Can an employee broker register as an RIA before quitting?
I’ve decided to leave my broker-dealer and start my own investment advisory company. I’m not ready to let my firm know, as I’ve heard it can take several months to get approved and I’m pretty sure they’ll terminate me once I tell them. However, I’m worried that, if I don’t tell them, they will mark up my U5 by saying I failed to advise them that I was engaging in an outside business activity. Can I begin to register as an RIA without letting my firm know?
Note that there are several caveats to what I’m about to say. First, this is just my opinion. Second, I’m basing my comments on a FINRA interpretive letter that only addressed registered reps starting their own broker-dealer, not their own investment advisory firm. And third, this does not address whether your current employer may have its own internal policies and procedures that you could still be deemed to be violating.
With that said, I believe, as far as FINRA is concerned, merely applying for registration should not be considered an outside business activity. In a Dec. 6, 2001, interpretive letter, FINRA staff said they believe that “the notice requirements of NASD Rule 3030 [now FINRA Rule 3270] are not triggered when, in an effort to apply for membership as a new broker/dealer, an associated person takes the following steps: (1) forms a company; (2) files an application on behalf of the company to become a member …; and (3) files a Form U-4 with NASD designating such associated person as a principal of such company.”
The staff did caution that the associated person could not accept any compensation from the new company or from anyone other than their current member firm, and could not engage in any securities or investment banking activity on behalf of the new company, nor raise capital or solicit customers for it.
Essentially, as long as you are not actually engaging in any “business activity” on behalf of the company, FINRA won’t consider you to be engaged in an OBA. There has been no updates to this guidance since that interpretive letter was written. Nevertheless, I believe the analysis is still valid and would apply to a representative setting up a registered investment advisory firm, but, again, your firm may have more-specific internal policies that could take precedence.
I recently took on a client who I think has some suspicious deposits and withdrawals. In regard to verifying the client’s identity, I relied on the information I was given by his outside investment advisor. I’ve spoken with the adviser, who said his attorney told him that RIAs aren’t subject to the anti-money-laundering rule. If they’re not subject to the AML rule, then should I not rely on the RIA’s information?
While it’s true that, technically, RIAs aren’t covered by the AML, the SEC has stated that broker-dealers can, in certain instances, treat an RIA as if it were subject to the rule.
The broker-dealer would have to otherwise be in compliance with the Customer Identification Program Rule and : (1) the broker-dealer’s reliance on the RIA must be reasonable, (2) the RIA must be a U.S. investment adviser registered under the Advisers Act of 1940; and (3) the RIA must enter into a contract with the broker-dealer and agree to: (a) implement its own AML Program; (b) perform the requirements of the broker-dealer’s CIP; (c) promptly disclose to the broker-dealer potentially suspicious activity; (d) certify annually to the broker-dealer that the representations remain accurate and that it is in compliance with such representations; and (e) promptly provide its books and records relating to its performance of CIP to the SEC, FINRA or authorized law enforcement agencies.
If you don’t meet those requirements, you can’t say you relied on the RIA to give you the information about the client, and you would be fully responsible for compliance with the CIP Rule.