The de minimis exemption lets an investment adviser work with a small number of clients in a state without registering there. Under Section 222(d) of the Investment Advisers Act of 1940, a state generally cannot require an adviser to register if the adviser (1) has no place of business in that state, and (2) has had fewer than six clients — that is, five or fewer — who reside in that state during the preceding 12 months. It’s a valuable exemption for firms that serve a few clients across state lines, but it comes with limits, and a handful of states play by their own rules.
This article explains when an investment adviser has to register at the state level, how the de minimis exemption works, which clients count toward the threshold, and the state-specific quirks that trip firms up.
When Must an Investment Adviser Register With a State?
Whether you answer to the SEC or to one or more states depends largely on your assets under management. As a general rule, an adviser with $100 million or more in regulatory assets under management registers with the SEC, while an adviser with less than $100 million registers with the state(s) where it does business. If a firm’s assets grow past that line — or fall back below it — its registration home can change. A firm whose assets drop below roughly $90 million, for example, generally must withdraw from SEC registration and register with the state(s) where it operates.
Once state registration is on the table, the next question is which states. That comes down to two things: where you have a place of business, and how many clients you have in each state.
How the De Minimis Exemption Works
In determining which state(s) a firm must register in, a short series of questions needs to be addressed:
- Does the firm have a physical place of business in the state — whether a home office or a separate location? If yes, the firm must register in that state. A place of business nullifies the de minimis exemption entirely, regardless of how few clients you have there.
- If not, how many clients does the firm have residing in that state? This is where the de minimis exemption comes in. Most states will not require you to register until you exceed the client threshold.
The federal baseline is set by the national de minimis standard in Section 222(d): a state may not require registration if the adviser has no place of business there and has had fewer than six clients residing in the state over the past 12 months. In plain terms, most states let an adviser work with five or fewer in-state clients before registration is required. The Uniform Securities Act of 2002, which many states model their laws on, uses the same five-client threshold.
Two points are worth emphasizing. First, the place-of-business condition is often the bigger trigger than the client count — the SEC defines a place of business broadly to include any office where you regularly provide advice, or any location you hold out to the public as one. Second, the de minimis exemption is an exemption from registration, not from regulation: even an exempt adviser remains subject to the anti-fraud provisions of the Advisers Act and owes a fiduciary duty to every client.
State-by-State Differences You Need to Know
Here is where confusion can set in, because each state has its own governing laws. The national standard is a floor, not a ceiling — a state can be more generous than “five or fewer,” but it cannot be more restrictive for an adviser with no place of business there. Most states simply adopt the five-client standard, but a few are notable exceptions:
- Louisiana has no de minimis exemption. An adviser must register with the state to serve even a single Louisiana client, whether or not it has a place of business there.
- Texas follows the five-client de minimis standard for registration, but requires an out-of-state adviser to file a notice (and pay a fee) before taking on its first Texas client.
- A few states, such as New Hampshire and Nebraska, recognize the de minimis exemption for state-registered advisers but not for SEC-registered (federal covered) advisers.
Because state laws vary in the details — and change frequently — an adviser operating across several states should confirm each state’s current rules rather than assume the five-client limit applies everywhere.
Which Clients Count Toward the De Minimis Threshold?
Counting clients correctly is the whole game, and it’s easy to get wrong. A few principles help:
- Natural-person advisory clients generally count — including project-based, hourly, and ongoing financial planning clients, not just AUM clients.
- Institutional clients generally do not count toward the limit, and there is typically no cap on the number of institutional clients you can serve in a state.
- How a “client” and a “resident” are defined can vary by state, and some states exclude additional categories (for example, certain private funds).
Because the count is measured over a rolling 12-month period, firms should track client locations continuously and register before they cross the line — not after.
State Application Requirements: Be Prepared for More Than Form ADV
Once state registration is necessary and Form ADV is submitted, advisers should be prepared to provide the state with additional documentation. The process can be rigorous, costly, and time-consuming, and it varies from state to state.
California, for example, requires far more than Form ADV — advisory contracts, a filing fee, conflict-of-interest disclosures, financial statements and a minimum financial requirements worksheet, a customer authorization for disclosure of financial records, and a Form U-4 for each investment adviser representative (and for certain officers, directors, and owners), among other items. States also frequently request additional information during the review, so firms should be ready to produce supplemental materials promptly and build in enough time to respond.
Best Practices for Managing Multi-State Registration
When registering as an investment adviser at the state level, it is imperative that you correctly calculate the number of clients your firm has and accurately research each state’s de minimis rules. Doing so helps the firm avoid unnecessary costs and filings. Similarities exist among state laws, but that does not mean the full process is identical in every state — so devote the time and resources needed to understand each state’s particular rules and prevent delays.
As a practical matter, if you have three or four clients in a state and expect to add more, begin the registration process sooner rather than waiting for the fifth or sixth client. Registration takes time, and you should not take on the client that pushes you over the threshold until the state has approved your registration.
Frequently Asked Questions
What Is the De Minimis Exemption for Investment Advisers?
The de minimis exemption is a provision of Section 222(d) of the Investment Advisers Act that prevents a state from requiring an adviser to register if the adviser has no place of business in the state and has had fewer than six clients — five or fewer — who reside there during the preceding 12 months.
How Many Clients Can an Adviser Have in a State Before Registering?
Generally, five or fewer under the national standard, provided the adviser has no place of business in that state. Some states are more generous, and a few (such as Louisiana) require registration with even one client, so always confirm the specific state’s rule.
Does Having a Place of Business Trigger State Registration?
Yes. A place of business in a state nullifies the de minimis exemption — you must register there regardless of your client count. “Place of business” is defined broadly to include any office where you regularly provide advice or any location you hold out to the public as one.
Which Clients Count Toward the De Minimis Threshold?
Natural-person advisory clients generally count, including financial planning and hourly clients. Institutional clients are typically excluded, and some states define “client” or “resident” differently — so review each state’s rule before relying on the exemption.
Contact Us for Investment Adviser Registration Support
Determining where — and when — your firm must register can be surprisingly complex, and the cost of getting it wrong is real. If you have questions or need help deciding whether a state registration is required, Core Compliance can help. Contact us at (619) 278-0020 to discuss your firm’s registration needs.
This article is for information purposes and does not contain or convey legal or tax advice. State registration rules and de minimis thresholds vary by jurisdiction and change frequently; confirm current requirements with the relevant state securities regulator before relying on any exemption.
