EDU Articles

The Legislative Foundation of Federally Covered Advisors

The regulatory landscape of investment advisory in the United States has been significantly shaped by a series of legislative changes, commencing with the Investment Advisers Act of 1940. This Act mandated that all advisors were required to register with the Securities and Exchange Commission (SEC). However, the monitoring responsibilities underwent an evolution with the advent of the Investment Advisers Supervision Coordination Act (IASC) of 1996. This act aimed to distribute the responsibility of supervising investment advisors between the states and the federal government.

The IASC amended the previous Act and formulated a new system of monitoring, based on the advisors' assets under management (AUM). It stipulated that advisors with AUM below $25 million would be overseen by their respective state agencies. Conversely, those with AUM exceeding this threshold would continue to be regulated by the SEC, thereby earning the designation of being "Federally covered".

The Introduction of the Investment Advisor Registration Depository (IARD)

The regulation of federally covered advisors was further streamlined with the inception of the Investment Advisor Registration Depository (IARD). This platform, managed by the Financial Industry Regulatory Authority (FINRA), was devised to facilitate electronic notice filings of the SEC-regulated advisors. Advisors use this system to file Form ADV, a requirement for those reporting to the SEC.

Amendments Under the Dodd-Frank Act

The landscape of investment advisory oversight witnessed further transformation with the introduction of the Dodd-Frank Act in 2010. This Act lifted a substantial burden of the SEC by excluding advisors with less than $100 million AUM from filing an ADV with the SEC. As a result, the term "Federally Covered Advisor" became less prevalent as the raised limit meant fewer advisors fell under this category.

Defining a Federally Covered Advisor

In the contemporary financial landscape, a Federally Covered Advisor refers to an investment advisor who is registered with the SEC under the Investment Advisers Act of 1940. This primarily includes advisors with AUM exceeding $100 million. However, there are exceptions such as Wyoming-based investment advisors of any size, certain pension consultants, internet-based advisors, and multi-state advisors who may register with the SEC even if they do not meet the AUM criteria.

The concept of a Federally Covered Advisor is a result of significant legislative progress, designed to create a more streamlined and effective system of regulation. By distributing monitoring responsibilities between the federal government and states based on AUM, the system ensures appropriate oversight of investment advisory practices across the spectrum.

Summary:
The Investment Advisers Supervision Coordination Act of 1996 sought to delegate the responsibility of monitoring investment advisors between the states and the federal government.

It amended the Investment Advisors Act of 1940, which required all advisors to register with the SEC. The Dodd-Frank Act further amended the IAA, such that only advisors with assets under management exceeding $100 million had to register with the SEC. The IASC was part of the NSMIA legislation passed in 1996. Up until that point, all advisors were regulated and monitored by the SEC.

After the new law, advisers with assets under management (AUM) of under $25 million would be monitored and regulated by their state agencies, while advisors with AUM over $25 million would still be regulated by the SEC, or “Federally covered”.

The Investment Advisor Registration Depository (IARD) was created to facilitate the electronic notice filings of the SEC-regulated advisors, and the IARD is operated by FINRA. Advisors use this system to file Form ADV if they are required to report to the SEC.

The Dodd-Frank Act of 2010 took more of the burden off of the SEC’s shoulders by preventing advisors with under $100 million AUM from filing an ADV with the SEC.

The term Federally Covered Advisor is not used as much since the limit was raised and it applies to much fewer advisors than it used to.

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