Understanding the Overlap and Gaps Between SEC and State Adviser Regulations

Regulatory expectations for investment advisers continue to evolve, and understanding the distinction between Securities and Exchange Commission (SEC) and state regulatory frameworks is essential for advisers of all sizes. While both divisions share the goal of protecting investors and ensuring fiduciary conduct, the complexity arises in the nuance where the rules overlap, where they separate, and how those differences shape compliance responsibilities.

This blog highlights key differences and commonalities between SEC and state regulations. Below are some key areas advisers should understand:

• Compliance Program Requirements - SEC registered advisers must comply with Rule 206(4)-7, requiring written policies, annual reviews, and designation of a Chief Compliance Officer. Many states adopt NASAA Model Rules, which contain similar provisions, though some states do not require annual reviews or a designated CCO.

• Form ADV & Disclosure Obligations - Investment advisers registered with either SEC or state regulators must file Form ADV Part 1A, but only state registered advisers must also file Part 1B. Both SEC and state registered advisers must prepare and deliver Form ADV Parts 2A and 2B to clients; however, only SEC registered advisers file Part 2A with the SEC, while state registered advisers file both Parts 2A and 2B with their states.

• Form CRS (ADV Part 3) is required for SEC registered advisers serving retail investors. Among states, only Rhode Island currently requires Form CRS for state registered advisers. 

• Personal Trading & Code of Ethics - Under SEC Rule 204A‑1, access persons must report personal securities transactions within 30 days after quarter-end, and new access persons must report their holdings within 10 days of becoming an access person. Some states may impose additional reporting requirements.

• Advisory Agreements - The SEC does not require written agreements, though certain authorizations must be in writing. Typically, states require written advisory agreements and often mandate specific provisions, many influenced by NASAA guidelines. 

• Reasonableness of Fees - While the SEC does not set fee caps though they do require that fees be fair, accurately calculated, and fully disclosed, some states consider fees above 2% or 3% to be unreasonable, triggering regulatory scrutiny. Massachusetts also requires a unique “Table of Fees for Services” disclosure.

• Marketing & Advertising Rules - The SEC’s modern Marketing Rule permits testimonials and merges solicitation rules into the advertising framework. States vary significantly. Some follow the SEC, others still prohibit testimonials or impose filing requirements.

• Custody Requirements - SEC custody rules require surprise exams unless advisers only deduct fees under specific conditions, or other relief applies, such as compliance with the No Action Letter regarding standing letters of authorization. Many states impose additional steps, such as requiring advisers to send invoices directly to clients.

• Privacy Obligations - All advisers are subject to privacy laws. SEC advisers follow Regulation S-P, while states may impose rules, including annual cybersecurity reviews and client opt-in requirements.

• Business Continuity Planning (BCP) - The SEC has proposed but not adopted a BCP rule. Most states require a written business continuity and succession plan aligned with NASAA’s Model Rule.

• Financial Reporting Requirements - SEC advisers do not have net worth or bonding requirements, though they must maintain financial books and records. States may require minimum net worth levels and annual financial filings.

• IAR Licensing & Continuing Education - All advisers must register their Investment Adviser Representatives (IARs) in states where they have a place of business or meet that state’s de minimis threshold for advisory clients. More than 23 states require ongoing IAR Continuing Education (CE) consistent with NASAA’s model.

While navigating the overlap and differences between SEC and state regulations can be challenging, it is important for investment advisers to understand their impact. SEC registered firms are still subject to certain state regulations, including anti-fraud provisions, registration of IARs, and CE, when applicable. State registered advisers with assets near the SEC threshold should also be preparing for how Advisers Act requirements will impact their business. A strong compliance program designed to address SEC and state regulations can support operational efficiency, reduce regulatory risk, and bolster client trust. Firms should build adaptable programs and seek expert support to ensure continued alignment with evolving rules.