Quick Answer
IAs register with the SEC or a state (not both); BDs register with both. When IARs and agents register, it is always at the state level, never with the SEC. Exclusions (LATE professionals, banks) mean never registering at all; exemptions (de minimis, institutional-only) mean meeting the definition but skipping registration. AUM thresholds, forms, and enforcement powers tie it together.
This synthesis ties together all six Legal Framework units to help you navigate registration requirements, exemptions, and enforcement on the exam.
Who Are the Four Securities Professionals?
| Professional | Role | Registers With | Compensation |
|---|---|---|---|
| Investment Adviser (IA) | Firm providing advice | SEC OR state (not both) | Fees (AUM-based, hourly, flat) |
| Investment Adviser Rep (IAR) | Individual representing IA | State only | Salary, fees |
| Broker-Dealer (BD) | Firm executing transactions | SEC AND state (both) | Commissions, markups |
| Agent | Individual representing BD/issuer | State only | Commissions |
Think of it this way: Investment advisers (IAs) and IARs are on the advice side. Broker-dealers (BDs) and agents are on the transaction side. After an IAR advises a client, an agent at a BD executes the trade.
Exam Tip: Gotchas
- IAs register with SEC OR state, never both. BDs register with both. This is the key distinction.
- IARs and agents register with state only. When registration is required, the individuals always register at the state level, never with the SEC.
What Is the Registration Decision Tree?
Step 1: Is This Person an IA/BD?
Investment Adviser (Three-Prong Test):
All three must be met:
- Gives advice on securities
- In the business of advising (regular activity)
- Receives compensation (direct or indirect)
Broker-Dealer:
- In the business of effecting securities transactions
- For others (broker) or own account (dealer)
Step 2: Are They Excluded from the Definition?
| IA Exclusions (L.A.T.E.) | BD Exclusions |
|---|---|
| Lawyers | Banks, savings institutions |
| Accountants | Issuers |
| Teachers | Agents (register separately) |
| Engineers | No place of business + institutional only |
Memory Aid: L.A.T.E. professionals are excluded from the IA definition when their advice is solely incidental to their profession. (The "no special compensation" condition belongs to the separate broker-dealer exclusion, not to L.A.T.E.)
Step 3: Are They Exempt from Registration?
| IA Exemptions (State) | BD Registration Exemptions |
|---|---|
| No place of business + institutional clients only | None: the BD "no place of business" provisions (institutional-only, existing-customer/snowbird) are definitional exclusions (Step 2), not registration exemptions |
| No place of business + 5 or fewer retail clients (de minimis) | No de minimis for BDs |
Exam Tip: Gotchas
- De minimis = 5 or fewer, not 6. "No more than 6" or "6 or fewer" exceeds the limit.
- The 5-or-fewer-clients de minimis applies to IAs only. There is no client-count de minimis for BDs, and none for agents either, but agents have a separate, narrower federal de minimis transaction-type exclusion (an established customer's account held 30+ days, assigned to the associated person 14+ days), not a client-count test.
- Federal IA exemption: Insurance companies, not banks. State law differs.
Step 4: Federal or State Registration?
For Investment Advisers (AUM-Based):
| AUM | Registration |
|---|---|
| Less than $25 million | State only (SEC prohibited) |
| $25M to $100M | State only (unless 15-state rule, or the home state does not examine advisers) |
| $100M to $110M | Eligible for SEC (optional) |
| $110M or more | SEC required |
| Below $90M (if SEC registered) | Must withdraw from SEC |
Memory Aid: The buffer zones: $100M = eligible, $110M = required, $90M = must leave.
What Are the Key Thresholds?
| Threshold | What It Means |
|---|---|
| 5 or fewer clients | De minimis exemption for out-of-state IAs |
| $25 million AUM | Below this = state registration only |
| $90 million AUM | Below this = must withdraw from SEC |
| $100 million AUM | Eligible for SEC registration |
| $110 million AUM | Required to register with SEC |
| 15 states | Optional SEC registration trigger |
| $500 prepayment (state) | Substantial prepayment threshold |
| $1,200 prepayment (federal) | Substantial prepayment threshold |
| 25% ownership | Control person under Advisers Act/USA |
| 30 days | State registration effective date |
| 45 days | SEC registration effective date |
How Do Exclusions Differ From Exemptions?
| Category | Excluded | Exempt |
|---|---|---|
| Definition | NOT an IA/BD at all | IS an IA/BD but no registration required |
| Antifraud rules | Still apply | Still apply |
| Example (IA) | Lawyer giving incidental advice | IA with no office + 5 or fewer clients |
| Example (BD) | Bank; also a BD with no office dealing only with institutions | (none: BD relief comes via definitional exclusions, not registration exemptions) |
Why does this matter? Excluded professionals never meet the definition, so they never register. Exempt professionals do meet the definition but qualify for an exception based on their client base or business model.
What Are the Key Forms?
| Form | Who Files | Purpose | Filed With |
|---|---|---|---|
| Form ADV Part 1 | Investment Advisers | Registration, business info | SEC or state |
| Form ADV Part 2A | Investment Advisers | Brochure (narrative disclosure) | Delivered to clients |
| Form ADV Part 2B | Investment Advisers | Brochure supplement (IAR info) | Delivered to clients |
| Form U4 | Agents | Individual registration | State (via CRD) |
| Form U4 | IARs | Individual registration | State (via IARD) |
| Form U5 | BDs, IAs | Terminate individual registration | State (via CRD/IARD, matching the U4) |
| Form BD | Broker-Dealers | BD registration | SEC and state |
| Form ADV-W | Investment Advisers | Withdraw registration | SEC or state |
Exam Tip: Gotchas
- Form ADV Part 2 = Brochure. Must be delivered to clients initially and annually.
- Form U4 is for individuals (agents, IARs). Form BD is for the firm. Agents file through the CRD; IARs file through the separate IARD system.
- ADV-W withdrawal: a state withdrawal becomes effective 30 days after filing, but the Administrator retains jurisdiction to bring proceedings on the willful-violation ground for 1 year afterward. (SEC withdrawal is effective in 60 days.)
What Are the Penalties and Enforcement Powers?
Criminal Penalties (1956 USA Baseline)
- Maximum fine: $5,000 per violation
- Maximum imprisonment: 3 years per violation
- Statute of limitations: 5 years from the date of the violation
Memory Aid: State penalties = 5-5-3 ($5,000 fine, 5 years to prosecute, 3 years prison). All numbers are 5 or under.
Civil Liability
- Rescission offer: Seller offers purchase price + legal interest minus income received; buyer has 30 days to respond (silence = seller released)
- Statute of limitations: 3 years from the transaction OR 2 years from discovery, whichever is earlier
- Joint and several liability: Any controlling person, officer, director, or materially aiding party can be held for the full amount
Administrator Powers
| CAN Do | cannot Do |
|---|---|
| Issue cease and desist orders | Issue injunctions (court only) |
| Deny, suspend, revoke registrations | Impose criminal penalties (court only) |
| Investigate violations | Approve or pass on securities merit |
| Subpoena witnesses and documents | Make arrests |
| Refer criminal cases to prosecutors | Sentence violators |
Think of it this way: The administrator has investigative and administrative power, but only courts can impose criminal penalties or issue binding legal orders like injunctions.
Exam Tip: Gotchas
- Administrator cannot issue injunctions. Only courts can do that.
- Administrator does not "approve" securities. Registration does not mean approval.
- Cease and desist ≠injunction. C&D is administrative; injunction is judicial.
What Are the Registration Actions?
| Action | Meaning | Due Process |
|---|---|---|
| Denial | Refuse initial registration | Prior notice + opportunity for hearing |
| Suspension | Temporarily halt registration | Prior notice + opportunity for hearing |
| Revocation | Permanently terminate registration | Prior notice + opportunity for hearing |
| Cancellation | Nonpunitive termination (death, missing, etc.) | No hearing required |
| Withdrawal | Voluntary termination by registrant | No hearing required |
Exam Tip: Gotchas
- Cancellation is nonpunitive. Used when registrant dies, becomes incompetent, or cannot be located.
- Denial, suspension, revocation require prior notice, opportunity for a hearing, and written findings. Due process protection: the Administrator need not hold a hearing that isn't requested.
- Summary actions (without prior hearing): the Administrator can postpone or suspend a registration pending final determination. A hearing must be set within 15 days of a written request; if none is requested, the order simply stays in effect.
Exam Question Framework
When you see a legal framework question, ask:
- Who is this person? (IA, IAR, BD, agent, issuer)
- Are they excluded from the definition? (L.A.T.E., banks, etc.)
- If not excluded, are they exempt from registration? (de minimis, institutional only, etc.)
- If registration required, with whom? (SEC vs state, AUM thresholds)
- What form do they file? (ADV, U4, BD)
- What are the consequences of violation? (criminal vs civil, state vs federal)
What Should You Check on Exam Day?
- IAs register with the SEC or a state, never both; BDs register with both; when IARs and agents register, it is always at the state level, never with the SEC.
- Exclusion means never meeting the professional's definition at all (antifraud rules still apply); exemption means meeting the definition but skipping registration.
- The AUM buffer zones: under $25M is state-only, $100M is SEC-eligible, $110M is SEC-required, and dropping below $90M forces withdrawal from the SEC.
- De minimis (5 or fewer retail clients, no place of business) applies to IAs only: there is no client-count de minimis for BDs or agents, though agents have a separate, narrower transaction-type de minimis exclusion.
- A control person under the Advisers Act/USA holds 25% or more of the voting rights or profits of a common-control adviser.
- The Administrator can investigate, subpoena, and deny/suspend/revoke registrations, and can issue cease and desist orders, but only a court can issue injunctions, impose criminal penalties, or make arrests.
- Denial, suspension, and revocation require prior notice and an opportunity for a hearing; cancellation and withdrawal do not.