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Advisers Act Alert Part 9: State vs Federal Registration

Under a regime created by the National Securities Markets Improvement Act of 1996, certain investment advisers are required to register with the SEC, and other advisers are prohibited from registering with the SEC.  Advisers that register with the SEC are exempt from state registration requirements, although the states may require notice filing and may license adviser representatives that exceed a specified threshold of involvement with clients that are natural persons.

Advisers that are prohibited from registering with the SEC may be required to register in the states where they have a place of business, depending on the registration exemptions available under the state’s law.  Advisers Act Section 222(d) prohibits states from requiring registration of advisers that do not have a place of business in the state and have had fewer than six clients residing in that state during the preceding 12-month period.23 (see "Federal De Minimis Exemption from State Registration” below).

Advisers with $25 million or less in assets under management (“small advisers”) are, and under the news will continue to be, required to register in the states in which they do business unless: (1) they are exempt from registration; (2) they have their principal office and place of business in a state that does not regulate investment advisers;24 or (3) they qualify for one of the exemptions in Rule 203A-2, which permits certain types of investment advisers to register with the SEC even though they have less than $25 million of assets under management. Federal registered advisers register with the SEC; no state may require them to register, although the states may require notice filing.

Section 410 of the Dodd-Frank Act creates a new category of “mid-sized advisers,” having assets under management between $25 million and $100 million, and places these advisers under the primary regulation of the states. Unlike a small adviser, a mid-sized adviser must register with the SEC if (1) the adviser is not required to be registered as an investment adviser in the state in which it maintains its principal office and place of business, or (2) if registered with that state, the adviser would not be subject to examination as an investment adviser by the state securities administrator. In the Implementing Release, the SEC notes that in addition to Wyoming, which does not require registration of investment advisers, the states of Minnesota and New York had not advised the SEC that advisers registered with them are subject to examination; however, the SEC has since advised that Minnesota will subject advisers registered with them to examination. 

Consequently, mid-sized investment advisers located in Wyoming and New York must register with the SEC, unless they otherwise qualify for a registration exemption. Section 203A(c) of the Advisers Act permits the SEC to create exemptions from the prohibition on federal registration for mid-sized advisers as it does for small advisers. As discussed below in the section entitled “Exemptions from Prohibition on Federal Registration,” the SEC is adopting amendments to two of the exemptions and eliminating the exemption for NRSROs. The five exemptions remaining after the amendments will apply to both mid-sized investment advisers and small investment advisers.

Transition Rules and Buffer. The SEC estimates that approximately 3,200 SEC-registered advisers will be required to withdraw their registrations and register with one or more state securities administrators. New Rule 203A-5 is intended to provide for an orderly transition to state registration for mid-sized advisers no longer eligible for SEC registration.

  • Existing Registrants. Each adviser registered with the SEC on January 1, 2012 must file an amendment to its Form ADV no later than March 30, 2012 (regardless of its fiscal year end and annual filing deadline). These amendments will respond to new items in Form ADV (discussed below) which are intended to identify mid-sized advisers no longer eligible to remain registered with the SEC. Those advisers no longer eligible for SEC registration must withdraw from registration with the SEC by filing Form ADV-W by June 28, 2012. Mid-sized advisers that wish to continue operations after June 28, 2012 must register with the appropriate states. Mid-sized advisers registered with the SEC as of July 21, 2011 that will be required to switch to state registration may not withdraw from SEC registration before January 1, 2012.
  • New Applicants. Until July 21, 2011, advisers that qualify as mid-sized advisers and are not yet registered may register with either the SEC or the appropriate state securities administrator. Beginning July 21, all new advisers qualifying as mid-sized advisers must register with the appropriate states (unless otherwise exempt from doing so).
  • New Form ADV Questions. The new Form ADV that all advisers must file by March 30, 2012 will contain an amended Item 2.A to reflect the new statutory threshold for registration. Each registrant will be required to identify whether it is eligible to register with the SEC by indicating that the adviser:
    • Is a large adviser that has $100 million or more of regulatory assets under management (or $90 million or more if the adviser is filing its most recent annual updating amendment and is already registered with the SEC);25
    • Is a mid-sized adviser that does not meet the criteria for state registration or is not subject to examination;26
    • Has its principal place of business in Wyoming (which does not register investment advisers) or outside of the U.S.;
    • Meets the requirements for one or more of the revised new rules under Section 203A (discussed below in the section entitled “Exemptions from Prohibition on SEC Registration”);
    • Is an adviser (or sub-adviser) to a registered investment company;
    • Is an adviser to a business development company and has at least $25 million of regulatory assets under management; or
    • Received an order permitting the adviser to register with the SEC.

      An adviser that does not qualify for continued registration with the SEC must indicate that status on its amended Form ADV filed by March 30, 2012.
    • “Buffer Zone” for Switching Between State and Federal Registration. To avoid the need for frequent switching between state and federal registration for advisers with assets under management near $100 million, the SEC has amended Rule 203A-1 to provide that an adviser may, but is not required to, register with the SEC if it has assets under management of at least $100 million but less than $110 million. Conversely, an SEC-registered adviser need not withdraw its registration unless it has less than $90 million of assets under management. The $20 million range between $90 million and $110 million is the “buffer zone” within which an adviser is not required to switch its registration.

      In amending Rule 203A-1 to create a buffer zone for mid-size advisers around the $100 million threshold, the SEC eliminated the $5 million buffer zone around the $25 million threshold, because that threshold is no longer significant for most advisers. However, the $25 million threshold continues to be significant for some advisers, notably those whose principal office and place of business are in New York, which regulates investment advisers but does not conduct examinations of advisers that it regulates. Thus, an adviser in New York must register with the state if it has assets under management up to $25 million (and does not qualify for an exemption from the prohibition on SEC registration) and must register with the SEC if it has assets under management over $25 million.27

    Exemptions from the Prohibition on SEC Registration. There are currently six exemptions from the prohibition on registration with the SEC. Under the new rules, one of the exemptions will be eliminated and two others amended. The following is a description of the exemptions under the new rules:

    • NRSROs. The exemption for nationally recognized statistical rating organizations has been eliminated as no longer necessary. Since the exemption was first adopted, Congress has amended the Advisers Act to exclude certain NRSROs from the Act’s definition of “investment adviser” and provided for a separate regulatory regime for NRSROs under the Exchange Act.
    • Pension Consultants. The minimum value of plan assets required to rely on the exemption has been raised from $50 million to $200 million.
    • Investment Advisers Affiliated with an SEC-Registered Adviser. No change.
    • Investment Advisers Expecting to Be Eligible for SEC Registration within 120 Days. No change.
    • Multi-State Investment Advisers. Section 410 of the Dodd-Frank Act provides that a mid-sized adviser that otherwise would be prohibited from SEC registration may register with the SEC if it would be required to register with 15 or more states. As a result, the SEC has lowered from 30 to 15 the number of states in which an adviser would have to be required to register to qualify for the exemption. However, the SEC has determined that, based on the Congressional intent to set the threshold at 15, there should not be a buffer number below 15, equivalent to the five-state buffer below 30 states available in the current rule.
    • Internet Advisers. No change.

    Proposed State Exemption for ERAs. As discussed above under “Exempt Reporting Advisers,” ERAs that would otherwise be required to register as investment advisers will be exempt from registration with the SEC, subject to reporting and other obligations. ERAs will generally not be “federal covered advisers” under state laws – i.e., advisers exempt from state registration because they are required to be registered with the SEC. Therefore, ERAs may be required to register with one or more states in which they do business unless there is an exemption available under state law. (Because the venture capital and private fund exemptions are not mandatory, advisers that are otherwise eligible for federal registration may elect, instead of claiming the venture capital or private fund exemption, to remain or become registered with the SEC to avoid state registration in the absence of a state exemption.)

    The North American Securities Administrators Association (“NASAA”) has published a proposed model rule for reporting advisers exempt from SEC registration.28 The model rule, which individual states would be free to adopt as written (or with revisions) or disregard, would provide an exemption for advisers to private funds if:

    • Neither the private fund adviser nor any of its advisory affiliates is subject to a disqualification as described in Rule 262 of SEC Regulation A;
    • The private fund adviser files with the state each report and amendment that an ERA is required to file with the SEC; and
    • The private fund adviser pays the required state fees.

    The proposed rule would include additional requirements for an adviser to one or more funds exempt under Section 3(c)(1) that are not “venture capital funds” under the definition discussed above:

    • Each of the owners of the 3(c)(1) funds advised by the private fund adviser (other than VC funds) must meet the definition of qualified client in SEC Rule 205-3;
    • The private fund adviser must make certain disclosures to every beneficial owner of a 3(c)(1) fund that is not a VC fund about the nature of the duties and responsibilities of the adviser to the beneficial owners, including the fact that the fund, rather than the individual beneficial owners, is the adviser’s client; and
    • The private fund adviser must obtain on an annual basis audited financial statements of each 3(c)(1) fund that is not a VC fund, and deliver a copy to each beneficial owner of the fund.

    The proposed rule also contains transition and grandfathering provisions, as well as a corresponding exemption from registration as an investment adviser representative.

    The deadline for comment to NASAA on the proposed model rule is July 13, 2011.

    Federal De Minimis Exemption from State Registration. Advisers will still be able to qualify for the de minimis exemption from state registration provided by the Advisers Act. This exemption, Advisers Act Section 222(d), is available to advisers that do not have a place of business in a state and have had fewer than six clients residing in that state during the preceding 12-month period. “Client” is currently defined for purposes of Section 222(d) as it is in Rule 203(b)(3)-1, permitting hedge funds and other entities to be counted as one client. The SEC is replacing the definition of “client” in Rule 203(b)(3)-1, which will be repealed, with a new definition in Rule 202(a)(30)-1 which will continue to permit entities to be counted as one client for purposes of this exemption or the Foreign Private Adviser Exemption. Rule 222-2 under the federal de minimis standard will cross reference the new definition in Rule 202(a)(30)-1.



    23 See “Federal De Minimis Exemption from State Registration.”

    24 Wyoming is the only state that does not regulate investment advisers.

    25 See the discussion below in the section entitled “Buffer Amount for Transition.”

    26 The SEC notes that advisers in New York are not subject to examination and therefore that mid-sized advisers with their main office and principal place of business in those states must register with the SEC. Mid-sized advisers with their principal office and place of business in other states may be required to register with the SEC if they qualify for an exemption in the state not available under federal law – e.g., an exemption for advisers whose only clients in the state are institutional investors.

    27 For more information about the transition of registration for mid-sized advisers, see the SEC publication "Frequently Asked Questions Regarding Mid-Sized Advisers."

    28 The proposal was originally published in December 10, 2010, and amended in response to comments.

    © 2014 Goodwin Procter LLP. All rights reserved. This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP, Goodwin Procter (UK) LLP or their attorneys. Prior results do not guarantee similar outcome.

    Goodwin Procter LLP is a limited liability partnership which operates in the United States and has a principal law office located at 53 State Street, Boston, MA 02109. Goodwin Procter (UK) LLP is a separate limited liability partnership registered in England and Wales with registered number OC362294. Its registered office is at Tower 42, 25 Old Broad Street, London EC2N 1HQ. A list of the names of the members of Goodwin Procter (UK) LLP is available for inspection at the registered office. Goodwin Procter (UK) LLP is authorized and regulated by the Solicitors Regulation Authority.