5 out-of-state clients

On the Series 65 or 66 exam there will likely be at least one question about registration issues for investment advisers with clients in other states. Maybe something like this:

Barry Mundy is a financial planner with a place of business in State A. Recently, three of his clients moved to State B. Barry has recently placed a billboard in State B offering a "total financial check-up, free of charge" with an 800-number and a link to a website. Therefore
A. Barry must register in State B because he is holding himself out to the public as an investment adviser in State B
B. Barry must register in State B because the clients who moved there were existing clients
C. Barry is exempt from registration requirements in State B because the number of clients there is 3
D. Barry is eligible for federal covered status due to the multi-state adviser exemption

You might have memorized the number 5 and decided that an out-of-state adviser with no more than 5 clients in State B is exempt from registration requirements there. And he is. Except when he isn't. See, that exemption is based on the fact that he is not holding himself out as an adviser in State B. Barry Mundy is definitely holding himself out as an investment adviser in State B, and right there he has to register in State B. He doesn't get to solicit clients and then stop when he gets to 5 . . . or solicit 5 clients. He's either soliciting clients in State B or he isn't. If he is, he has to register there. If he isn't, he can have 5 clients in that state without registering there. Most likely, they're existing clients or referrals . . . but if he wants to drum up business in State B, he needs to register there.

So the answer above is A.

Real World De Minimis

I just had a former client, who passed his Series 66 with an 80%, send me an email wondering if the de minimis exemption for out-of-state advisers with 5 clients actually applies in the real world, since he has 1 client in the state of Colorado but no place of business there.

Here is Question 8 and the answer from the Colorado Division of Securities website:

Q: Are there any exemptions from licensing for an IA located in another state, that are not FCAs?
A: The law contains a diminimus exemption from licensing for an IA that has no place of business in Colorado and has five or less clients in Colorado.

By "FCA" can you guess what they mean? Federal Covered Adviser. So, if I'm not a federal covered adviser, I have no place of business in Colorado, can I have 5 clients there without registering there? Yes. This saves you some time and money. Of course, if you defraud these Colorado residents, Colorado can come after you, and so can your state securities Administrator. But, you don't plan to do anything like that, of course.

And, of course, things change when the adviser employs an IAR with a place of business in Colorado, as # 9 on the website explains:

Q: What is required of an IA located in another state that is not a FCA, has five or less clients in Colorado and employs one or more IARs with a place of business in Colorado?
A: The difference between this question and the one immediately above is the IA employs IARs with a place of business in Colorado. It does not matter how many clients are located in Colorado. An IA should file a current Form ADV and pay the appropriate fee. For each IAR with a place of business in Colorado the IA shall file a Form U-4 for each individual and pay the IAR fee.

As you can see--and as I've written before--much of the information that you study for your exam is connected to the real world. It's just buried under a bunch of tricky exam questions filled with mumbo-jumbo. But the de minimis exemption is 5 on the test and 5 in the real world. Just thought you'd like to know that.