An investment adviser (IA) registered in State A manages money for 15 clients. Eight of these clients are residents of State B, while the remaining seven reside in State A. The IA does not have an office in State B. Under the Uniform Securities Act (USA), in which state(s) must this IA register?
- AOnly in State A, due to the de minimis exemption.
- BIn both State A and State B.
- CNeither State A nor State B, if they qualify as a federal covered investment adviser.
- DOnly in State B, as the majority of clients are there.
Show answer & explanationAnswer & explanation
Correct answer: B. In both State A and State B.
Under the Uniform Securities Act, an investment adviser must register in any state where they have a place of business or if they have more than 5 clients (the de minimis exemption threshold) who are residents of that state, even if they don't have an office there. Since the IA has 8 clients in State B, exceeding the 5-client de minimis exemption, registration in State B is required in addition to State A where they have a place of business.
Why the other options are wrong
- A. The de minimis exemption applies to clients in a state where the IA does not have an office, but only if the number of clients is 5 or fewer. Eight clients exceed this limit.
- C. The scenario does not provide information suggesting the IA meets the AUM threshold for federal covered status, and even federal covered IAs may have state registration requirements if they have a place of business.
- D. Registration is required in State A because the IA has a place of business there, regardless of client count in that specific state.
IA State Registration (De Minimis Exemption)
An investment adviser (IA) must register in a state if they have a place of business there or if they have more than 5 clients who are residents of that state, unless an exemption applies. The de minimis exemption allows an IA to avoid registration in a state where they have no office, provided they have 5 or fewer non-institutional clients.
- Applies to state-registered IAs.
- Exempts IA from registration in a state without a place of business if they have 5 or fewer clients in that state.
- Does not apply if the IA has a place of business in the state, regardless of client count.
Memory trick: Office or Many Clients? Register!