by Isabel Alcántara, Esq.
As the officers of an investment adviser apply for registration in a certain state or with the SEC, they realize that they are required to list their principal office and place of business address in Form ADV Part 1 and Part 2. That seems straightforward to most, but believe it or not, there seems to be some confusion on the topic amongst those that form adviser firms. We are going to briefly review what the SEC's definition of the term "principal office and place of business" is, and we will discuss why it is important to consider that definition when applying for registration (filling out Form ADV).
The SEC defines "principal office and place of business" as "[y]our firm's executive office from which your firm's officers, partners, or managers direct, control, and coordinate the activities of your firm."
We know that a firm's registration obligations depend on where the firm's principal office and place of business is located, where the firm's clients reside, and where the firm maintains other offices depending on particular state rules.
A non-U.S. adviser that seeks to register in the State of Florida, may feel tempted to input a virtual office address as their principal office and place of business address when filling out Form ADV to appear as if the firm actually maintains a physical office location in the State of Florida. Unless I'm missing something here, it is quite clear that the firm's officers do not direct, control, and coordinate the activities of the firm from a virtual office. The most that likely occurs at the virtual address is the receipt of the firm's mail and its forwarding thereafter.
When applying for registration, investment adviser firms should think longterm and not only about the firm's approval. During a regulator's initial review of the firm's registration application, the regulator may miss the fact that the firm listed a virtual address because such addresses tend to look very similar to any other business address. They often even contain a suite number. However, after the firm is approved, it may be audited by their regulator not long after approval. During such audits, regulators may visit the adviser's principal office and place of business. I suppose I don't have to explain how visiting a virtual address will reveal that the firm's management does not actually manage, control, and coordinate from such address.
Regulators provide investment advisers with notice of deficiencies found during a firm's audit. Most deficiencies are corrected by the firm's management. However, disclosing a virtual address in lieu of a physical location as the firm's principal office and place of business will likely rise above the level of a deficiency and instead be considered fraud, leading to the revocation of the firm's registration all together.
In 2018, the SEC filed a complaint against Goldsky Asset Management, LLC asserting, among other things, that:
34. As Defendants knew or recklessly disregarded, their representations were materially false and designed to mislead investors into believing that Defendants were physically located in Manhattan.
35. In fact, as Defendants knew, the Park Avenue Address was a "virtual" office - they never maintained a physical office in the United States.
Goldsky was ordered to pay civil monetary penalties of $50,000 and $25,000, respectively.
Avoid this issue in the first place by inputting an address in the Form ADV, that satisifies the SEC's definition of principal office and place of business. If using the firm's physical address would prevent you from registering where you seek registration, contact me to discuss alternatives to the use of a virtual office address that comply with rules imposed on investment advisers.
(Note: The State of Florida was only referred to as an example. This concept is applicable to any investment adviser regulated by state and federal authorities in the U.S..)
