The criteria and process for becoming a federal covered adviser registered with the SEC are tested on the Series 63, 65, and 66 exams. In this video, Brandon walks you through the requirements for being federal covered, how you can lose that status, and other things you’ll see on these tests.
The criteria and process for becoming a federal covered adviser registered with the SEC are tested on the Series 63, 65, and 66 exams. In this video, Brandon walks you through the requirements for being federal covered, how you can lose that status, and other things you’ll see on these tests.
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00:00:00 Firms that are considered investment advisors are always placed into one of two buckets on this exam, the first one being state registered advisors subject to state laws and regulations. They basically the Uniform Securities Act and are regulated by the state administrator. That's bucket number one. Bucket 2 would be federal covered advisors or what we sometimes just call covered advisors. 00:00:24 These are advisors that are subject to the Investment Advisors Act of 1940 and are regulated by the Securities and Exchange Commission. Maybe an easy way of putting that would be we have investment advisors that are subject to state registration and regulation, and we have investment advisors that are subject to federal registration and regulation. Investment advisors will always fall into one of those two categories and they'll never be considered both at the same time. The best way to conceptualize this topic for the exam. 00:00:54 Is to know when an investment advisor is either eligible for federal covered status, mandatorily required to register as a federal covered advisor, or even when a federal covered advisor must deregister and go back to the states. 00:01:10 That, in fact, will be what we cover today. So first, what is a federal covered advisor? We've already said this. This is an investment advisor registered with the Securities and Exchange Commission and subject to the laws and regulations of the Investment Advisors Act of 1940, when is an investment advisor eligible to register as a federal covered advisor? 00:01:34 There are three distinct points here that we'll want to be clear on. The first one is the most important one by far. Once an investment advisor reaches 100 million of assets under management or more, they become eligible to register as a federal covered advisor. Now one keyword here is the word eligible. Some investment advisors may choose to stay registered and regulated at the state level once they hit 100 million of assets under management. That really depends on. 00:02:04 The company itself, every state, has their own state administrator. The size of the state administrator really depends on the size of the state. So if you were to compare California State administrator to, say, North Dakota State administrator, you'd see a great difference in the size of those offices. It doesn't really matter what state administrator we're talking about. 00:02:24 The SEC has more resources, has more money and frankly just more power than any state administrator out there, which is why we have the larger investment advisors. Under their regulation, the 2nd way an investment advisor becomes eligible for federal covered status is when they start engaging clients in 15 or more states. That is what we call a multistate advisor. Once they get to that level, I think this is a way for the regulators to. 00:02:54 Say, hey, once you're doing business in 15 or more states, it's up to you. You can register and deal with every state administrator in all of those states, and it could be 50 states potentially. Or you can register with the SEC and have them be your primary regulator. I've never been a compliance officer in my life, but I would assume that. 00:03:17 If you're looking to comply with rules and regulations and are dealing with regulators, let's say you're in 30 different states. To me it sounds like it would be easier to deal with 1SEC than it would be to deal with 30 different state administrators or however many different states you're in. So bottom line, hey, if you're doing a bunch of business over 15 or more states, then great, you can become a federal covered advisor and deal with 1SEC. Now to be clear, even federal. 00:03:47 Advisors still have to deal somewhat with state administrators in the states that they're doing business in. But still, do you want your primary regulator to be one party or you know, 15 plus parties? It just depends on how the investment advisor wants to manage its business. One last eligibility here, and that is for pension consultants only. This is a really unique rule, only applicable to this type of person. If you don't already know a pension is a type of retirement. 00:04:17 Retirement plan. Kind of an old school retirement plan that doesn't really exist as much as it did in the past. But the idea was, hey, I work for an organization for 20 years. Once I retire, they pay me until the day I die. In order for an organization to offer that type of retirement plan where they're paying the retirees, they have to set aside a good amount of money and invest that money over time to make sure that they have the ability of paying the retirees. So a pension consultant would be a type of investment advisor, as you've learned with I A. 00:04:47 1092, this is a type of investment advisor. They have to register as an investment advisor. The question really is, are they state registered or they federal covered? Well, back to the eligibility part of it, if we have a pension consultant advising on 200,000,000 or more, that is when they're eligible to be registered as a federal covered advisor. Be careful with this one, you might remember it but not remember it that it only applies to pension consultants. 00:05:16 They got to remember what type of party this applies to. Now let's go on to mandatory and what circumstances do we have an investment advisor that has to register as a federal covered advisor? 00:05:28 There's two points here. Both of them are very heavily tested. Once an investment advisor exceeds 110 million of assets under management, they are required to register as a covered advisor. Now let's go ahead and compare that back to when we were eligible and advisor is eligible to become a covered advisor once they hit 100 million of assets under management, but it's only mandatory once they exceed 110. Again, this goes back to what we talked about before the. 00:05:58 The SEC's job is regulating the larger advisors and they do so because they are the more powerful regulator as compared to the state administrator. The other time an advisor must register as a covered advisor is when they're providing advice to a registered investment company. A really good example of an investment company is a mutual fund. Mutual funds take money from their investors invested in a way that's defined within their investment objective. So for example. 00:06:28 If it's a large cap stock fund, that fund will take money from customers, invest it into stocks of very large companies and try to make them as much money as they can. Granted that investment objective, every mutual fund has an investment advisor that they assign to manage their customers assets. And just a quick silly example of this, let's say that Vanguard decided to hire Achievable to manage one of their mutual funds. 00:06:57 Achievable would have to register as a federal covered advisor in order to do that. And once we're registered as a federal covered advisor, we will manage that fund, You know, take the money from our customers, invest it according to whatever the investment objective is and go from there. One key thing to remember here is there's no dollar amount specified and all it takes to establish an investment company is $100,000 of capital. So if a small mutual fund with say $200,000 of assets. 00:07:27 Comes to achievable and says, hey, achievable, we want you to manage our fund. We again would have to register as federal covered advisors even though we're nowhere close to the 100 or $110 million figures we've already cited. All we have to do is be giving some kind of advice or managing some type of investment company like a mutual fund to be considered a federal covered advisor. There are three different types of investment companies to be aware of for the exam. There are management companies. That is where mutual funds fall under. 00:07:57 We also have unit investment trusts and we have face amount certificates and if any firm is hired to manage the assets or give advice to any one of those three parties, they have to register as a federal covered advisor. One last point we'll cover here which is deregistration. 00:08:15 And deregistration here is specific to any firm that registered as a federal covered advisor because of their asset level. So for example, a firm reaches 115 million of assets under management, they mandatorily register as a federal covered advisor and then go from there. Now deregistration will kick in if an advisor that registered because of their asset level then falls to below 90 million of assets on their management. This is probably the way that. 00:08:45 The SEC ensures that they're only dealing with the big fish and hey, they will kick you out of the club if your asset level falls below 90 million. Hopefully by now you feel better about what a federal covered advisor is. Let's take a look at a practice question to see how these concepts might be tested on the exam. OK question is up on the board. Registration as a covered advisor is required. In which circumstance? 00:09:11 If you want to go ahead and take some time and answer it on your own, pause the video and we will reconvene here momentarily. OK, Feeling confident? All right, let's see. Before we actually go through each answer, let's go back to the question and just be 100% sure on what we're looking for. Registration as a covered advisor is required. 00:09:33 So really what we're asking here is in in what circumstance must we register the mandatory registration as if covered advisor that we talked about previously. And if you recall, there were only two times we had a mandatory requirement to register as a federal covered advisor. Number one was when we exceeded 110 million of assets under management or 2 when we had an advisor to a registered investment company. If you know that, then you know what you're looking for. Let's go through the answers. 00:10:03 And see which one fits first one. KLM Capital Management, a multistate advisor currently managing 32 million. Now the first part that's interesting here is the term multistate advisor. We talked previously about how multistate advisors, specifically advisors operating in 15 or more states are eligible to be considered federal covered advisors and to register with the SEC. 00:10:28 The keyword there is eligible. The 32 million is nowhere close to the amount of money that we care about for mandatory registration. The multi state advisor part might mean that they are eligible because they're in 15 or more states for exam purposes. I would still be a little cautious even if the question here was when they're eligible. 00:10:46 I'd more so be looking for them to absolutely confirm that we have an advisor doing business in 15 or more states if I'm looking for that answer. But the bottom line is that we don't have anything here that meets the mandatory requirements to register as a federal covered advisor. So that first answer is not going to be our right answer. We'll go ahead and eliminate that second answer, FFF Advisors, a firm managing a unit investment trust with a $55 million portfolio. 00:11:13 OK. 55 million is nowhere close to exceeding 110 million. In fact, we're just halfway there with 55 million. But that's not the part that's interesting here. This is a firm that manages a unit investment trust and if you recall a unit investment trust is one of the three types of investment companies. 00:11:34 This is an advisor that is giving advice to a registered investment company, which is one of the two mandatory requirements to register as a covered advisor. This has to be our right answer. Now, of course, you've got to keep going through the answers to make sure there's not either a better answer or just to make sure we can actually eliminate the other two answers. So let's go through the other two. 00:11:58 UVX Financial Advisors and intrastate advisor currently managing 62 million, OK. This advisor has 62 million of assets under management, nowhere close to the 110 million that we care about. They're also intrastate which means they're operating in one state only. 00:12:14 Not only with this advisor not even be eligible to be registered as a federal covered advisor, they in fact are kind of pigeonholed into state registration by virtue of them being an intrastate advisor. This is a concept that you can actually apply in multiple areas in this exam. Anytime we have a professional operating in one state only, they almost always are just going to register with that state only. 00:12:40 There is no federal registration. This is a concept that goes beyond finance and frankly, is just how our government works. In order for the federal government to get involved with something, we're typically looking for the thing they're regulating to fall into an Interstate category, meaning it's crossing state lines. If something is happening in one state only, that almost always will be subject to state regulation only. 00:13:06 And again that's just how our government works. The last answer, GHI Investment management company currently managing 108 million in assets. Now the number here is the interesting one with 108 million of assets under management. This advisor certainly could register as a federal covered advisor, but they're not quite exceeding 110 million yet. So they're not yet into mandatory territory, they're still eligible. 00:13:33 They can go either way, but they are not forced to register as a federal covered advisor until they exceed that $110 million mark. So we can eliminate that last one there as well. To summarize it all, there are only two instances an investment advisor would mandatorily be required to register as federal covered, and that would be one if they're exceeding 110 million of assets under management or two if they're hired to give advice to any registered investment company. 00:14:03 Yeah.
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