What the De Minimis Exemption Means

The de minimis exemption means certain investment advisors don't have to register in a state where they have only minimal business. They are typically free from doing so where they have no more than five retail clients and no physical address.

Understanding the De Minimis Exemption

The de minimis exemption allows investment advisors to forgo registration in a state where they have minimal business. Each state has its own securities regulations, so the specifics of the de minimis exemption and other registration requirements vary.

However, according to the Uniform Securities Act of 2002, which sets a guiding framework for state securities regulations, investment advisors are exempt from registering in states where they have had no place of business and no more than five clients in the past 12 months.

The de minimis threshold of five clients applies to the number of retail investors working with the financial advisor. The Uniform Securities Act specifies that advisors are also exempt from state registration if their only clients in the state are other registered advisors, institutional investors, or clients with primary residences in another state where the advisor is registered.

The standard set by the 2002 guidelines corresponds with the rules established in the National Securities Markets Improvement Act (NSMIA), the 1996 simplification of national securities laws that amended the Investment Company Act of 1940. According to the NSMIA, states cannot require an advisor to register who "(1) does not have a place of business located within the State; and (2) during the preceding 12-month period, has had fewer than six clients who are residents of that State."

Registration Requirements for Investment Advisors

In the U.S., the responsibility for regulating securities falls to both the federal government and the states. Investment advisors are required to register with either the U.S. Securities and Exchange Commission (SEC), representing federal oversight, or with the states where they do business. However, investment advisors don't have to register with both federal and state authorities.

Advisors can register at the federal level only if they meet certain eligibility requirements. For instance, an advisor with more than $100 million in regulated assets under management qualifies for SEC registration. Advisors can also register with the SEC if they handle pension plans, are affiliated with other federally registered advisors, work exclusively online, or have their primary place of business outside the U.S., among other criteria.

Advisors who don't register with the SEC must register at the state level. This is where the de minimis exemption may come into play.

In addition to determining their eligibility for SEC registration, advisors need to review the requirements in each state where they have clients. Although SEC-registered advisors are not expected to register with the states, they may have "notice filing" requirements in some states.

State Rules

Although the Uniform Securities Act of 2002 establishes national guidelines, states retain the final say over their securities regulations, including the de minimis exemption for advisor registration. While the threshold of fewer than five clients and no place of business applies in most states, there are a few notable exceptions.

In Texas, advisors with even a single in-state client are subject to "notice filing" requirements, much like federally registered advisors who operate in the state. In other words, Texas has additional rules on advisors who qualify for a de minimis exemption in other states.

Louisiana regulations also don't have a de minimis exemption, requiring out-of-state advisors with even a single client in the state to register.

The Bottom Line

Under the de minimis exemption, investment advisors are not responsible for registering in most states if they have no more than five clients and no place of business within their borders. Like other securities regulations, these rules can vary from state to state, so advisors should carefully review the details in every state where clients reside.