What Is the De Minimis Exemption for Investment Advisers?
Learn how the de minimis exemption applies to investment advisers, its qualification criteria, and what happens when the threshold is exceeded.
Investment advisers must comply with various regulations, but some qualify for exemptions that reduce their compliance burden. One such exemption, the de minimis exemption, allows certain advisers to operate without full registration under specific conditions.
Understanding this exemption is essential for advisers seeking to meet legal requirements while minimizing regulatory hurdles.
Qualification Threshold
The de minimis exemption applies to advisers who remain below a specific client threshold. Under the Investment Advisers Act of 1940, advisers were historically exempt from SEC registration if they had fewer than 15 clients over a rolling 12-month period and did not market themselves as investment advisers. The Dodd-Frank Act repealed this exemption in 2010, requiring advisers to rely on state-level exemptions unless they qualify for another federal exemption, such as the private fund adviser exemption.
At the state level, most jurisdictions set a lower threshold. Many exempt advisers with no more than five clients in a state, provided they have no physical presence there. This allows an adviser to serve a small number of clients in another state without triggering registration. However, states differ in how they define a “client.” Some count only retail clients, while others include institutional investors, trusts, and affiliates.
Federal Criteria vs. State Criteria
Investment advisers must navigate both federal and state regulations. While the SEC no longer offers a general de minimis exemption, certain federal exemptions remain. For example, advisers managing only private funds with less than $150 million in assets under management (AUM) may qualify for the private fund adviser exemption under Rule 203(m)-1 of the Investment Advisers Act. This allows them to avoid SEC registration while still meeting reporting obligations under Form PF if they exceed certain thresholds.
State-level de minimis exemptions vary significantly. Many states follow the five-client limit, but some impose additional conditions. Texas, for instance, requires advisers relying on the exemption to have no place of business in the state and only serve accredited investors under Rule 501 of Regulation D. Florida does not offer a de minimis exemption at all, meaning even one client there could require registration. These differences make it necessary for advisers to review state-specific securities laws, often found in blue sky laws or state securities acts.
Regulatory enforcement also differs between federal and state authorities. The SEC focuses on systemic risks and large-scale fraud, while state regulators scrutinize smaller advisers more closely, particularly those serving retail clients. Some states, such as California, require exempt advisers to file a notice or pay a fee despite not being fully registered, adding another layer of oversight.
Exceeding the Threshold
Once an adviser surpasses the de minimis limit, full registration becomes mandatory, triggering a range of compliance requirements. At the federal level, advisers must register with the SEC by filing Form ADV through the Investment Adviser Registration Depository (IARD). This form requires disclosures on assets under management, fee structures, disciplinary history, and conflicts of interest. Failure to register can result in enforcement actions, including fines and cease-and-desist orders under Section 203 of the Investment Advisers Act.
State-level compliance adds further complexity. Many states require licensing, which often includes passing the Series 65 exam or obtaining a waiver through professional designations like the CFA or CFP. Some states also require financial disclosures, particularly if the adviser has custody of client funds. Minnesota mandates audited balance sheets for advisers with custody, while New Jersey requires surety bonds for those with discretionary authority over client accounts.
Ongoing compliance obligations increase once registration is triggered. Advisers must implement written policies under Rule 206(4)-7, conduct annual compliance reviews, and maintain records per Rule 204-2. Advertising practices face stricter oversight under the SEC’s Marketing Rule (Rule 206(4)-1), which limits the use of performance data and testimonials unless specific conditions are met. Advisers managing over $100 million in AUM must also submit Form PF, providing regulators with systemic risk data. Compliance costs can be significant, often exceeding $50,000 annually, making it a key consideration for smaller firms looking to expand.