Wednesday, October 14, 2009

Out-of-State Adviser with 5 clients

A former Pass the 65(c) customer wrote me an email this evening that touches on a few important testable points. He wrote:

I used your program to pass the 65 test in AZ. Thanks so much.

One of my coworkers and I have a disagreement on the number of clients you can have vs. the number of people you can solicit outside of the state you are registered. I say you can have 5 clients outside the state. He says you can only solicit to 5 outside the state and once you solicit 5, you cannot solicit or have more clients even if you get none. Who is right?

Thanks for the help!


Great job on passing a tough test!
Basically, the de minimis exclusion for an out-of-state adviser with no more than 5 clients in another state accomodates financial planners who might have a few clients who end up moving to various states. So, if a few of your clients move to Florida, you can be their adviser without paying licensing fees to Florida. As always, there is a catch. Remember that this exclusion is predicated on the fact that you are not soliciting new clients in the other state. If you're going to solicit clients, or "hold yourself out as an adviser," the other state is going to want you to register. Plus, how can you solicit five clients? To get five clients, I think you'd better call more than 5 people--more like 500 people. Right? The state laws generally say that an adviser can commit fraud even when just soliciting clients, so they like to get people registered if they're "holding themselves out as being an investment adviser in their state." So, your co-worker isn't quite right, either. It's not that you can solicit five people. It's a question of, are you soliciting and "holding yourself out to the public as being an adviser," or not? If you are, you have to register. If you're not, you can have up to 5 clients, as long as you have no physical presence/place of business in that other state.

Here is a snippet from a state law, Pennsylvania's. Their Act states that you're not an investment adviser if you/your firm are: a person who has no place of business in this State and, during the preceding twelve-month period has had not more than five clients in or out of this State and does not hold himself out generally to the public as an investment adviser.

The bold statements are why your buddy is partly right--in general most states won't grant you the de minimis exclusion if you're holding yourself out as being an adviser to the public in their state, which is what you'd be doing by calling or writing to potential clients, or advertising, or even handing out brochures or business cards at a garage sale. In fact, if you sat at a local tavern or diner and simply talked to anyone too slow or lonely to walk away from you about your advisory services, you would be "holding yourself out to the public as an investment adviser."

You both would probably like an absolute answer, but it would depend on the state, the wording of their own statutes, their reading of their own statutes, and their list of priorities. To be on the safe side, get registered before you start soliciting advisory clients in any state. The de minimis exclusion really only works when you have existing clients who happen to move to another state. Once you "hold yourself out to the pubic as being an investment adviser," that state likes to make you register.
And, I'd be on the safe side with all state licensing issues. You're usually talking about an annual fee of a few hundred dollars to get registered and renew each year.

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