Why State-Registered Investment Advisers Can’t Rely on Federal Compliance Rules Alone

For state-registered investment advisers, compliance is rarely straightforward. Even if you operate in just one state, staying on top of that state’s rules can be challenging. If your firm is registered in multiple states, the complexity grows exponentially—each jurisdiction has its own requirements, many with subtle but important differences.

While most states tend to follow the SEC’s lead by adopting rules modeled after the Advisers Act, the timing and scope of these changes can be inconsistent. It’s challenging to keep up with changes to your state’s regulations, and even more challenging to understand what has changed.

Why It’s Risky to Assume “SEC Rules Cover It”

It’s common for firms to build their compliance programs around SEC standards- an approach not looked upon favorably by state regulators. This practice leaves gaps, as there are several areas where state rules go beyond - or differ from – federal requirements, including:

• Client agreements – Some states require specific contract terms not addressed in SEC regulations.
• Financial reporting – State-imposed net worth or bonding requirements may apply.
• Continuing education – Certain states require annual training for investment adviser representatives.

These are just a few examples of state-specific regulations; however, there are also examples of regulatory topics that apply to both federal and state registered firms, but the actual regulations differ significantly. Some of these include:

• Variations in marketing and advertising rules
• Different recordkeeping requirements
• Disparities in custody requirements

Failing to comply with the actual regulations that apply to your practice can result in fines deficiencies, and even enforcement actions for your firm.

The Importance of State-Specific Compliance Awareness

A sound compliance program for a state-registered adviser should be built on:

   1. A clear understanding of your state’s rules – including any unique provisions.

   2. Regular monitoring for changes or updates to those rules.

   3. Tailored policies and procedures that reflect both state and, where applicable, federal standards.

This is especially important for firms operating in multiple states. What satisfies one state’s regulator may not satisfy another’s, and assuming uniformity across jurisdictions can be a costly mistake.

Bottom line: If your firm is state-registered, federal rules are only part of the picture. A compliance framework that fully integrates your state-specific obligations is essential to protecting your business and your clients.