A state-registered Investment Adviser (IA) has been experiencing rapid growth and now manages $120 million in client assets. The IA's principal office is in State X, and it has clients in several other states. According to the Dodd-Frank Act, what is the most likely regulatory consequence for this IA?
- AThe IA must remain state-registered due to having a principal office in State X.
- BThe IA must register in every state where it has clients.
- CThe IA must register with the SEC as a federal covered investment adviser.
- DThe IA is exempt from all registration requirements due to increased AUM.
Show answer & explanationAnswer & explanation
Correct answer: C. The IA must register with the SEC as a federal covered investment adviser.
Under the Dodd-Frank Act, the threshold for mandatory SEC registration as a federal covered investment adviser (FCIA) was generally set at $100 million or more in assets under management (AUM). Since this IA now manages $120 million, it exceeds the state registration threshold and must transition to SEC registration.
Why the other options are wrong
- A. Once an IA crosses the $100 million AUM threshold, it generally transitions from state to SEC registration, regardless of the principal office location.
- B. As an FCIA, the IA would be exempt from state registration, though notice filings might be required in certain states.
- D. Increased AUM triggers SEC registration, not an exemption from all registration.
IA Transition to Federal Covered Status
Under the Dodd-Frank Act, an Investment Adviser (IA) generally transitions from state registration to federal covered status (SEC registration) when its assets under management (AUM) reach $100 million or more. This is a mandatory change, and the IA must withdraw its state registration and register with the SEC.
- Threshold for SEC registration is typically $100 million AUM.
- Mandatory transition from state to federal covered status.
- IA must withdraw state registration upon SEC registration.
- Allows states to focus on smaller IAs and maintain anti-fraud authority over all.
Memory trick: AUM Grows, Jurisdiction Shifts.