State vs. Federal Registration
Now that you understand state registration requirements, you need to know the dividing line between state and federal (SEC) regulation. The key factor is the investment adviser's assets under management (AUM).
The Dividing Line: Assets Under Management (IAA Section 203A)
The Investment Advisers Act of 1940, Section 203A establishes the AUM-based dividing line:
| AUM Level | Registration |
|---|---|
| Less than $25 million | Must register with the state(s); prohibited from SEC registration |
| $25 million to $100 million (mid-sized) | Generally registers with the state(s) unless eligible for SEC registration |
| $100 million or more | Must register with the SEC; becomes a "federal covered adviser" |
Mid-Sized Advisers ($25M-$100M)
Mid-sized advisers may register with the SEC instead of the states if:
- They are required to register in 15 or more states (the "multi-state" exemption), OR
- They advise a registered investment company
The $110 Million Buffer
To prevent constant switching near the $100 million threshold:
- An investment adviser (IA) must have at least $110 million in AUM before it is required to register with the SEC
- Once SEC-registered, an IA does not need to switch back to state registration until AUM drops below $90 million
This $90M-$110M buffer zone prevents advisers from bouncing back and forth between state and SEC registration as their AUM fluctuates around the threshold.
Exam Tip: Gotchas
- Under $25M = state only; $100M+ = SEC only; $25M-$100M = generally state unless multi-state (15+ states) or adviser to a registered investment company
- The buffer zone is $90M-$110M, not $95M-$105M
Federal Covered Advisers
A federal covered adviser is a person registered under IAA Section 203 with the SEC. Federal covered advisers are:
- Excluded from the state IA definition; they do NOT register with the state as an IA
- Still subject to significant state oversight (see table below)
| State Authority Over Federal Covered Advisers | Details |
|---|---|
| Notice filing | Must file copies of SEC-filed documents with the state Administrator and pay fees |
| Antifraud provisions | Remain subject to state antifraud laws |
| Fees | Must pay state notice filing fees |
| Regulation of IARs | State retains authority to register investment adviser representatives (IARs) who have a place of business in the state |
| Investigation and enforcement | State retains authority to investigate and bring enforcement actions for fraud or deceit |
States may NOT impose registration, licensing, or qualification requirements on federal covered advisers themselves; this is the federal preemption under IAA Section 203A.
Exam Tip: Gotchas
A federal covered adviser is excluded from the STATE definition of IA and does NOT register with the state. But the state can still require notice filings, collect fees, regulate the adviser's IARs, and bring antifraud enforcement actions. Federal preemption blocks state registration, not ALL state oversight.
Notice Filing Requirements
Before acting as a federal covered adviser in a state, the adviser must file with the Administrator such documents as have been filed with the SEC. This typically means:
- Filing a copy of Form ADV (or relevant portions) with the state
- Paying applicable notice filing fees
- The Administrator may specify by rule or order which SEC-filed documents must be filed
Exception: Federal covered advisers whose only clients in the state are institutional investors (described in Section 201(c)(2)) need NOT make notice filings.
Exam Tip: Gotchas
- Notice filing exception: if a federal covered adviser's only clients in a state are institutional investors, no notice filing is required in that state
Summary: State vs. Federal Registration
| Feature | State-Registered IA | Federal Covered Adviser |
|---|---|---|
| AUM | Under $100M (generally under $25M) | $100M+ (or eligible mid-sized) |
| Registers with | State Administrator | SEC |
| Filing form | Form ADV via Investment Adviser Registration Depository (IARD) | Form ADV via IARD |
| State notice filing | Not applicable (already state-registered) | Required (with fees) |
| State antifraud authority | Yes | Yes |
| State can regulate IARs | Yes | Yes (if IAR has place of business in state) |
| State can require registration | Yes | No (federal preemption) |