Series 65

AAA

Regulation of Investment Advisors - Federal (SEC) vs. State Registration

The National Securities Markets Improvement Act of 1996 (NSMIA) was signed into law October 7, 1996. Title III, the Investment Adviser Supervisory Coordination Act ("Coordination Act"), went into effect on July 8, 1997. NSMIA divided registration and oversight responsibilities between state and federal securities regulators. However, with the implementation of the Dodd-Frank Act, the amount thresholds at which investment advisers (IAs) were required to registered federally increased.

  • The value of client assets under management is one key indicator of whether you must register with the SEC instead of with your individual state.
    • "Assets under management" means securities portfolios for which an investment adviser provides continuous and regular supervisory or management services.

    • Under Dodd-Frank, the SEC generally registers investment adviser firms with over $100 million in assets under management, while the states register investment adviser firms within the $25 million to $100 million range in assets under management.

    • If assets under management are at $110 million, an IA must register with the SEC. Those with client assets at about $100 million may register with the SEC or their individual state(s). Those with a lesser amount of client funds must register with their state instead, unless their state does not regulate advisers.

The following table summarizes the above requirements:

Investment Advisers
Less than $25M
State Registration
Between $25M and $100M
SEC or State registration*
Between $90M and $110M
May register once $100M acquired; must register at $110M.
More than $110M
SEC registration



*There are certain situations that require IAs with more than $25 million but less than $100 million AUM to register with the SEC instead of their state(s):

  • IAs whose state does not regulate investment advisers
  • If the principal office and place of business is in New York or Wyoming (unless exempt, like an IA to a private fund.)
  • Newly formed IAs who reasonably believe they will become eligible for federal registration within 0 days



Look Out!
Note that all IAs, even those not required to register, are subject to the anti-fraud provisions of the Uniform Securities Act.




Exam Tips and Tricks
Exam questions will often refer to definitions or regulations for either the Uniform Securities Act or the Investment Advisers Act of 1940. Most of the requirements are similar, but make sure you read the question carefully, since there may be differences. Here are examples of each type of question:

  1. Which of the following are defined as "investment advisors" under the Uniform Securities Act?
    1. General circulation newspaper with an investing column
    2. Publisher of an investment newsletter that offers specific advice for clients in certain circumstances
    3. Individual who charges a fee for giving clients advice about securities
    4. Lawyer who advises a pension client about investments at no charge
    1. I & IV
    2. III & IV
    3. I & III
    4. II & III

  2. Which of the following are defined as federal covered investment advisers?
    1. An engineer who provides investment advice for a fee to 20 of his colleagues
    2. A stockbroker who gives a free financial plan to his clients
    3. An investment adviser whose only clients are insurance companies
    4. An investment adviser whose only clients are lawyers
    1. I & IV
    2. III & IV
    3. I, II & III
    4. All of the above


Answers:
While there are some common exclusions between the two definitions (such as publishers of general investing information and professionals who give incidental advice), there are several important differences in the definitions:

Question 1 is very straightforward, the correct answer is "d".

Question 2is more difficult. Your first instinct may be to exclude III & IV, due to the exclusion of professionals. However, there is no exclusion for providing advice to attorneys, only insurance companies, so the correct answer is "a" - the engineer who has more than 15 clients does not qualify for the private adviser exemption and the investment adviser to attorneys also doesn't qualify for exemption.

State Registration Process
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