NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
An investment adviser (IA) registered in State A provides investment advice to 40 clients, all of whom reside in State B. The IA has no office in State B and does not solicit business in State B. Under the Uniform Securities Act (USA), which of the following statements is TRUE regarding the IA's registration requirements?
- AThe IA must register in State B because it provides advice to clients in that state, regardless of the number.
- BThe IA must register in State B because it has more than 5 clients in that state.
- CThe IA must register with the SEC as a federal covered investment adviser.
- DThe IA is exempt from registration in State B due to the de minimis exemption.
Show answer & explanationAnswer & explanation
Correct answer: B. The IA must register in State B because it has more than 5 clients in that state.
Under the Uniform Securities Act (USA), an investment adviser (IA) must register in a state if it has a place of business in that state or if it has more than a de minimis number of clients (typically 5) in that state, even if it has no office there. Since the IA has 40 clients in State B, the de minimis exemption does not apply, and registration in State B is required.
Why the other options are wrong
- A. While providing advice to clients in a state does trigger registration requirements, the de minimis exemption can override this for a small number of clients. However, with 40 clients, the de minimis exemption is exceeded.
- C. Registration with the SEC as a federal covered investment adviser is typically based on assets under management (AUM) thresholds (e.g., $100 million or more), not solely on the number of clients in a particular state.
- D. The de minimis exemption applies when an IA has no place of business in a state and fewer than 6 clients. With 40 clients, this exemption is not applicable.
IA State Registration De Minimis Exemption
An investment adviser (IA) is generally exempt from state registration in a state where it has no place of business and transacts business with fewer than 6 clients who are residents of that state during any 12-month period.
- No place of business in the state
- Fewer than 6 clients who are residents of the state
- Applies on a state-by-state basis
Memory trick: No Place, Few Clients, Stay Free!