Not every adviser answers to the state. In 1996, NSMIA split the adviser world in two: federal covered advisers register with the SEC and merely notice-file with states, while everyone else registers state by state. This chapter is about that dividing line — what a state can still do to a federal covered adviser (spoiler: collect a fee, register its IARs, and prosecute fraud), and the two-prong de minimis rule that lets a small out-of-state adviser skip registration entirely.
What you'll cover
the NSMIA preemption framework and the federal-covered concept under §203A
what states retain: notice filings, IAR registration, and §101 antifraud authority — preemption never touches fraud
place of business: what counts, what doesn't
the de minimis exemption — no in-state place of business AND 5 or fewer retail clients in 12 months, both prongs required
the five-step decision sequence that resolves any IA-scope fact pattern
The Series 63 rarely asks for the AUM dollar thresholds here — it asks for the consequences of being federal covered. Learn the can/cannot split and these questions become free points.
Federal-covered advisers and state notice filing
Under the National Securities Markets Improvement Act (NSMIA) of 1996 and Section 203A of the federal Investment Advisers Act, certain investment advisers are regulated at the federal level by the SEC rather than at the state level. These are the federal-covered advisers — advisers meeting the federal AUM threshold, advisers to SEC-registered investment companies, and certain pension fund advisers — and NSMIA preempts states from requiring them to register.
Here's the exam's actual angle: for Series 63 purposes, the question is rarely about the exact AUM dollar figures — it's about the consequence. When you see a federal-covered adviser doing business in a state, the state can:
Require a notice filing (typically the same Form ADV the adviser filed with the SEC) and collect a filing fee
Require the adviser's IARs to register at the state level if they have a place of business in the state
Pursue antifraud violations under USA §101 (NSMIA does not preempt state antifraud authority)
And what the state cannot do: require the federal-covered adviser itself to register, or impose substantive rules on the adviser's books, records, financial requirements, or supervisory procedures. Preemption takes the paperwork; it never takes the fraud jurisdiction — that asymmetry is the tested fact.
Place of business and the de minimis rule
Two phrases decide the jurisdiction question. First: "place of business" determines where a state-registered adviser must register and where a federal covered adviser must notice-file. Defined in NASAA model rules and adopted by reference in most state statutes, a place of business is any office or location from which the adviser conducts advisory business on a regular basis.
What counts as a place of business:
The adviser's primary office or any branch office
Any location where the adviser holds itself out as conducting business (e.g., listed on the website, business cards, or letterhead)
Any location where the adviser regularly meets clients
An IAR's home office if it is used to meet clients or is held out as the IAR's office
What does NOT count as a place of business:
A vacation property where business is conducted only occasionally
An itinerant location where no clients are met and no business is held out
A hotel room or temporary office
Second: the de minimis exemption from state registration. An adviser with NO place of business in a state may have up to 5 retail clients in that state during the preceding 12-month period without triggering state registration. Widely tested, frequently confused — keep these edges sharp:
The exemption requires no place of business in the state
The 5-client count is for non-institutional (retail) clients only — institutional clients (other IAs, BDs, banks, insurance companies, large pension plans) don't count
If the adviser has any place of business in the state, the de minimis exemption does not apply and the adviser must register regardless of client count
The exemption is parallel to the BD/agent "snowbird" rule that allowed unlimited existing-client follow-on contact (covered in Chapter 4-4)
State registration scope decision sequence
Every IA-scope scenario on the Series 63 walks the same five filters — run them in order:
Is the entity an investment adviser? Apply the ABC test — advice about securities + in the business + compensation. All three required.
Does an exclusion apply? Lawyer / accountant / teacher / engineer / broker-dealer / publisher / bank.
If IA + no exclusion: is the adviser federal-covered (large AUM, RIC adviser, pension consultant) or state-registered?
Federal-covered: state notice filing + IAR registration at state level + antifraud only. State-registered: full state registration via IARD.
State de minimis check: no place of business in the state AND 5 or fewer non-institutional clients there in 12 months → excluded from that state's IA registration.
The heaviest trap on this page: the de minimis rule has TWO prongs — no place of business AND 5 or fewer retail clients. Both must be met. A single in-state office or a sixth retail client defeats the exclusion, and the Series 63 loves handing you exactly one of those two facts.
Concept Check
A federal-covered investment adviser with $250 million in AUM has its principal office in Connecticut. The adviser solicits clients in Pennsylvania, where it has no physical office but has 12 retail clients. Under the Uniform Securities Act, the adviser must:
A federal-covered adviser is preempted by NSMIA from substantive state registration but is still subject to state notice-filing requirements in every state where the adviser does business (subject to each state's adopted thresholds). The notice filing typically consists of the same Form ADV the adviser filed with the SEC, plus the state filing fee. NSMIA preemption removes the substantive registration burden but does not eliminate notice filing, state-level IAR registration, or state antifraud enforcement under USA §101.
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Concept Check
A federal-covered investment adviser engages in fraudulent misrepresentation while soliciting a client in State X. Under the Uniform Securities Act, State X's Administrator may:
NSMIA preempts substantive state regulation of federal-covered advisers — states cannot require federal-covered advisers to register or impose additional books-and-records, financial-responsibility, or supervisory requirements. However, NSMIA expressly preserves state antifraud authority. Under USA §101, the Administrator retains full authority to investigate and prosecute fraudulent acts, manipulative practices, and material misstatements, regardless of whether the adviser is federal-covered. Antifraud is the one area where state and federal jurisdiction overlap fully.
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Concept Check
A state-registered investment adviser exercises discretionary authority over client accounts but does not maintain custody of client funds or securities. Under NASAA model rules adopted by most states, the adviser must maintain:
NASAA model rules establish financial responsibility tiers for state-registered investment advisers based on the level of authority exercised over client assets. An adviser that maintains custody of client funds or securities must have minimum net worth of $35,000 or post a surety bond. An adviser that exercises discretionary authority but does not have custody must have minimum net worth of $10,000 or post a bond. The bond serves as a substitute when net worth falls below the threshold. Federal-covered advisers are preempted from these state financial requirements under NSMIA §203A.
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Concept Check
A state-registered investment adviser based in California has no offices outside California. Over the past 12 months, the adviser has acquired 4 retail clients in Nevada. Under the de minimis exemption, the adviser:
The de minimis exemption under NASAA model rules and adopted state statutes allows an adviser with NO place of business in a state to have up to 5 retail clients in that state during the preceding 12 months without triggering state registration. The adviser here has no Nevada place of business and only 4 retail Nevada clients — below the 5-client threshold. Registration in Nevada is not required. The 5-client threshold counts retail clients broadly, not just individual natural persons. The federal multi-state rule is a separate 15-state mechanism on a different AUM range.
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Concept Check
An investment adviser with $100 million in assets under management is currently state-registered. Under the Dodd-Frank Wall Street Reform Act, the AUM trigger for transitioning to federal SEC registration is:
Under the Dodd-Frank Wall Street Reform Act of 2010, advisers with AUM above $110 MILLION must register with the SEC (federal-covered status); below $100 MILLION, advisers are state-registered. The $100M-$110M buffer prevents constant back-and-forth registration as AUM fluctuates around the threshold. Pre-Dodd-Frank, the SEC threshold was $25 million; the increase shifted approximately 4,000 mid-sized advisers from federal to state registration. Pension consultants, mutual fund advisers, and certain other categories qualify as federal-covered regardless of AUM.
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Concept Check
An investment adviser with $80 million in AUM is required to register in 18 different states because it has clients spread across the country. Under the Dodd-Frank mid-sized adviser rule, this adviser:
Under USA and Dodd-Frank, a "mid-sized adviser" with AUM between $25 million and $100 million who would otherwise be state-registered MUST register federally with the SEC if required to register in 15 OR MORE STATES. The rule prevents the burden of multi-state registration from falling on small/mid advisers with broad geographic reach. An adviser with 18-state coverage falls within this rule. State antifraud authority continues to apply, and the adviser must notice-file in states where required. Pension consultants and mutual fund advisers register federally regardless of AUM or state count.
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Concept Check
An investment adviser registered in State X maintains its only office and all client meetings in State X. The adviser has 3 retail clients who are residents of State Y. The adviser has no office, mail drop, or solicitation activity in State Y. Under the de minimis exclusion, the adviser:
Under USA Section 222(d) and the NASAA de minimis exclusion, an investment adviser is excluded from state registration if it has (1) NO place of business in the state AND (2) 5 OR FEWER non-institutional (retail) clients during the prior 12 months. Both prongs must be met. The adviser with 3 retail clients in State Y and no office, mail drop, or solicitation activity satisfies both. The result would change if the adviser opened any in-state office (even part-time), or if the retail client count exceeded 5. Account size does not affect the de minimis analysis. State antifraud authority applies regardless.
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Concept Check
A federal-covered investment adviser solicits prospective clients in State Z through direct mail and internet advertising. The adviser is registered with the SEC and has 50 existing clients who are residents of State Z. Under USA Section 307, the adviser must:
Under USA Section 307 (Notice Filing) and NSMIA, federal-covered advisers are exempt from STATE REGISTRATION but must NOTICE-FILE in states where they have a place of business OR more than 5 retail clients. The notice filing typically consists of a copy of Form ADV plus payment of state fees, processed through IARD. Full state registration is preempted, but notice filing is required. NSMIA prevents states from requiring full registration of federal-covered advisers but expressly permits state notice-filing fees and antifraud enforcement. The 5-client de minimis applies to STATE-REGISTERED advisers only.
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