On August 17, New Jersey passed legislation that increased the minimum net capital or bond requirement for investment advisers who have custody of their clients’ funds or securities from $25,000 to $35,000. The revised regulations exempt only advisers with custody of their clients’ funds or securities if they only make direct fee deductions or advise pooled investment vehicles.
What should NJ investment advisers know about security requirements?
According to Chapter 47A, Title 13 of the New Jersey Administrative Code, investment advisers with custody of their clients’ funds or securities have the option to satisfy the minimum net capital requirement or the surety bond requirement, both of which are $35,000. If you are an investment adviser who has discretionary authority over client funds or securities, but does not have custody of client funds or securities, you must maintain a net worth of $10,000. If you are an investment adviser charging a prepayment of advisory fees of more than $500 per client six or more months in advance, you must maintain a positive net worth at all times.
What are the details of the bond requirement?
The investment adviser bond ensures that the principal (investment adviser) does not misuse or misapply clients’ funds or securities. Should the principal violate the terms of the bond and cause damages to a third party, this bond is subject to a claim filed against it. In the case of a valid claim, the surety will pay out all incurred damages up to the full amount of the bond ($35,000). The principal must reimburse the surety for all damages paid out.
The term of the bond is two years, however, the right to bring action against the bond continues for two years from the time the aggrieved party knew about the grievance. If the surety wishes to terminate the bond, it must send a written notice to the Chief of the Bureau of Securities 90 days prior to the effective date of cancellation.
What other useful resources exist for NJ investment advisers?
The North American Securities Administrators Association compiled a quick guide concerning New Jersey investment adviser registration. RIA Compliance Consultants, Inc. also produced a comprehensive frequently asked questions page about investment adviser registration. Subchapter 2 of Chapter 47A, Title 13 of the New Jersey Administrative Code contains all present legislation pertaining to New Jersey investment advisers.
Photo courtesy Ken Teegardin (CC BY-SA 2.0)