Legal Framework Synthesis

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?

Investment Adviser (IA): Firm providing advice. Registers With: SEC OR state (not both). Compensation: Fees (AUM-based, hourly, flat).

Investment Adviser Rep (IAR): Individual representing IA. Registers With: State only. Compensation: Salary, fees.

Broker-Dealer (BD): Firm executing transactions. Registers With: SEC AND state (both). Compensation: Commissions, markups.

Agent: Individual representing BD/issuer. Registers With: State only. Compensation: 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:

1. Gives advice on securities.

2. In the business of advising (regular activity).

3. 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.): Lawyers, Accountants, Teachers, Engineers.

BD Exclusions: Banks, savings institutions, trust companies; Issuers; Agents (register separately); 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): 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.

BD Registration Exemptions: 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?

General assets under management (AUM) route for investment advisers: Other SEC eligibility bases and exemptions can change the result. Assess eligibility in the annual updating amendment, rather than reacting to every daily AUM fluctuation.

Less than $25 million AUM: State only (SEC prohibited unless an exception applies).

$25M to $100M AUM: State only (unless 15-state rule, or the home state does not examine advisers).

$100M to $110M AUM: Eligible for SEC (optional).

$110M or more AUM: SEC required.

Annual update reports below $90M (if SEC registered): Withdraw within 180 days of fiscal year-end unless another SEC eligibility basis applies.

Memory Aid: The general AUM route: $100M = eligible, $110M = required, below $90M = review withdrawal and other eligibility bases.

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?

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: Annual update below this = withdraw unless otherwise SEC-eligible; 180 days of fiscal year-end.

$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% or more voting rights or profit entitlement: Presumption of control for the related-adviser SEC registration exception.

30 days: State registration effective date.

45 days: SEC registration effective date.

For that related-adviser exception, control means the power to direct management or policies through ownership, contract, or otherwise. The percentage creates a presumption; actual control can exist below it. Eligibility also requires an eligible SEC-registered adviser and the same principal office and place of business.

How Do Exclusions Differ From Exemptions?

Excluded: Definition: NOT an IA/BD at all. Antifraud rules: Still apply. Example (IA): Lawyer giving incidental advice. Example (BD): Bank; also a BD with no office in the state dealing only with institutions.

Exempt: Definition: IS an IA/BD but no registration required. Antifraud rules: Still apply. Example (IA): IA with no office in the state + 5 or fewer clients there. Example (BD): 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 ADV Part 1A: Who Files: All advisers (SEC and state). Purpose: Registration, business info. Filed With: SEC or state (via IARD).

Form ADV Part 1B: Who Files: State-registered advisers only. Purpose: Additional state-specific questions. Filed With: State (via IARD).

Form ADV Part 2A: Who Files: All advisers. Purpose: Brochure (narrative disclosure). Filed With: Delivered to clients.

Form ADV Part 2B: Who Files: State registrants file; SEC registrants retain without filing. Purpose: Brochure supplement (IAR info). Filed With: Delivered to required clients; SEC copies available to staff on request.

Form ADV Part 3 (Form CRS): Who Files: SEC-registered advisers with retail investors. Purpose: Relationship summary. Filed With: SEC (via IARD); delivered to retail investors.

Form U4: Who Files: Agents. Purpose: Individual registration. Filed With: State (via CRD).

Form U4: Who Files: IARs. Purpose: Individual registration. Filed With: State (via IARD).

Form U5: Who Files: BDs, IAs. Purpose: Terminate individual registration. Filed With: State (via CRD/IARD, matching the U4).

Form BD: Who Files: Broker-Dealers. Purpose: BD registration. Filed With: SEC and state.

Form ADV-W: Who Files: Investment Advisers. Purpose: Withdraw registration. Filed With: SEC or state.

Form BDW: Who Files: Broker-Dealers. Purpose: Withdraw registration. Filed With: 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.

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

Administrator Can Do: Issue cease and desist orders. Cannot Do: Issue injunctions (court only).

Administrator Can Do: Deny, suspend, revoke registrations. Cannot Do: Impose criminal penalties (court only).

Administrator Can Do: Investigate violations. Cannot Do: Approve or pass on securities merit.

Administrator Can Do: Subpoena witnesses and documents. Cannot Do: Make arrests.

Administrator Can Do: Refer criminal cases to prosecutors. Cannot Do: 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 is not equal to injunction. C&D is administrative; injunction is judicial.

What Are the Registration Actions?

Denial: Meaning: Refuse initial registration. Due Process: Prior notice + opportunity for hearing + written findings (a summary postponement may come first).

Suspension: Meaning: Temporarily halt registration. Due Process: Prior notice + opportunity for hearing + written findings (a summary suspension may come first).

Revocation: Meaning: Permanently terminate registration. Due Process: Prior notice + opportunity for hearing + written findings.

Cancellation: Meaning: Nonpunitive termination (death, missing, etc.). Due Process: Prior notice + opportunity for hearing + written findings.

Withdrawal: Meaning: Voluntary termination by registrant. Due Process: 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:

1. Who is this person? (IA, IAR, BD, agent, issuer).

2. Are they excluded from the definition? (L.A.T.E., banks, etc.).

3. If not excluded, are they exempt from registration? (de minimis, private fund/venture capital adviser, etc.).

4. If registration required, with whom? (SEC vs state, AUM thresholds).

5. What form do they file? (ADV, U4, BD).

6. 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 general AUM route uses $100M for optional SEC registration and $110M for mandatory registration. An annual update below $90M requires withdrawal within 180 days of fiscal year-end unless another eligibility basis applies.

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.