The Problem with Minnesota's RIA Minimum Supervisory Experience Requirement

Nov. 09, 2017

Minnesota’s securities 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

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 this experience.  

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:

  1. 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.

  2. Think outside the box regarding your own experienceIt 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.

  3. 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 requirements.

  4. 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?


Written By:
Brian Edstrom

Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen seven years of experience working for federal and state regulators.

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