TDCI’s Securities Division Provides Clarity to Recently Amended Rules for Investment Advisers Relying on De Minimis Exemption

NASHVILLE – The Tennessee Department of Commerce & Insurance’s (TDCI) Securities Division recently amended its current rules to allow certain investment advisers, private fund advisers, and venture capital firms whose only clients are private funds that meet the new rule’s definition, to be exempt from registration and custody requirements. However, these firms will be required to notice file and annually renew this notice filing with the Division.

Since the rule change, however, there has been some confusion among some advisers regarding the de minimis exemption and how the custody requirements apply.  In an effort to curb confusion, TDCI is providing greater clarification and encouraging advisers to contact the Division with any questions they may have.

“Regulatory and compliance requirements are intended to protect Tennessee investors and maintain integrity in the securities industry,” said TDCI Assistant Commissioner for the Securities Division Elizabeth Bowling. “Our Division recognizes the potential for some regulatory requirements to impede small business practices in our state. This new exemption for certain investment advisers, known as the ‘private fund exemption,’ strikes a balance between the regulatory requirements that ensure investor protection while still promoting venture capitalism in Tennessee. Working collaboratively with advisers in Tennessee speaks to our mission of empowering and protecting Tennesseans.”

“The Division has worked to become a resource and partner for state-registered investment advisers,” said TDCI Director April Odom. “We listened to industry participants and registrants and recognize the challenges facing small businesses and investment advisers. The adoption of the private fund exemption has eased regulatory requirements for investment advisers and encouraged business for Tennesseans without compromising investor protections.”

To clarify, the de minimis exemption never exempted an investment adviser from the requirement to comply with the custody rules.

However, those who meet the requirements of the newly created private fund exemption, found at Tennessee Securities Rule 0780-04-03-.05 (1)(c) are exempt from custody requirements.

The new exemption allows a qualifying investment adviser to notice file as an exempt reporting adviser with the Division rather than registering as an investment adviser. The advisers who qualify for the exemption and notice file will also require an annual renewal filing. All filings are completed through the Investment Adviser Registration Depository (IARD) system. 

The de minimis exemption, found in Tennessee Securities Rule 0780-04-03-.05(1)(b), exempts an investment adviser from the registration requirements if the adviser is domiciled in Tennessee and, during the course of the preceding 12 months, has had fewer than 15 clients and neither holds itself out generally to the public as an investment adviser or acts as an investment adviser to any investment company registered under the Investment Company Act.

The anti-fraud provision found in T.C.A. § 48-1-121(b)(3) makes it unlawful for an investment adviser to take or have custody of any securities or funds of any client except as the Commissioner may by rule permit, or unless the person is registered as a broker-dealer. The rule permitting custody is found in Tennessee Securities Rule 0780-04-03-.07; the reliance of such requires an investment adviser to be registered, unless specifically excepted in the rule.

This means an investment adviser cannot rely on the de minimis exemption once it takes custody or possession of funds or securities, unless it is an SEC-registered investment adviser that complies with SEC Rule 206(4)-2 (17C.F.R. § 275.206(4)-2). See also Tennessee Securities Rule 0780-04-03-.07(5).

Custody requirements may be found under Tennessee Securities Rule 0780-04-03-.07. These requirements include: Annual audited financials, and a surprise examination of client funds.

Simply put, if an investment adviser has custody in any capacity, it cannot rely on the de minimis exemption unless it is an SEC-registered investment adviser that complies with SEC Rule 206(4)-2 (17C.F.R. § 275.206(4)-2).

For more information about these amendments or to contact TDCI’s Securities Division, please visit tn.gov/securities, email securities.2@tn.gov, or call 800-863-9117.

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