Navigating State De Minimis Exemptions from RIA Registration (or Notice Filing)

Navigating State De Minimis Exemptions From RIA Registration (or Notice Filing)

10 MIN READ 

As a registered investment advisor, you are subject to specific registration and filing requirements in the states where you provide advisory services. Failing to register or notice file in the appropriate jurisdiction(s) when required can and does lead to regulatory fines and actions brought against advisors for operating in their jurisdiction while unregistered or without submitting a proper notice filing. It is crucial to monitor the number of clients your firm has in various jurisdictions and ensure that you are registered in that jurisdiction (or notice filed if you are SEC-registered) when appropriate.

For SEC-registered firms, as a federally covered advisor registered with the Securities and Exchange Commission, while you do not need to register the firm at the individual state level, you still must notice file in certain states when appropriate, and each of your investment advisor representatives will be required to register in the state(s) where they operate from. 

As a state registered investment advisor, you are required to register with each state where you have a place of business and/or work with a certain number of clients, typically more than five. Most states also require each IAR of the firm that works with clients in a given jurisdiction to also become registered in that jurisdiction at the time the firm is registering there, regardless of where the IAR’s place of business is. 

The National De Minimis Standard:

Section 222(d) of the Investment Advisers Act of 1940 establishes the standard for states with regard to requiring the registration of investment advisors who do not have a place of business in that state and who have not had six or more clients who are residents of that state in the past 12 months (the national de minimis standard). 

Specifically, the national de minimis standard states that: 

No law of any state or political subdivision thereof requiring the registration, licensing, or qualification as an investment advisor shall require an investment advisor to register with the securities commissioner of the state (or any agency or officer performing like functions) or to comply with such law (other than any provision thereof prohibiting fraudulent conduct) if the investment advisor:

  • does not have a place of business located within the state; and
  • during the preceding 12-month period has had fewer than six clients who are residents of that state.

While this de minimis standard is commonly accepted among most states, there are a few commonly known exceptions applicable to state-registered advisors:

Texas 

While Texas does follow the de minimis standard with regard to requiring registration in their state, they do, however, require a notice filing prior to engaging in any advisory activity for compensation. A notice filing in this case simply requires filing an amendment to your Form ADV and any applicable Form U4 to request registration in the state of Texas and then sending the Texas State Securities Board a letter claiming their notice filing exemption under Rule 116.1(b)(2)(A)(iv).

Louisiana

Louisiana requires an investment advisor to register in their jurisdiction in order to conduct any advisory business with any clients who are residents in that state, regardless of whether or not the firm has a place of business in that state. They do not refer to a de minimis exemption or standard within their regulation. 

For SEC-registered firms

These two states require that you submit a notice filing and register any applicable IARs of the firm with those jurisdictions before engaging in the delivery of advisory services to clients who are residents of those states. Nebraska and New Hampshire also require timely notice filings for SEC-registered firms regardless of the place of business or the number of clients served in those states. 

Counting the Number of Clients For Purposes of De Minimis

For purposes of determining registration or notice filing needs with the de minimis standard in mind and for reporting the number of clients on Form ADV Part 1, most firms count as a single client any individual, their minor children, and most other members of their direct household. So, if you are working with an individual as well as their spouse, and maybe you also have minor accounts for two of their children, you can count these as one client. The number of accounts you have for those clients, including for any of their dependents, does not generally factor in here. 

The SEC, as well as most states, rely on the definition of a client set forth in Rule 203(b)(3)-1 of the Advisers Act, which states that you may deem the following to be a single client:

(1) A natural person, and

          (i) Any minor child of the natural person;

          (ii) Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;

          (iii) All accounts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only               primary beneficiaries; and

          (iv) All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only                     primary beneficiaries;

(2) (i) A corporation, general partnership, limited partnership, limited liability company, trust (other than a trust referred to in paragraph (a)(1)(iv) of this section), or other legal organization (any of which are referred to hereinafter as a “legal organization”) to which you provide investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries (any of which are referred to hereinafter as an “owner”); and

          (ii) Two or more legal organizations referred to in paragraph (a)(2)(i) of this section that have identical owners

What about financial planning or hourly clients (non-AUM advisory clients)?

We are often asked by advisors whether or not they need to count their project-based, hourly, or ongoing financial planning clients for purposes of de minimis, and the answer is yes. At this time, I am not aware of any jurisdictions that exclude financial planning clients from their definition of advisory clients. They may not call out financial planning clients in their rules or regulations either; however, financial planning is an advisory service provided by your firm just as investment management is, and all advisory clients who have engaged with your firm in the preceding 12-month period should be counted. If you provide limited-term hourly or project-based financial planning services, you will count those clients for twelve months following the date the engagement or contract ended/terminated, just as you should for any other advisory client who terminates their engagement.

Monitoring Your Firm's Number of Clients in Each State

The key to staying on top of registration and filing requirements for your firm is to implement practices that allow you to monitor the number of clients you have in any state to ensure that you apply for registration in a timely manner and know when to press the brakes on taking new clients in a certain state until you are properly registered (or notice filed for SEC-registered firms) in a given state. 

We see many advisors maintain a running log, via excel or google sheets, of all current and former clients that includes (at a minimum) their name and contract execution date, as well as the contract termination date for former clients, as you typically must count them for twelve months following the date the contract was terminated. Maintaining this list should be done as you onboard and offboard each client, and you can periodically check the number of clients in each jurisdiction as you update the log.

Depending on your CRM, you may be able to run an export of clients with their address included and then filter by each state or refine the report to a group and subtotal your clients by state. Running this type of report on a periodic basis, such as monthly or more or less often, is a good idea based on the number of clients you are bringing on from various states. 

Some compliance technology solutions such as Smart RIA also have features that allow you to integrate with your CRM and pull this information for this purpose. If all clients are householded correctly in the “Clients” module of Smart RIA, you will receive notifications when you near the de minimis threshold in a given state indicating you may be required to register in that state. If configured appropriately, this takes the reviews and logging of clients by state off your hand and provides you with proactive notifications to ensure that you become registered in the appropriate jurisdictions in a timely manner. 

When should you initiate registration?

As you monitor the number of clients you have in each jurisdiction, and with the de minimis standard and exceptions discussed above in mind, you should be proactive in initiating the registration in any jurisdiction where you are nearing or expect to exceed the cap on clients in the coming months or year. We commonly recommend that advisors who have 3-4 clients in a state (TX & LA requirements aside) apply for registration sooner rather than waiting until their fifth client, as the length of time to get registered varies by state, and you must not take on your sixth client until appropriately registered in the relevant state in order to avoid violating the rules & regulations of that jurisdiction. 

Our compliance consultants at XYPN support many advisors with additional state registrations. Through our compliance service offerings, we provide proactive support and, in some cases, take most of the work off your hands when getting your firm registered in the appropriate jurisdictions when needed. If this sounds like the hands-off compliance solution you’ve been looking for or have questions about compliance as an XY Planning Network member benefit, you can learn more here


Travis Johnson


About the Author

As XYPN's Director of Compliance, Travis Johnson leads the Compliance Team in the development and delivery of all of XYPN's compliance offerings and resources. Travis leverages his years of experience as a member of XYPN's Compliance Team, as well as prior experience building and running operations and compliance programs within RIAs to provide practical insights into the application of compliance rules, regulations, and industry best practices.

 

 

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