board
IA Regulation
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Registration
& Form ADV
Texas State Securities Board
IA Regulation:
The Registration Process
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You now have two choices regarding the timing of your
registration.
 Remain SEC registered and continue your Notice Filing in Texas until
the SEC establishes a new deadline.
 Move forward with dual registration with the SEC and the state. If
all conditions of registration have been met, your application for
Texas registration will be approved.
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 1
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Form ADV Part 1 is a uniform form that:
 will be used by the Adviser to determine their eligibility to remain
registered with the SEC, or to switch to state registration.
 must be filed electronically on the Investment Adviser Registration
Depository (IARD).
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 1
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 Material changes must be filed within 30 days –Texas Rule
116.9(a)(6).
 Called an “other than annual amendment”
 Do not file hard copy changes with our office – Online ONLY
 What is a material change that requires an other than annual
amendment?
 Change of name, address, contact information, form of
organization, custodial arrangements, disciplinary actions, etc.
 Texas recently adopted Texas Rule 116.9(d) that requires state
registered advisers to file a Part 2 along with the annual updating
amendment on Form ADV within 90 days of the end of fiscal year.
The effective date of the Rule is March 9, 2011.
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 2
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 July 28, 2010: SEC adopted a new Form ADV Part 2 replacing the old
Part II, effective October 12, 2010.
 All new and current SEC advisers are required to use the new
Form ADV Part 2 and uploaded onto the IARD system.
 Part 2 will be available for viewing through Investment Advisor
Public Disclosure System (IAPD) available from the SEC website
at:
http://www.adviserinfo.sec.gov
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 2
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Effective March 9, 2011:
 New Applicants applying for IA registration for the first time should
submit the new Form ADV Part 2 through the IARD.
 IAs Switching from SEC to State registration must incorporate the
new Form ADV Part 2 with their Form ADV Part 1.B submission
seeking State registration.
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 2
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 The new Part 2 consists of three parts:
 Part 2A, the Firm Brochure – 19 Items
 Includes all firm details written in plain English to promote
effective communication between you and your clients.
 Part 2A Appendix 1, Wrap Fee Program Brochure - 10 Items
 If you sponsor a wrap fee program.
 Part 2B Brochure Supplement - 7 Items
 For supervised persons who formulate investment advice for
clients and have direct client contact.
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 2
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Key Points of Form ADV Part 2:
 Provides new and prospective clients with a brochure written in plain
English. No more “check the box” features.
 Describes business practices and investment strategies;
 Provides meaningful disclosure regarding material or potential conflicts
of interest; and
 Describes the background of the investment adviser and its advisory
personnel.
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 2
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Key Points of Form ADV Part 2
 An adviser is a fiduciary whose duty is to serve the best interests of its
clients.
 An adviser must deal fairly with clients and prospective clients, seek to
avoid conflicts with its clients and, at a minimum, make full disclosure
of any material conflict or potential conflict.
 Disclosures that clients and prospective clients receive is critical to their
ability to make an informed decision about whether to engage an
adviser.
 To evaluate the risks associated with a particular IA, its business
practices and investment strategies, it is essential that clients and
prospective clients have clear disclosure that they are likely to read and
understand.
Texas State Securities Board
IA Regulation:
ADV Part 2A Appendix 1 | Wrap Fee Program Brochure
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Instructions for Preparing your Wrap Fee Program Brochure
Who must deliver a wrap fee program brochure?
 If you sponsor a wrap fee program, you must give a wrap fee program
brochure to each client of the wrap fee program.
 However, if a wrap fee program that you sponsor has multiple sponsors
and another sponsor creates and delivers to your wrap fee program
clients a wrap fee program brochure that includes all the information
required in your wrap brochure, you do not have to create or deliver a
separate wrap fee program brochure.
 A wrap fee program brochure takes the place of your advisory firm
brochure required by Part 2A of Form ADV, but only for clients of wrap
fee programs that you sponsor. See SEC rule 204-3(d) and similar
state rules.
Texas State Securities Board
IA Regulation:
Form ADV Part 2B | Brochure Supplement
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Instructions for Preparing your Brochure Supplement
For which investment adviser representatives must we prepare a
brochure supplement?
 You must prepare a brochure supplement for the following investment
adviser representatives:
 (i) Any representative who formulates investment advice for a client
and has direct client contact; and,
 (ii) Any representative who has discretionary authority over a
client’s assets, even if the representative has no direct client
contact.
Texas State Securities Board
IA Regulation:
The Registration Process
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 To begin the registration process, check “Texas” under Item 1 of Form
ADV Part 1B, and file Form U4 for each investment adviser
representative who intends to provide services in this state.
 The fee to amend the Form ADV is $25 (and collected thru the IARD
system) to switch from SEC to state registration
 The fee for each Form U4 is $285.
 Upload the Form ADV Part 2
Texas State Securities Board
IA Regulation:
Documents Required for Registration
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 The TSSB will be notified electronically of your Form ADV filing within 48
hours of your filing and payment of the fees. Upon receipt, the TSSB
will communicate directly with you requesting additional documents
required for registration.
 List of documents that must be submitted in paper form for registration in
Texas.
 Articles of incorporation/Bylaws
 Balance Sheet and Certification Form
 Advisory contract
 Private Placement Memorandum and subscription documents, if an
adviser to a hedge fund
Texas State Securities Board
IA Regulation:
Registration | Goal of registration review
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 Upon receipt of a complete application, your application is reviewed
for compliance with Chapter 116 of the Rules and Regulations of the
Texas Securities Board.
 The goal is to ensure that your firm is in compliance before
conducting business. You will receive a comment letter if, among
other things:
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You failed to include information required or requested;
Your investment adviser representatives have not qualified by examination (i.e.,
passed the Series 65);
We find discrepancies in the responses in Form ADV Part 1 and 2 and the advisory
contract.
 Must respond to comment letters to continue with the application
process.
 Upon our determination that you have satisfied all of the registration
requirements, the Agency will approve your registration.
Texas State Securities Board
State IA
Examinations/Inspections
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What to Expect
Texas State Securities Board
State IA Examinations/Inspections:
What to Expect
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 Our goal in examining state-registered Investment Advisers is to
protect investors and ensure the advisers are in compliance with the
statutes and regulations
 Generally, there are two types of Inspections
 Routine ► generally a standard comprehensive exam
 For Cause ► there for a reason, sometimes a focused
exam
 Typically, examinations are unannounced.
Texas State Securities Board
State IA Examinations/Inspections:
Examination Focus
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 State IA examinations generally include the following areas:
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Books and records
Financials
Registration – Form ADV Part I and 2
Investment Activities
Complaints
Advertising and Marketing
Conflicts of interest
Custody
Supervisory/Compliance Procedures
Business Practices
Texas State Securities Board
State IA Examinations/Inspections:
What to Expect
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 Routine exams are typically a three-part process.
 On-Site Inspection
 Post-Exam
 Resolution
 Onsite portion of exam may last from one day to a week
depending on several factors.
 Usually two examiners.
Texas State Securities Board
State IA Examinations/Inspections:
What to Expect | Onsite
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ONSITE
 Introduction and description of the purpose of the visit.
 Identify contact/point person for the examiner.
 Initial interview conducted by examiner.
 Tour of the office
 Where are your records?
 Where is the copier?
 Where can I work?
 Interview: Questions about your practice
Texas State Securities Board
State IA Examinations/Inspections:
What to Expect | Onsite
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ONSITE
 Try to have key personnel available.
 Exit interview (optional).
 The examiner explains what comes next. May be done onsite or may
come after the actual visit, but not required.
Texas State Securities Board
State IA Examinations/Inspections:
What to Expect | Post-Exam
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Post-Exam
 Once examiner has left your office, the exam is not over.
 Most of exam is done at the regulator’s office and frequently
additional documents or information is requested.
 May take one to several weeks depending on several factors.
Texas State Securities Board
State IA Examinations/Inspections:
What to Expect | Resolution
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Resolution
 Once post-exam work is complete, a deficiency letter will be mailed to
you.
 Registrant must respond to the deficiency letter in writing, usually within
a set amount of time.
 Once all deficiencies have been satisfactorily addressed, exam is
closed.
 Certain issues may be referred to the legal section of the Inspections &
Compliance Division.
Texas State Securities Board
State IA Examinations/Inspections:
Common Exam Deficiencies
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 Inaccurate or incomplete Forms ADV Part 1 & 2
 Incomplete, inadequate, or no contract with clients
 Failing to maintain current suitability information
regarding clients
 Non-compliance with privacy requirements
 Incomplete or no written supervisory/compliance procedures
Texas State Securities Board
State IA Exams:
Common Exam Deficiencies
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 Non-compliance with advertising rules
 Failing to maintain applicable books and records
 Not sending invoice of fees if auto-deducting fee
Texas State Securities Board
Resources
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 Texas State Securities Board
 www.ssb.state.tx.us
 North American Securities Administrators Association
 www.nasaa.org
 Investment Adviser Resources
 Uniform Forms
 IA Switch Resource Center
Texas State Securities Board
IA Regulation:
Registration | Form ADV Part 2
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Form ADV Part 2 Resources
 The new Part 2 of Form ADV is posted on the websites of the SEC and
the North American Securities Administrators Association (NASAA).
 NASAA has posted guidance for investment advisers filing the new
Form ADV Part 2 in IARD.
 Visit the NASAA website, look in “Industry & Regulatory
Resources”
www.nasaa.org
Texas State Securities Board
More IA Switch Resources
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NASAA IA Switch Resource Center
 The North American Securities Administrators Association (NASAA)
is assisting states with the migration of investment advisers.
 NASAA’s online IA Switch Resource Center includes an FAQ,
calendar of events and additional guidance to help advisers make
the switch to state regulation.
 Advisers can use the resource center to submit questions about the
switch. The resource center is available at www.nasaa.org
Texas State Securities Board
Questions?
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For more information,
contact:
Texas State Securities Board
Registration Division
512-305-8300
Texas State Securities Board