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:
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?
Brian Edstrom is a Shareholder and Attorney at Avisen
Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having
spent several years working for federal and state regulators in Washington D.C.
and Saint Paul, MN before entering private practice. Brian assists
clients in all aspects of working with securities regulators, whether it be to
obtain a license or registration, prepare for an audit, or respond to an
enforcement investigation. Brian also regularly advises clients on their
general business needs, particularly surrounding raising money through