Unregistered Advisers: A Potential Trap for Unaware Investors and Custodian Broker-Dealers

By: DWH Legal

Since the 2008/2009 financial crisis, many former financial advisors, portfolio managers and investment adviser representatives have elected to branch out on their own and serve as independent investment advisers.  Often times, these investment advisers fall below the SEC registration requirement of $25 million assets under management but, importantly, fail to consider registering as advisers in the state in which they do business.  States have their own specific set of parameters to determine exemptions, registration, and other regulatory requirements as referenced by the  North American Securities Administrators Association, Inc. (www.nasaa.org).  Further, custodian broker-dealers that permit unregistered advisers to manage client assets on their platforms have been subject to state enforcement actions.  For example, In the Matter of Fidelity Brokerage Services, LLC, Commonwealth of Massachusetts Office of the Secretary of the Commonwealth Securities Division Docket No. E-2015-0078 (2015), the state recently charged, among other things, that Fidelity “knowingly [allowed] unregistered investment advisers to utilize Fidelity’s trading platform to conduct unregistered activity in Fidelity customer accounts…”  Similar, as far back as 2013, In the Matter of Interactive Brokers, Arkansas Securities Commissioner Case No. S-12-0130 (2013), Interactive Brokers entered into a Consent Order and paid a fine after the Commissioner concluded that “Interactive Brokers failed to perform adequate due diligence” regarding the registration status of certain advisers utilizing its platform.  Thus, an investor with a brokerage account at a nationally known firm such as Fidelity or Interactive Brokers may be subjecting his assets to management by a wholly unregulated and/or unlicensed adviser, and the broker-dealers themselves may now be exposed to regulatory and perhaps civil liability.

If you are an investment adviser or broker-dealer professional who has questions regarding investment advisor registration; or an investor who has concerns about investments that may have been made with an unlicensed/unregistered investment advisor, please contact us today at DWH Legal.