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 (the IA/IAR de minimis test, which excludes institutional clients from the client count) 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, not both (apart from a brief overlap when switching). 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, trust companies |
| Accountants | Issuers |
| Teachers | Agents (register separately) |
| Engineers | No place of business in the state + 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 in the state + 5 or fewer retail clients there (de minimis); institutional clients don't count toward that 5, so unlimited institutional clients plus up to 5 retail clients still qualifies | No de minimis for BDs: the BD "no place of business in the state" provisions (institutional-only, existing-customer/snowbird) are definitional exclusions (Step 2), not registration exemptions |
Exam Tip: Gotchas
- De minimis = 5 or fewer, not 6. "No more than 6" or "6 or fewer" exceeds the limit.
- Federal IA exemption: insurance companies, not banks. Under the Advisers Act an adviser whose only clients are insurance companies is exempt from federal registration, while banks are excluded from the adviser definition outright. State law draws the line differently: the USA's institutional list covers banks and insurance companies alike.
- The 5-or-fewer-clients de minimis applies to IAs and IARs, not to BDs or agents. An IAR's version requires no place of business in the state and fewer than 6 resident clients there in the preceding 12 months.
- BDs and agents have no client-count de minimis. Agents have a narrower federal transaction-type exclusion for an established customer's account held 30+ days and assigned to the agent 14+ days.
Step 4: Federal or State Registration?
For Investment Advisers (AUM-Based):
| AUM | Registration |
|---|---|
| Less than $25 million | State only (SEC prohibited unless an exception applies) |
| $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.
Exam Tip: Gotchas
- "The home state does not examine advisers" has one name: New York. It is the only state that does not examine or inspect its state-registered investment advisers, so a mid-size adviser ($25M-$100M AUM) headquartered there must register with the SEC instead. That is a mandatory trigger, not a choice, unlike the 15-state rule on the same row.
What Are the Key Thresholds?
| Threshold | What It Means |
|---|---|
| 5 or fewer clients | De minimis exemption for out-of-state IAs (retail clients) and IARs (resident clients, "fewer than 6") |
| $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: more than $500 per client, six months or more in advance |
| $1,200 prepayment (federal) | Substantial prepayment threshold: more than $1,200 per client, six months or more in advance |
| 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 in the state + 5 or fewer clients there |
| Example (BD) | Bank; also a BD with no office in the state 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 1A | All advisers (SEC and state) | Registration, business info | SEC or state (via IARD) |
| Form ADV Part 1B | State-registered advisers only | Additional state-specific questions | State (via IARD) |
| Form ADV Part 2A | All advisers | Brochure (narrative disclosure) | Delivered to clients |
| Form ADV Part 2B | All advisers | Brochure supplement (IAR info) | Delivered to clients |
| Form ADV Part 3 (Form CRS) | SEC-registered advisers with retail investors | Relationship summary | SEC (via IARD); delivered to retail investors |
| 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 |
| Form BDW | Broker-Dealers | Withdraw registration | SEC and state |
Exam Tip: Gotchas
- Form ADV Part 1B is the state-only part. An SEC-registered adviser does not complete it; a state-registered adviser does.
- Form CRS (Part 3) is an SEC requirement. SEC-registered advisers deliver it to retail investors; state-registered advisers generally do not file it.
- 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. Agent filings go through the CRD; IAR filings go through the separate IARD system.
- A state ADV-W withdrawal becomes effective 30 days after the Administrator receives it, unless a revocation or suspension proceeding is pending or instituted within 30 days after filing. The Administrator retains jurisdiction to bring proceedings on the willful-violation ground for 1 year afterward.
- Form BDW follows the same state timeline as ADV-W. It becomes effective 30 days after receipt (absent a pending or newly instituted proceeding), and the Administrator can bring willful-violation proceedings for 1 year afterward. Unlike ADV-W, BDW is filed with the SEC and state together, since BD registration itself is dual.
- Form ADV-E is a different form from the ones above. It is the cover page an independent CPA files to report an adviser's annual custody surprise examination, not a registration or withdrawal filing. See the custody page in Professional Excellence for the full timeline (120 days to file, a 1-business-day discrepancy report).
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, where the state adopts the Act's optional limit
Memory Aid: State penalties = 5-5-3 ($5,000 fine, 5 years to prosecute where the state adopts the Act's optional limit, 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 + written findings (a summary postponement may come first) |
| Suspension | Temporarily halt registration | Prior notice + opportunity for hearing + written findings (a summary suspension may come first) |
| Revocation | Permanently terminate registration | Prior notice + opportunity for hearing + written findings |
| Cancellation | Nonpunitive termination (death, missing, etc.) | Prior notice + opportunity for hearing + written findings |
| Withdrawal | Voluntary termination by registrant | No hearing required |
Exam Tip: Gotchas
- Cancellation is nonpunitive. Used when registrant dies, becomes incompetent, or cannot be located.
- An order of denial, suspension, revocation, or cancellation requires prior notice, opportunity for a hearing, and written findings. The one exception: the Administrator may summarily postpone or suspend a registration pending final determination, then set a hearing within 15 days of a written request. The Administrator need not hold a hearing that isn't requested.
- The Administrator can postpone or suspend a registration without a prior hearing (a summary action), 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, private fund/venture capital adviser, 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, not both, apart from a brief overlap when switching; BDs register with both; when IARs and agents register, it is always at the state level, never with the SEC.
- The assets under management buffer zones: under $25M is state-only, $100M is SEC-eligible, $110M is SEC-required, and dropping below $90M forces withdrawal from the SEC.
- A client-count de minimis applies to state-registered IAs and IARs with no place of business in the state; BDs and agents have no client-count de minimis.
- 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.
- An order denying, suspending, revoking, or canceling a registration requires prior notice and an opportunity for a hearing (a summary postponement or suspension may come first); a routine withdrawal does not.