I live in New Jersey and I'm licensed there as a registered representative. Next month I'll be moving my office to New York. If I don't have any clients in New York, do I need to get licensed there? Also, I have some clients who spend part of the year in Florida. When they're in Florida, can I make recommendations and take their orders if I'm not licensed in Florida?
— T.S., New Jersey
Some states have what are known as "into or from" registration requirements, which requires registration not only if you're selling to people in the state but also if you're selling from that state. New York is one such state, as are Arizona and Florida. New York's law reads, in part, as follows: "It shall be unlawful for any dealer, broker or salesman to sell or offer for sale to or purchase or offer to purchase from the public within or from this state, any securities...unless and until such dealer, broker or salesman shall have filed with the department of law a registration statement as provided herein."
So if your office is in New York and you're selling securities "from" that office, you must be registered in New York. Likewise, Florida's statute is actually uncharacteristically clear on this point. It says in relevant part: "No... associated person... shall... sell securities to persons in this state from offices outside this state, by mail or otherwise, unless the person has been registered with the office pursuant to the provisions of this section." When it comes to reading state laws, you can't get much clearer than that.
I left one firm about two years ago. While employed with my current firm, an arbitration was filed against me relating to something that happened at my old firm. My old firm filed an amended U5 disclosing the arbitration claim and the matter is still pending. I'm now planning on leaving my current firm to go independent. Does my current employer have to answer "yes" to the question on my U5 asking about pending arbitrations?
— S.H., Alabama
The specific question you're referring to on the Form U5 is Question 7E.1 which asks: "In connection with events that occurred while the individual was employed by or associated with your firm, was the individual named as a respondent/defendant in an... arbitration... which: (a) is still pending..."
The operative language there is: "In connection with events that occurred while the individual was employed by your firm." That language refers to the underlying allegations of the arbitration complaint which, in this case, occurred while you were employed with your old firm.
Assuming nothing else happened while you were employed at your current firm, then they have nothing to report and can answer no. This does not contradict the amended U5 your old firm filed, since the pending arbitration claim will still be listed on your CRD report until that information is updated either with another amended U5 or a new U4.
I'm a solo investment advisor with my own RIA. I know I'm supposed to designate someone to supervise the advisors, but as a one-man operation does that mean I can supervise myself, or do I have to hire someone to supervise me?
— S.K., New Jersey
Rule 206(4)-7(c) of the Investment Advisers Act of 1940 requires that a registered investment advisor "designate an individual (who is a supervised person) responsible for administering the policies and procedures that you adopt under... this section." There are a lot of one-man RIA shops out there, and even more at small RIAs with only a handful of investment advisor representatives. In most cases, the owner of the firm is designated as the chief compliance officer, but he also almost always has his own clients.
So, who supervises the supervisor in a one-person operation? The answer is the guardian guards himself. This is comparable to the situation that has prevailed for many years in one-person broker-dealer shops, where there can be only one licensed principal, despite the normal rule requiring two principals. The hope is that the proprietor of the firm will be both knowledgeable enough to do the job properly and incentivized by his or her financial stake in the operation to make sure that is the case.
In the event the person is not up to the job, he or she undoubtedly will be on the hook for his or her errors because there is no one else to blame. More frequent inspections of such firms from the regulators would probably be a reasonable safety check. However, the emphasis in recent years on focusing inspection efforts based on dollars under management has most likely prevented much of that.
With the re-alignment under Dodd-Frank and the intention to allocate inspection resources based on risk factors beyond mere dollar volume, it's possible that such firms may see more frequent visits. Only time will tell. Thanks to Steven Felsenstein from the law firm Greenberg Traurig for his assistance in answering this question.
Alan J.Foxman, is an attorney in private practice
in Boca Raton, Fla. He also works as an
independent contractor with National Compliance Services
Inc. He can be contacted at this email address.