When Congress passed the National Securities Markets Improvement Act of 1996, it drew a line. Large investment advisers (eventually, after Dodd-Frank, those with more than $110 million under management) would register with the SEC. The states would lose jurisdiction over the firms themselves. That was the preemption half of NSMIA.
The compromise half was smaller but consequential. States insisted on keeping jurisdiction over the humans: the people sitting across the table from the client. That is why, today, an adviser can be SEC-registered and its representative can still be required to register with the state where the representative has a place of business. The firm answers to the SEC. The representative answers to the state. This is the entire logic of Chapter 7, and it is one of the three most frequently tested distinctions on the exam.
Section 1: IAR Definition Under USA §401
An investment adviser representative (IAR) is a partner, officer, director, or other individual employed by or associated with an investment adviser who does any of the following:
- Makes any recommendations or otherwise renders advice regarding securities
- Manages accounts or portfolios of clients
- Determines which recommendation or advice regarding securities should be given
- Solicits, offers, or negotiates for the sale of investment advisory services
- Supervises employees who perform any of the above
Test tip: A research analyst who never meets a client is still an IAR because of item 3. A solicitor who just refers clients in exchange for a fee is still an IAR because of item 4. A supervising principal is still an IAR because of item 5. Clerical staff, receptionists, and pure back-office employees are not IARs.
Section 2: State-Registered IA Trigger
If the investment adviser itself is state-registered (AUM is under the federal threshold), its representatives must register with the state if EITHER of the following is true:
- (A) The IAR has a place of business in that state, OR
- (B) The IAR has more than 5 non-institutional clients in that state in any 12 consecutive months
Either condition triggers registration. The IAR only needs to clear one of these bars, not both.
Section 3: IAR Registration for a Federal Covered IA
If the investment adviser is federal covered (SEC-registered, usually because AUM is above the federal threshold), the rule is different and simpler.
An IAR of a federal covered IA must register with a state only if the IAR has a place of business in that state. Client count does not matter. Not 5, not 50, not 500. If the IAR has no place of business in the state, the state cannot require registration of that IAR no matter how many clients the IAR serves there.
This is the single most tested distinction in Chapter 7. Say it out loud: for a state IA, place of business or more than 5. For a federal covered IA, place of business only.
Section 4: NASAA Model Rule 202(a)-2
NASAA Model Rule 202(a)-2 governs the mechanics of becoming and staying a registered IAR. It was adopted September 9, 1988 and amended September 6, 2000.
Initial Application
The initial application is made by filing Form U-4 through the IARD (Investment Adviser Registration Depository, the electronic system run by FINRA on behalf of NASAA and the SEC). The application must include proof of passing the required exam (Series 65 or Series 66 plus Series 7) and the filing fee.
The 30-Day "Promptly" Rule
"An amendment will be considered to be filed promptly if the amendment is filed within thirty (30) days of the event that requires the filing of the amendment."
Lock in the definition. "Promptly" in the IAR registration context means within 30 days of the triggering event. Not 10 days. Not 60 days. (Form U-4 has been the universal registration form since 1980, which means every adviser in America has spelled their name the same way on the same form for forty-plus years. The form is not the challenge. The 30-day deadline is.)
Annual Renewal and Completion
Annual renewal is filed through IARD with the required fee. An application is not considered filed until the fee and all required submissions have been received by the Administrator. Missing fee, no filing.
Section 5: NSMIA Preemption and Antifraud
IAA §203A(b)(1): State Preemption With an IAR Carve-Out
The general rule is that states may not require registration of federal covered advisers themselves. If an adviser is SEC-registered, a state cannot make the firm register with the state as an IA. But §203A(b)(1) carves out an exception: states retain the right to require registration of investment adviser representatives who have a place of business in the state, even if the advisory firm itself is federal covered.
The federal law preempts state registration of the firm but expressly preserves state registration of the individual IAR when that IAR has a place of business in the state. Firm answers to the SEC. Rep answers to the state.
IAA §203A(b)(2): State Antifraud Authority Preserved
Even though states cannot require a federal covered IA to register, states retain full authority to investigate and bring enforcement actions against SEC-registered advisers for fraud or deceit. Federal preemption under §203A(b)(1) does not touch state antifraud power. A state securities administrator can still sue an SEC-registered adviser for fraud under §102, even though the state has no power to require that same adviser to register. Registration and antifraud authority run on separate tracks.
Section 6: Thresholds, Traps, and Memory Tactics
Quantitative Thresholds for Chapter 7
| Threshold | What it governs |
|---|---|
| More than 5 non-institutional clients | De minimis trigger for IAR registration (state IA only) |
| 30 days | Deadline for "prompt" Form U-4 amendments under Rule 202(a)-2(c)(3) |
| Place of business | Only registration trigger for IARs of federal covered IAs |
Common Traps
Trap 1: Federal covered IA and client count. Most common Chapter 7 trap. An IAR working for an SEC-registered firm with 50 clients in a state but no office there does NOT need to register in that state. Client count is irrelevant when the firm is federal covered. Only place of business matters.
Trap 2: Confusing IAR rules with IA rules. The investment adviser itself follows an AUM-based split between state and federal registration (Chapter 6). The IAR follows a completely different logic based on place of business and client count. Do not apply AUM reasoning to IAR questions.
Trap 3: "Promptly" means 30 days. Not 10 business days, not 60 days. If a question offers 10 business days, that is the IA oral discretion rule from Chapter 3, not the Form U-4 amendment rule.
Trap 4: "More than 5" means 6 or more. Exactly 5 clients does not trigger registration. Six crosses the line.
Trap 5: A solicitor is an IAR. A person who solicits advisory clients for compensation is generally acting within item 4 of the IAR definition and must register.
Trap 6: A supervisor is an IAR. Item 5 of the definition expressly includes anyone who supervises employees performing IAR functions.
Trap 7: Passing the Series 63 does not register you. Passing the exam is one requirement. Registration is a separate filing through Form U-4 and IARD.
Memory Tactics
- "Place OR more than 5 for state. Place only for federal." Seven words. Memorize this sentence exactly. It answers most Chapter 7 questions.
- 30 days equals promptly. Form U-4 amendment deadline.
- Form U-4 in, Form U-5 out. Registration, then termination.
- IARD is the filing pipe. Not CRD for IARs.
- Firm to SEC, rep to state. NSMIA preemption logic.
Chapter 7 is the shortest chapter in the study guide and the highest-leverage hour of review for those three questions. Chapter 8 (Remedies) closes the loop on what happens when any of the rules in Chapters 1 through 7 are broken.