State-Registered vs. Federal-Covered by AUM

Federal investment adviser laws

The this material is a state-based exam that primarily focuses on the Uniform Securities Act (USA), but it also covers federal laws such as the Investment Advisers Act of 1940. Investment advisers — financial firms in the business of providing advice — are regulated at either the federal level or the state level.

In the mid-1990s, the National Securities Market Improvement Act of 1996 (NSMIA) was enacted to reduce over-regulation and promote efficiency in the securities markets.

The Dodd-Frank Wall Street Reform Act (usually called Dodd-Frank) set specific AUM thresholds and grouped advisers into three categories:

• Large investment advisers
• Mid-size investment advisers
• Small investment advisers

🔑 Numbers & deadlines

🔑 DECISION TABLE — State-registered vs. federal-covered by AUM band

🔑 Buffer / hysteresis rules (as stated)

🔑 Transition deadlines (commonly tested)

Large investment advisers

• 🔑 Advisory firms with at least $100 million of AUM are considered large investment advisers.
• Once a firm reaches $100 million of AUM, it is eligible to register with the SEC as a federally covered adviser.
• ⚠️ If the firm exceeds $110 million of AUM, it must register with the SEC as a federally covered adviser.
• Many advisers choose to register with the SEC once they reach $100 million of AUM.
• 🔑 Dodd-Frank also allows an adviser that expects to reach at least $100 million of AUM within 120 days to register as a federal-covered adviser (meaning it’s eligible, but not required).
• A federally covered adviser that qualifies for SEC registration may keep its federal-covered status until its AUM falls below $90 million. Once it drops below $90 million, the adviser must withdraw its federal registration and register with the appropriate states.

🔑 Definitions

Mid-size investment advisers

In a few situations, a mid-size adviser becomes eligible for SEC registration as a federal-covered adviser:

*📌 The text says: “Don’t worry about the specifics here. The language quoted above comes directly from SEC rules and refers to uncommon situations. The key point is that advisers in these situations may be treated as federal-covered. Don’t worry about the context.”

Small investment advisers

• 🔑 Advisory firms with less than $25 million of AUM are considered small investment advisers.
• Like mid-size advisers, small advisers are typically state-registered.
• ⚠️ However, a small adviser can still be federal-covered under the multi-state adviser rule. If the adviser operates in 15 or more states, it qualifies for SEC registration as a federal-covered adviser.

🔑 Federal-covered REGARDLESS of AUM

In addition to AUM size, NSMIA identified two other situations where an adviser is considered federal-covered:

Advisers to registered investment companies

As covered in a previous chapter, there are several types of investment companies:

Example: many stock-based Vanguard funds are managed by a registered investment adviser called Vanguard Equity Index Group. This firm (a Vanguard subsidiary) is a federal-covered adviser registered with and regulated by the SEC. The same is true for other investment advisers hired to manage registered investment companies.

Excluded persons

The IA40 explicitly excludes certain persons, in specific circumstances, from the definition of an investment adviser. Many of these exclusions overlap with state law, and they’re covered later in this unit. One exclusion is unique at the federal level and does not appear in the USA.

Sidenote — Pension consultants

You learned about pension consultants in a previous chapter. These are persons who assist in managing the assets of a pension fund.

• SEC Release IA-1092 explicitly defines a pension consultant as an investment adviser, but it does not specify whether the consultant is regulated at the state or federal level.
• 🔑 Dodd-Frank provides guidance: a pension consultant with at least $200 million of AUM is eligible to register with the SEC as a federal-covered adviser.
• ⚠️ The choice is up to the consultant: it may register with each state where it does business, or register only with the SEC.

Key points

Investment Advisers Act of 1940

• Federal law regulating investment advisers

National Securities Market Improvement Act (NSMIA)

• Established the term “federal-covered”
• Enforces federal laws over state laws if common jurisdiction exists

Federal-covered advisers

• Register with and regulated by the SEC
• Provide notice filing to the state

Mandatory registration as federal-covered adviser

• Advisers exceeding $110 million AUM
• Advisers to registered investment companies

Eligible for registration as federal-covered adviser

• Advisers with $100 - $110 million AUM
• Advisers operating in 15 or more states
• Pension consultants with $200 million+ AUM
• Advisers expecting to qualify as federal-covered within 120 days

Required to de-register as federal-covered adviser

• If falling below $90 million AUM

If only providing advice on US Gov’t securities

• Excluded from the definition of investment adviser under IA40
• Considered a federal-covered adviser (from the state’s perspective)

More from Investment advisers: Disclosures & fees · Financial requirements · Effective registration · Post-registration obligations · Exemptions

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.