A state-registered investment adviser (IA) firm has 15 clients, all of whom are qualified purchasers as defined under the Investment Company Act of 1940. The IA exclusively advises these qualified purchasers on complex investment strategies. Which of the following statements regarding the IA's registration status is most accurate?
- AThe IA must remain state-registered unless its AUM exceeds the federal threshold.
- BThe IA must register with the SEC because it advises qualified purchasers.
- CThe IA is exempt from state registration but must register with the SEC.
- DThe IA may qualify for an exemption from SEC registration, allowing it to remain state-registered.
Show answer & explanationAnswer & explanation
Correct answer: D. The IA may qualify for an exemption from SEC registration, allowing it to remain state-registered.
Investment advisers that exclusively advise private funds with less than $150 million in AUM, or those that exclusively advise qualified purchasers, may qualify for an exemption from SEC registration under the Dodd-Frank Act, allowing them to remain state-registered. The 'qualified purchaser' definition is key here, often associated with private fund exemptions.
Why the other options are wrong
- A. While AUM thresholds are critical, the 'qualified purchaser' status specifically relates to an SEC exemption, not a state registration requirement.
- B. Advising qualified purchasers can actually lead to an *exemption* from SEC registration, not a requirement.
- C. This scenario allows for an exemption from SEC registration, meaning state registration would be required, not exempt.
SEC Registration Exemption (Qualified Purchasers)
Under the Dodd-Frank Act, an investment adviser that exclusively advises 'qualified purchasers' (as defined in the Investment Company Act of 1940) may be exempt from SEC registration, allowing them to remain state-registered.
- A 'qualified purchaser' is an individual or family-owned business that owns at least $5 million in investments.
- This exemption is related to, but distinct from, the private fund adviser exemption.
- If exempt from SEC registration, the IA must register at the state level (unless another state exemption applies).
- Helps manage regulatory burden for advisers serving sophisticated investors.
Memory trick: AUM is the primary gatekeeper, but 'Qualified' clients can open another door.