regulations make it challenging for some financial services professionals to
break away from larger firms to start their own independent registered
investment adviser (“RIA”). Arguably the most notorious
problem? Minnesota’s “minimum supervisory experience” requirement.
Namely, Minnesota Rule 2876.4120 Subp. 2 (“Minn. R. 2876.4120”) states:
"No person shall be
registered as an investment adviser or a broker-dealer unless at least one
person employed full time in a supervisory capacity, by the applicant for a
license, was actively engaged in the securities business in a similar
supervisory capacity for a minimum of three of the preceding five years."
This condition of
registration is in addition to other minimum requirements, such as the passage
of a Series 65 exam or possession of a qualifying professional designation
(e.g., a Certified Financial Planner (CFP) designation).
The problem with Minn. R.
2876.4120 is that it is purely objective—black and white. It limits the
discretion of the Minnesota Department of Commerce (“Commerce”), the agency
responsible for administering Minnesota’s investment adviser registration
program. No matter how many years of experience an individual has spent
responsibly servicing clients as a representative of a larger firm, that person
is prohibited (at least under a strict reading of the rule) from registering as
an investment adviser if she did not also work in a “supervisory capacity” for
a seemingly arbitrary time period. Most investment adviser representatives
wishing to break away from a larger broker-dealer or RIA simply do not have
Four Possible Solutions
Thankfully, there are some
opportunities for hopeful sole-proprietors to meet Minnesota’s minimum
supervisory experience requirement without having worked as a compliance
officer or branch supervisor. Here are a few:
- Hire a third-party consultant. In
the past, Commerce has permitted some investment advisers to become
registered when they demonstrate that they have a contractual relationship
with a third-party consultant, such as an attorney or compliance service,
that can assist them with drafting, reviewing, and testing their policies
and procedures. If you are going this route, it is best to work with
someone experienced in Minnesota’s securities regulations who can tailor
policies and procedures specifically to you and your firm.
- Think outside the box regarding your own
is easy to assume that you lack the requisite experience if your current
or recent title does not include the words “supervisor” or
“compliance.” However, Commerce has historically been somewhat
flexible in what they accept as “prior supervisory experience.” Have
you helped draft or implement your firm’s written supervisory
procedures? Counseled younger advisers on your firm’s policies and
procedures? Led compliance-related training? If so, you should describe these
experiences in writing when communicating with Commerce about your
registration application. This type of experience, especially if combined
with several years of general advisory experience, a professional
designation, and/or a squeaky-clean Form U-4, may be enough to get you
over the initial registration hurdle.
- Find a partner.
Much has been made of the aging population of investment advisers,
and the need for younger advisers to succeed them. Partnering with an
older adviser wishing to sell or wind down their practice—and volunteering
to take on compliance responsibilities— may be a good way for you to
transition into you own practice, while gaining supervisory/compliance
experience that will eventually allow you to meet the Minn. R. 2876.4120
- Petition Commerce to change the rule. Finally,
I believe those in the industry should make clear to Commerce that this
rule needs to change. Simply adding six words to the rule (six words taken
verbatim from Subpart 1 of Minnesota
Rule 2876.4120) would allow Commerce to appropriately
use discretion in applying this rule: "Unless otherwise waived by
the administrator, [n]o person shall be registered as an investment
adviser or a broker-dealer unless at least one person employed full time
in a supervisory capacity, by the applicant for a license, was actively
engaged in the securities business in a similar supervisory capacity for a
minimum of three of the preceding five years."
The Commerce Commissioner has
the authority to adopt, amend or repeal a
rule. However, any of
these actions requires Commerce to go through a lengthy rule making process—a process that is measured in months, if not
years. Still, what better time to start that conversation than now?