Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [Series 63] S631: Investment Adviser Registration: State vs. Federal Covered Status & Notice Filing
Transcript
- Hey, welcome to VoraPrep Audio. Glad you could tune in. Let's talk about a situation that comes up all the time, both on the exam and in the real world. Your investment advisory firm is doing well. Really well. You're bringing in new clients, assets are growing, and suddenly you’re approaching that magic number: one hundred million dollars in assets under management. And your boss asks, "Hey, with this growth, do we need to change our registration? Are we a state firm or an S.E.C. firm now?" Getting that answer wrong is a huge compliance problem. So, we need to get it right. Think of it like this. When you first learn to drive, you get a license from your state. You're a local driver, subject to local rules. But if you decide to become a long-haul trucker, driving a massive rig across the country, you suddenly fall under federal transportation rules. The size and scope of your operation changes who regulates you. It’s the same basic idea for investment advisers. The amount of assets you manage—your A.U.M.—determines whether you answer to your state securities authority, or to the big one: the S.E.C. This whole framework was solidified by the Dodd-Frank Act. The main idea is, you register with either the states or the S.E.C., but not both. And the deciding factor is your Regulatory Assets Under Management, or R.A.U.M. Let's start with the smallest firms. If you're an adviser with less than 25 million dollars in A.U.M., you're considered a 'small adviser'. The rule is pretty straightforward for you. You register with the state where you have a place of business. You're a local operation, so you're regulated locally. Now, things get more interesting in the middle. If your firm manages between 25 million and 100 million dollars, you're a 'mid-sized adviser'. The general rule is that you also register with the states. But there are a couple of important exceptions where a mid-sized firm registers with the S.E.C. instead. The first exception is if your home state's regulator doesn't conduct examinations of investment advisers. This is rare. But if there's no state-level cop on the beat, the S.E.C. will step in to fill that gap. The second, more common exception is about scale. Let's say your business has grown so much that you're required to register in 15 or more states. That's a massive administrative burden. To simplify this, the rules provide an escape hatch. In that situation, you register with the S.E.C. instead of all those states. One federal registration is much simpler than managing 15 different state ones. Okay, so what happens when you cross that big line? At 100 million dollars in A.U.M., you officially become a 'large adviser'. The rule here says you may register with the S.E.C. It’s your choice. You can make the jump to federal registration if it makes sense for your business. But once your A.U.M. hits 110 million dollars, it’s no longer a choice. At 110 million, you must register with the S.E.C. That’s the mandatory threshold. Now, a quick thought. Markets go up and down, right? What if you hit 112 million, register with the S.E.C., and then a market dip pulls your A.U.M. down to 98 million? Do you have to immediately switch back to state registration? No, that would be a nightmare. The rules give you a buffer to prevent this constant flip-flopping. An S.E.C.-registered adviser doesn't have to withdraw and go back to the states unless its A.U.M. falls below 90 million dollars. So there's a 20-million-dollar cushion, from 90 up to 110, that keeps things stable. Once you’re registered with the S.E.C., you get a new name. You're a 'Federal Covered Investment Adviser'. This is a critical exam concept. Federal Covered Advisers are regulated by the feds, so they do not register with the states. But the states still want to know you're operating within their borders. So, instead of registration, you do what's called a 'notice filing'. It's basically a "just so you know." You send the state a copy of your S.E.C. registration documents, like your Form A.D.V., and you pay a fee. It's much less involved than full-blown registration. You have to notice file in any state where you have a physical place of business. You also have to notice file in any state where you have 6 or more retail clients. Six. That's the trigger number. So what about the advisers who stay registered at the state level? The small and mid-sized ones. Let's say your firm is registered in New York, and you have no other offices. But you happen to have a few clients who live in Connecticut. Do you have to go through the whole registration process in Connecticut, too? Maybe not. This is where the 'de minimis' exemption comes in. De minimis is just a fancy way of saying "too small to worry about." You're exempt from registering in another state if two conditions are met. First, you have no place of business in that state. And second, you have five or fewer retail clients who are residents of that state during any 12-month period. Five or fewer. As soon as you open an office there, or you sign up that sixth retail client, the exemption is gone. You have to register. Let's walk through an example. Imagine an adviser called Global Growth Advisors. They manage 95 million dollars. They have one office, in State A, and State A's regulator examines advisers. They have 12 retail clients in State B, and 4 retail clients in State C. First step: A.U.M. At 95 million, they're a mid-sized adviser. The default is state registration. Do any of the S.E.C. exceptions apply? Well, their home state does examine advisers, and we assume they don't need to register in 15 states. So, they stick with the states. They must register in their home state, State A. Now, what about the other states? In State B, they have no office, but they have 12 retail clients. That's more than five. So the de minimis exemption does not apply. They must also register in State B. Then there's State C. In State C, they have no office and only 4 retail clients. Four is five or fewer. So, the de minimis exemption does apply here. They do not need to register in State C. It's just a logical, step-by-step process. On the exam, it's easy to get these concepts tangled. A huge one is confusing registration with notice filing. Remember, Federal Covered Advisers notice file with the states; they don't register. State-level advisers register. Also, be super precise with those A.U.M. numbers. You may register with the S.E.C. at 100 million. You must register at 110 million. And you don't have to leave the S.E.C. until you drop below 90 million. Finally, don't mix up the de minimis rule with the notice filing rule. The de minimis exemption is for state-registered advisers. It lets them avoid registration in a new state if they have 5 or fewer clients there. The notice filing rule is for federal advisers. It requires them to notice file in a state once they have 6 or more clients there. They're two different rules for two different types of advisers. So, to wrap this all up, what do you need to remember? First, A.U.M. is king. It determines your primary regulator. Second, know the magic numbers. Under 25 million is state. 100 million is optional S.E.C. registration, and 110 million is mandatory. Below 90 million is the buffer for leaving the S.E.C. Third, if an adviser is Federal Covered, they're with the S.E.C. They notice file with states, they don't register. And finally, for state-registered advisers, the de minimis exemption is their ticket to avoiding registration in other states. This applies as long as they have no office and five or fewer retail clients there. VoraPrep is a full exam-prep app — lessons, practice questions, and an A.I. tutor in one place. Get started at Vora Prep dot com.