For an investment adviser to qualify for an exemption from state registration, they have to either meet an exemption under the Investment Act of 1940, be a federal covered adviser, or be registered with the SEC. The Dodd-Frank Act has created 3 thresholds for investment advisers based of their assets under management (“AUM”) as well as some more general exclusions, all of which provide advisers the ability to register with the SEC.

Exemptions Under the Investment Act Of 1940

The National Securities Markets Improvement Act of 1996 (“NSMIA”) divided investment adviser registration between the SEC and the states. To see how investment advisers can claim an exemption from registration under The Investment Act of 1940, check out our Federal Exemptions from Investment Advisor Registration blog.

Federal Covered Advisers

Federal Covered Advisers are advisers who:

  • Are required to be registered or registered as an investment adviser with the SEC because they meet the minimum threshold of $110 million assets under management (“AUM”);
  • Are under contract to manage an investment company registered under the Investment Company Act of 1940, regardless of the amount of AUM; or
  • Are not registered with the SEC because they are excluded from the definition of an investment adviser by the Investment Advisers Act of 1940

The Dodd-Frank Act

The Dodd-Frank Act has created 3 thresholds for investment advisers based of their assets under management (“AUM”), Large Investment Advisers, Medium Investment Advisers, and Small Investment Advisers. Each level provides ways for investment advisers to qualify for SEC registration. If an investment adviser registers with the SEC, then they will be exempt from registering with the states, as the Investment Advisers Act preempts state registration.

Large Investment Advisers

There are two thresholds for SEC registration for large investment advisers. The first one is at $100 million or more in AUM and after reaching that threshold the investment adviser is eligible to register with the SEC. The second threshold is at $110 million AUM, and after reaching that it the investment adviser is required to register with the SEC.

Medium Investment Advisers

Medium investment advisers are investment advisers with AUM greater than $25 million but less than $100 million. These investment advisers usually must register with the states, unless they meet one of the following exceptions:

  • If they are an adviser to an investment company registered under the Investment Company Act of 1940;
  • If the adviser is not required to be registered as an investment adviser with the securities Administrator of the state in which it maintains its principal office and place of business;
  • The adviser elects to take advantage of the Buffer;
  • If registered, the adviser would not be subject to examination as an investment adviser by that securities Administrator; or
  • If the adviser is required to register in 15 or more states.

The Buffer allows for large and medium investment advisers to maintain their state or SEC registration when fluctuating slightly above or below their registration’s threshold. For large investment advisers, once they hit $110 million AUM, they are permitted to retain their SEC registration until they fall under $90 million AUM. For medium sized advisers, they are permitted to retain their state registration after reaching $100 AUM until they hit $110 million AUM. This measure was put in place to reduce haste and administrative costs of constantly switching registrations when market conditions changed or advisers gained/lost clients. For more information on timing and

Small Investment Advisers

Small investment advisers are those with under $25 million AUM and are not exempt from state registration unless:

  • They are an adviser to an investment company registered under the Investment Company Act of 1940 and are exempt from state registration under state rules; or
  • The adviser would be required to register in at least 15 states.

General Exemptions Under Dodd-Frank

Besides the AUM thresholds, the Dodd-Frank act provides another way for investment advisers to register with the SEC instead of the states. This exception to the prohibition of SEC registration occurs when it would be “unfair, a burden to interstate commerce, or otherwise inconsistent with the purposes” of the Dodd-Frank Act. Instances where this exception applies are as follows:

  • Pension consultants with at least $200 million AUM. The SEC has determined that $200 million AUM constitutes the advisers activities as “significant enough to have an effect on the national markets”;
  • Medium sized advisers with AUM between $100 million and $100 million who choose to register with the SEC instead of the states.
  • Investment advisers affiliated with an adviser already registered with the SEC;
  • Investment advisers expecting to be eligible for SEC registration within 120 days of filing Form ADV; or
  • Internet advisers.

For more on Investment adviser registration, check our When Do You Have to Register as an Investment Advisor? and Exclusions from the Definition of Investment Advisor blogs.

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