The difficulties of operating without RIA status in the U.S. 

By Sean Wilke, Head of Growth Strategy, and Dan Miller, Senior Managing Director, U.S. 

Not every investor, holding company or buy-side entity is required to register as an investment adviser (RIA) in the United States. Legitimate single-family offices, proprietary trading outfits and investment clubs all fall outside the purview of the Investment Advisers Act of 1940 (“Advisers Act”). Even exempt reporting advisers – whether modestly sized blind pools or venture capital funds – are not subject to the bulk of Advisers Act regulation.  

Nevertheless, prime brokers and banks have made it increasingly difficult for unregistered investment advisers to access trading platforms and credit lines, mainly due to heightened regulatory scrutiny and risk management concerns. While broader retail access to trading, including day trading, has grown – especially through digital platforms – traditional prime brokers and banks remain cautious about extending margin and credit lines to advisers who lack U.S. Securities and Exchange Commission (SEC) or state registration. 

Trading access and account approval

Major broker-dealers and banks require robust account approval and eligibility checks for trading activities, including margin accounts, lines of credit and involvement in new issues. 

These checks typically demand evidence of regulatory registration or exemption status; unregistered advisers generally face greater scrutiny or outright restrictions than their registered counterparts. This is especially true when it comes to anti-money laundering and know-your-client (AML/KYC) programs. 

Credit lines and margin lending

Banks, especially bulge bracket and foreign institutions, dominate the prime brokerage and credit line market for private funds and investment advisers. However, when lending to entities such as private funds, banks prefer clients with established track records, a reputable and known investor base, and clear regulatory standing. Lending to unregistered advisers is rare and would likely be at higher cost or require substantial collateral due to perceived regulatory and reputational risks. 

Regulatory and compliance barriers

Recent and pending regulations regarding AML/KYC and recordkeeping further restrict unregistered advisers’ ability to interface with banks and brokers. The SEC and FinCEN’s proposed rules target the risks posed by unregulated entities, prompting financial institutions to tighten their onboarding processes for such clients. Even though the compliance deadlines have been postponed, banks are preparing for inevitable installation of these new requirements.  

Limited optionality to take on outside capital

As the generational wealth transfer increases the complexity of the asset mix for family offices, co-investment opportunities and the ability to accept capital from institutional allocators into special situation funds and special purpose vehicles (SPVs) reduces optionality for family offices. 

QPAM eligibility

Some banks and execution counterparties might not open more esoteric accounts for investment managers unless they can hold themselves out as a qualified professional asset manager (QPAM). Family offices generally don’t meet QPAM status unless they elect to register with the SEC. 

Key takeaways

In summary, unregistered advisers face significant obstacles in accessing prime brokerage services and credit due to risk, compliance and regulatory priorities. Registered status remains a decisive factor for access to institutional trading and credit facilities. 

Today, there exists an interesting dynamic where institutions are imposing heightened scrutiny while the SEC is admittedly taking a less aggressive approach to industry regulation. Certainly at IQ-EQ we’ve seen an uptick in unregistered firms voluntarily pursuing RIA registration in hopes of eliminating many of the operational and compliance hurdles. 

This self-policing mechanism could be an effective tool to effect change even as the SEC experiences staff reductions and budgetary constraints.  

To find out more about our U.S. regulatory compliance expertise or speak to a member of our experienced team, please click here.