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In October 1996, President Clinton signed into law the Investment Advisers Supervision Coordination Act (“Coordination Act”). The Coordination Act, and the new rules implementing the Act, went into effect on July 8, 1997, and operate to reallocate federal and state regulation of investment advisers. This reallocation of responsibility is designed to make the states primarily responsible for smaller advisers and the SEC primarily responsible for larger investment advisers. The SEC estimates that approximately two-thirds of the more than 23,000 advisers currently registered with the SEC are ineligible for federal registration under the Coordination Act.

$30 Million “Assets Under Management” Test
Essentially, the Coordination Act requires investment advisers with more than $30 million of “assets under management” to register with the SEC. The SEC defines “assets under management” as securities portfolios with respect to which an investment adviser provides “continuous and regular” supervisory or management services. Most accounts over which an investment adviser has discretionary control (i.e., for which the adviser is authorized to buy and sell securities) will receive continuous and regular” services within the meaning of the Coordination Act. In addition, a limited number of non-discretionary arrangements may receive continuous and regular supervisory or management services, but only if the adviser has responsibility to select or make recommendations, based upon the needs of the client, as to specific securities and is responsible for arranging the purchase or sale.

Once it is determined that a securities portfolio receives “continuous and regular supervisory or management services,” the entire value of the account (not just the securities portion) is included in determining the amount of the adviser’s assets under management. If only a discrete portion of the portfolio receives “continuous and regular” services, however, only that portion may be included as part of the adviser’s assets under management.

The Coordination Act also requires SEC registration for certain categories of investment advisers (such as advisers to registered investment companies) regardless of the amount of assets the adviser has under management. Those advisers that are required to register with the SEC will be exempt from any state registration or licensing requirements. However, some state authority, such as the authority to investigate and prosecute fraud, is preserved in all cases by the Coordination Act.

Registration with State Authorities
Any adviser not falling within an express provision for federal registration must look to state law to determine applicable registration requirements. Some advisers not qualifying for federal registration will likewise be exempt from state registration because the Coordination Act establishes a “national de minimis standard” prohibiting states from requiring the registration of an adviser that does not have a place of business within the state and that has had fewer than six clients who were residents of the state in the previous 12 months.

Elimination of Dual Federal and State Registration
One of the leading objectives of the Coordination Act is to reduce the amount of SEC resources dedicated to regulating small, locally operated financial advisory firms . Consequently, the Coordination Act puts on the states’ shoulders sole responsibility for the regulation of a large class of investment advisers. In addition to promoting more efficient use of SEC resources, such jurisdictional mutual exclusivity allows advisers to avoid the difficulties of maintaining both federal and state registration.

Transition to the New Scheme
The enactment of the Coordination Act obviously entails a dramatic shift away from the previous adviser registration system. Consequently, a number of the provisions of the Coordination Act and the rules promulgated by the SEC are specifically designed to govern the transition process. The workhorse of the transition is Form ADV-T. The SEC requires every federally registered investment adviser to file a completed Form ADV-T no later than July 8, 1997. The Form is designed to aid the SEC in determining which federally-registered advisers will continue to be eligible for SEC registration following the Coordination Act’s effective date. Those SEC- registered advisers now ineligible to register with the SEC must use Form ADV-T to withdraw from federal registration.