De Minimis Exemption

B is correct. Westfield has 6 retail clients in Pennsylvania: 4 individuals plus 2 family trusts. Private trusts are NOT institutional investors (trust companies are, but family trusts are not). Since 6 clients exceeds the de minimis limit of "5 or fewer," Westfield must register in Pennsylvania.

A incorrectly counts institutional clients. The 12 registered investment companies (mutual funds) are institutional investors and do not count toward the threshold. C makes the common mistake of thinking "fewer than 6" means 6 is acceptable, but the limit is "5 or fewer" (maximum of 5). D is incorrect because trusts for individuals are retail clients, not institutional clients.

B is correct. The de minimis exemption allows out-of-state investment advisers with no place of business in the state to have a maximum of 5 retail clients (also phrased as "5 or fewer" or "fewer than 6") in that state during the preceding 12 months without registering.

A (3 or fewer) is too restrictive and not the regulatory threshold. C (6 or fewer) is a common trap answer because "fewer than 6" equals 5, but "6 or fewer" means up to 6, which exceeds the de minimis limit. D (10 or fewer) is not a regulatory threshold and far exceeds the limit.

A is correct. Four clients count as retail clients: the 3 high-net-worth individuals (HNWIs are retail clients unless they meet institutional investor criteria) and the small employee benefit plan with $800,000 (institutional threshold requires at least $1 million in assets). Since 4 clients is within the "5 or fewer" de minimis limit and Beacon has no office in Massachusetts, no registration is required.

B incorrectly counts all clients. Banks and insurance companies are institutional investors and do not count. C forgets to count the small employee benefit plan, which lacks the $1 million minimum to qualify as institutional. D incorrectly treats the employee benefit plan and HNWIs as institutional.

C is correct (the EXCEPT answer). Adding institutional clients does NOT cause loss of de minimis exemption because institutional clients are unlimited and do not count toward the 5-client threshold. An adviser can have 5 retail clients and unlimited institutional clients while maintaining the exemption.

A causes loss of exemption: having a place of business (office or branch) in the state eliminates the de minimis exemption regardless of client count. B causes loss: the 6th retail client exceeds the "5 or fewer" threshold, requiring registration. D causes loss: publicly advertising availability to meet clients in that state creates a "place of business" at the advertised location, eliminating the exemption.

C is correct. Statements 1, 2, and 3 are accurate.

Statement 1 is TRUE: The de minimis exemption is a state-level exemption that applies to both state-registered and SEC-registered (federal covered) investment advisers when determining state registration requirements. SEC registration does not eliminate state de minimis eligibility.

Statement 2 is TRUE: The 5 individual clients count as retail clients (within the "5 or fewer" limit), but the 20 pension funds are institutional investors and do not count toward the threshold. This qualifies for de minimis exemption.

Statement 3 is TRUE: Advertising availability to meet prospects in the state creates a "place of business" in that state, which eliminates the de minimis exemption. The exemption requires no place of business in the state.

Statement 4 is FALSE: Broker-dealers and agents have NO de minimis exemption. This is a critical distinction. De minimis applies only to investment advisers and investment adviser representatives, not to broker-dealers or agents.