A newly formed investment adviser firm, based solely in State X, plans to offer investment advice to private funds only. The firm anticipates managing assets for these funds that will total $75 million. Which of the following statements accurately describes the firm's registration requirements under the Uniform Securities Act?
- AThe firm must register as a federal covered adviser due to its focus on private funds.
- BThe firm must register with the Administrator of State X because it falls below the $100 million AUM threshold for federal registration.
- CThe firm is exempt from state registration but must register with the SEC as a private fund adviser.
- DThe firm is exempt from both state and SEC registration as long as it advises only private funds and remains below the $150 million AUM threshold.
Show answer & explanationAnswer & explanation
Correct answer: B. The firm must register with the Administrator of State X because it falls below the $100 million AUM threshold for federal registration.
Advisers to private funds with less than $150 million in assets under management (AUM) are generally exempt from SEC registration. Since this firm also falls below the $100 million AUM threshold for standard federal covered adviser status, it would be required to register with the state Administrator unless another state-specific exemption applies.
Why the other options are wrong
- A. The firm is below the $150 million AUM threshold for SEC registration as a private fund adviser.
- C. The firm is exempt from SEC registration as a private fund adviser because its AUM is less than $150 million.
- D. The firm is exempt from SEC registration, but not automatically from state registration; state registration is required in this scenario.
Private Fund Adviser Exemption (State vs. Federal)
Advisers solely to private funds are generally exempt from SEC registration if their AUM is less than $150 million, but they may still be subject to state registration depending on their AUM and state rules.
- Below $150M AUM for private funds: SEC exempt.
- Below $100M AUM (general threshold): State registration.
- Above $150M AUM for private funds: SEC registration required.
Memory trick: Private funds have their own AUM 'gate' for SEC, but if it's too small, the state still 'watches' them.