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Apr 14, 2010 8:30 am

Background: I am a part-time investment advisor with a federally covered RIA. I am registered in the state of CA.

I have enough understanding to have done fairly well with the Series 65, but I could not find answers to some basic questions. I may need some legal assistance, but I was hoping to get some pointers here first.  I am well qualified to provide portfolio planning, and financial goal-matching plans. While I don't have the expertise for other things such as disability or comprehensive planning, I am cream of the crop when it comes to finding investments that help people meet their financial goals. That said, under the RIA I am working with, I passively accept new clients and manage their assets and the firm charges an AUM fee and I get a percentage of that. Currently, they are not allowing me to sell other services or even promote myself.

1. If I want to concurrently establish a hourly fee-based business starting as a sole proprietor and later as an LLC, would it be possible to distinguish my business as a sole proprietor and my business under the RIA firm? 

I would like to qualify for the 5 and under rule exemption for registration as a RIA for my sole proprietorship that would charge an hourly fee for objective analysis and plan implementation. Because I would NOT be funnelling clients to my RIA fund, and NOT selling products in which I get a commission, my advice would be purely "fee only" with no outside commission. My concern is that in counting the "number of clients" and in determining the 5 client limitation to NOT have to register a business as an RIA, they would count both my clients that I have with the other firm on a AUM basis AND the independent clients I get independently. Is there any way to keep these separate?

2. I know from experience that when under a broker-dealer as an agent, that "dual registration" is a problem both from an internal standpoint and a compliance standpoint. Most firms do NOT permit it and disclosure is required. I am not so clear about the RIA/IAR situation.

For example I want to ask about 2 cases:

a.) The RIA I work for has a AUM model, to which I work part time for that firm as an IAR.  I have a separate business that is a fee-based model. These two businesses share 0 clients and there are no conflicts of interest. I am not registered with my independent business that is fee-based because I have 5 or less clients. Am I under a legal obligation to disclose this to the RIA I am under working as a IAR? Would the regulatory body, the state of California, allow this and are there cases  or legal clauses or relevant information that I can be directed to? If I have 10 clients under the AUM model under the RIA, and 5 clients I advise personally on a hourly fee basis independently, will the regulators count this as my sole proprietor advising 15 clients thus requiring registration as an RIA? Or could I keep the 10 and 5 separate?

b.) Same situation as above, but say somehow some of my clients became common or shared between the RIA firm/AUM-model and my independent business. I still have less than 6 clients in my independent business. I also make sure that all conflict of interest disclosures are made, and I discount my hourly fee for one year's worth of AUM management fees or 33% whichever is the smaller discount. I do this because I do not believe in charging an hourly fee for the approximate fraction of assets which are directed to products where I get some outside compensation. In keeping suitability in mind, unless there are no better alternatives and under their written permmission and written acknowledgement of possible conflicts of interest and the discounts provided do I place clients in the RIA/AUM fund which I receive compensation from.

Same questions. Am I under legal obligation to inform my RIA? Will the state Administrator or self-regulating bodies/NASAA accept this situation? And how would the "number of clients" for my independent business be counted?

3. In the case that the client count exceeds 5 clients, I understand that there are securities laws that require registration as an RIA. In this case, can an IAR of RIA firm A establish his own independent RIA firm B if the RIA firm A consents? and if firm A does NOT consent?

Would NASAA or the State Administrator take issue with the fact that I am registered as a IAR under RIA firm A and as an IAR of RIA firm B? More simply, what are the legalities of dual registration under the state of CA and NASAA? Again, RIA firm A is a federally covered RIA, and if I registered my sole proprietorship as an RIA, it would be under the state of CA since I have less than $25M in AUM.

Finally, would being a sole proprietorship for my independent RIA cause issues in terms of keeping accounts legally separate? That is, I don't quite understand if say a person does independent business under a sole proprietorship but say he also works part-time as an independent contractor as an individual-- does everything fall under the sole proprietorship umbrella? Or can a distinction be made for a. client count purposes, b. tax-purposes?

Thank you for your time.