De Minimis Rule For State Registrations and Notice Filing

What is considered an investment advisory client?

When it comes to the definition of an investment advisor client it is not as cut and dry as one might think. The different regulatory bodies look at what constitutes a client and what counts as a client differently. Certain types of clients will not count toward the number of clients that a registered and unregistered investment advisor may have. The SEC labels a single “client” a client if that said client constitutes one or all of the following attributes:

  • A natural person

  • A minor child of said natural person

  • A relative, spouse or partner with the same principle residence

  • All accounts and trusts of which the natural person(s) and relatives are the only primary beneficiaries

Therefore, to the SEC, a client is not limited too just one person with one account and one tax identification number. The definition of a client is dynamic and encompassing. As for organizational clients, the SEC has set forth the following:

  • Identical shareholders, partners & beneficiaries; the IA delivers advice based on the organizations investment objective

  • Any separate investment advice given to an organization or individual a will constitute as a separate client

  • Any Limited Liability Company and any Limited Partnership where the advisor is a general partner, managing member or investment advisor

Additionally, the SEC considers non-paying clients, clients, and will be considered as such when looking at the 6 client De Minimis limit.

States can differ tremendously when determining what constitutes a client. The State of Connecticut, for example, states that non-paying clients are not considered clients. Also, there are a number of states that do not include the following as investment advisory firm clients:

  • Broker dealers

  • Depository organizations

  • Investment companies

  • Insurance companies

  • Government Agencies

  • Municipalities

  • Other investment advisors

  • Employee benefit plans in excess of $1 million

  • Certain institutional investors

  • Accredited investors

As you can see, different states’ registration rules can differ drastically, and can be complex and specific. This is why it is important to have a good understanding of the subject when determining whether your firm should be registered or not in a specific state. Questions regarding registration should be directed to your Chief Compliance Officer or a full service compliance firm such as Aurora Compliance Solutions. Contact Aurora to learn more…

Written by: Edward Romanowsky