The Five-Client Rule, the Place of Business Test and Why Broker-Dealers Have No Equivalent

The de minimis exemption allows an investment adviser to work with a small number of clients in a state without registering there. If the adviser has no place of business in the state and has had fewer than six clients resident there during the preceding 12 months, the state cannot require it to register.

The term comes from the Latin phrase de minimis non curat lex, meaning the law does not concern itself with trifles. A handful of clients in a state is treated as too small to justify a full registration.

This guide covers how the exemption works, how clients are counted, how it applies to advisers and their representatives, why there is no equivalent for broker-dealers, worked examples, the exam traps and five practice questions. For the bigger picture on registration, FRC’s guide to investment advisor representative requirements by state explains how each state approaches it.

Where the Exemption Comes From

Investment advisers are regulated at two levels. Larger advisers register with the Securities and Exchange Commission, while smaller advisers register with the securities regulator in each state where they do business.

Before 1996, an adviser with clients in many states could face a separate registration in each one, even if it had only one or two clients in some of them. The National Securities Markets Improvement Act of 1996 created a national de minimis standard to remove that burden.

That standard sits in the Investment Advisers Act of 1940, and it overrides any stricter state rule. The Uniform Securities Act, the model state law drafted with input from NASAA, reflects the same approach.

Where This Topic Appears on the Exams

The de minimis exemption appears in the laws and regulations section of the Series 65, alongside the rules on who must register, where and with which regulator. It is one of the most tested numbers on the exam because the wording of the questions is designed to catch candidates out.

FRC’s Series 65 Exam Preparation course covers adviser registration, the Uniform Securities Act and the exemptions in detail, and the exam requires no sponsor. The SIE Examination Preparation course introduces the federal and state regulators that sit behind these rules.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. The de minimis rule is a single number with a few conditions, and learning it precisely turns it into reliable marks.

The Two Conditions of the Exemption

The exemption has two conditions, and both must be met. The first is that the adviser has no place of business in the state.

A place of business is an office where the adviser provides advisory services or holds itself out as doing so, or any other location it presents to the public as a place where advice is given. Even a small branch office or a home office used to meet clients counts.

The second condition is that, during the preceding 12 months, the adviser has had fewer than six clients who are residents of the state. In other words, five clients or fewer keeps the adviser within the exemption, while a sixth client ends it.

How Clients Are Counted

Counting clients is where many exam questions focus. Under the SEC’s rules, a natural person and certain family members who share the same principal residence are counted as a single client, as are accounts in which they are the only owners.

A corporation, partnership, trust or other legal entity is counted as one client, as long as it receives advice based on its own objectives rather than those of its individual owners. A natural person’s residence is where they live, and an entity’s residence is its principal office and place of business.

The count looks back over the previous 12 months, not the calendar year. An adviser that had five resident clients last spring and takes on a sixth this autumn needs to look at the rolling period, not just the current list.

How It Applies to State-Registered Advisers

For a state-registered adviser, the exemption works on a state-by-state basis. An adviser registered in its home state can take on up to five clients in a neighbouring state without registering there, provided it has no office in that state.

Once it reaches a sixth client resident in that state, it must register there before continuing. If it opens an office in the state, it must register immediately, however few clients it has.

This is why advisers whose clients move or who market across state lines track their client counts carefully. A missed registration is a violation, even if the adviser’s home state registration is fully in order.

How It Applies to Federal Covered Advisers

Advisers registered with the SEC are known as federal covered advisers, and states cannot require them to register. However, states can require them to make a notice filing, which means filing a copy of their SEC paperwork and paying a fee.

The de minimis standard applies here too. A state can only require a notice filing from a federal covered adviser that has a place of business in the state or has had more than five clients resident there in the preceding 12 months.

FRC’s guide to what a registered investment adviser is explains the difference between SEC and state registration. Generally, advisers with $110 million or more in regulatory assets under management must register with the SEC, while those below $100 million register with the states, and advisers between the two figures may choose.

The Institutional Client Exemption

There is a separate exemption that has no client limit at all. Under the Uniform Securities Act, an adviser with no place of business in a state does not need to register there if its only clients in the state are institutions.

These include investment companies, banks, insurance companies, trust companies, other investment advisers, broker-dealers and other institutional investors. An adviser serving 50 institutional clients in a state can rely on this exemption, while one serving six individuals cannot rely on de minimis.

The two exemptions are often tested together. The question to ask is who the clients are, and only if they include individuals does the five-client count come into play.

Investment Adviser Representatives

The individuals who give advice on behalf of an adviser are investment adviser representatives. Their registration follows the adviser’s position in the state.

For representatives of federal covered advisers, a state can generally only require registration if the representative has a place of business in that state. A representative working from an office in New Jersey for an SEC-registered adviser registers in New Jersey, even if many of the clients live in New York.

For representatives of state-registered advisers, registration generally follows the adviser. If the adviser is exempt in a state under de minimis and the representative has no place of business there, the representative usually does not need to register there either. FRC’s guide to how IAR registration works covers the process in detail.

No Numerical De Minimis for Broker-Dealers

This is one of the most important exam traps in the topic. There is no five-client de minimis exemption for broker-dealers or their agents.

A broker-dealer with no place of business in a state is exempt from registering there only in limited situations. Examples include dealing only with issuers, other broker-dealers and institutional investors, or dealing with an existing customer who is temporarily in the state rather than a resident.

The temporary presence rule is sometimes called the snowbird rule. A broker-dealer can continue to serve an existing customer who spends the winter in another state, but taking on a single new individual customer resident in that state requires registration there.

Comparing the Exemptions

Worked Example: Crossing the Threshold

A state-registered adviser based in Ohio has no office outside Ohio. Over the past 12 months it has advised four individual clients who live in Indiana.

It does not need to register in Indiana, because it has no place of business there and fewer than six resident clients. It then signs a married couple who live together in Indianapolis and share a joint account.

The couple share a principal residence, so they count as one client, bringing the total to five. The adviser is still within the exemption, but its next Indiana client would require it to register there first.

Worked Example: The Office Problem

A different adviser has only two clients in Kentucky. To make meetings easier, it rents a small office in Louisville and lists it on its website as a location where clients can meet the team.

The office is a place of business, so the de minimis exemption is no longer available. The adviser must register in Kentucky, even though it has only two clients there.

Had it met the clients at their homes or in a hotel without presenting any Kentucky location to the public, the exemption would still apply. The office, not the client count, is what changes the answer.

Worked Example: The Snowbird Client

A broker-dealer registered only in New York has a long-standing customer who spends every winter in Florida. While in Florida, the customer calls to place a trade.

The broker-dealer can accept the order without registering in Florida, because the customer is an existing customer who is not a Florida resident. If the customer later sells the New York home and becomes a Florida resident, the broker-dealer and the agent would need to be registered in Florida to continue the relationship.

Had this been an investment adviser instead, the five-client de minimis count would apply. The same facts can give different answers depending on whether the firm is an adviser or a broker-dealer.

De Minimis in Other Areas

The term de minimis appears elsewhere in finance, always meaning that something is too small to count for a particular rule. Candidates should not confuse the adviser exemption with these other uses.

In bond taxation, the market discount de minimis rule treats a small discount as zero. If a bond is bought at a discount of less than 0.25% of its face value multiplied by the number of full years to maturity, the gain at maturity is generally taxed as a capital gain rather than as ordinary income.

Firms also apply de minimis thresholds in compliance areas such as gifts and personal trading. These are firm or industry limits, and they have nothing to do with the five-client state registration count.

How the Exemption Connects to an Adviser’s Duties

The de minimis exemption removes a registration requirement, but it never removes an adviser’s obligations to its clients. An adviser serving five clients in a neighbouring state owes each of them the same fiduciary duty as its home state clients.

The antifraud provisions of the state’s securities law still apply too. An adviser that misleads a client in a state where it is exempt from registration can still face enforcement action from that state’s securities regulator.

Compliance teams therefore track client residences, office locations and registration status together. The aim is to register before the sixth client or the first office, not after a regulator notices.

The Exam Traps

The first trap is the number itself. The rule is fewer than six clients, which means five or fewer, and questions often describe a sixth client to test whether candidates apply the limit correctly.

The second trap is ignoring the place of business condition. Any office in the state removes the exemption, regardless of how few clients the adviser has.

The third trap is applying de minimis to broker-dealers, which have no numerical exemption. The fourth trap is forgetting that a couple sharing a principal residence counts as one client, and that the count covers the preceding 12 months rather than the calendar year.

FRC’s guide to Series 65 ethics and laws questions and exam traps covers more traps in this area. For the full list, see FRC’s guide to Series 65 exam traps and common mistakes.

A Memory Aid

Remember “no office, five or fewer, twelve months back.” That covers the two conditions and the look-back period.

For broker-dealers, remember “advisers count clients, brokers do not.” Only investment advisers have a numerical de minimis exemption.

Practice Questions

Question one: an adviser has no office in a state and four resident clients. Must it register there? No, it qualifies for the de minimis exemption.

Question two: the same adviser opens an office in the state. Must it register, even with only four clients? Yes, having a place of business removes the exemption.

Question three: a husband and wife who share a home and a joint account are advised by the same adviser. How many clients is that for de minimis purposes? One.

Question four: a broker-dealer with no office in a state takes on one new individual customer who lives there. Must it register in that state? Yes, there is no numerical de minimis exemption for broker-dealers.

Question five: an adviser with no office in a state has 30 clients there, all of them banks and insurance companies. Must it register? No, it can rely on the institutional client exemption.

Related Questions

The de minimis exemption is one part of the wider question of who must register as an adviser and with whom. FRC’s guide to investment advisor representative vs registered investment adviser explains how firm and individual registration fit together.

Get Exam-Ready

Registration questions reward precise reading. Once the five-client limit, the place of business condition and the broker-dealer exception are clear, these questions become some of the most dependable marks on the exam.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE or both, structured exam preparation turns topics like state registration into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

The de minimis exemption lets an investment adviser with no place of business in a state and fewer than six resident clients over the preceding 12 months work there without registering or, for federal covered advisers, notice filing. It does not apply to broker-dealers, and it never removes an adviser’s fiduciary or antifraud obligations.

Remember “no office, five or fewer, twelve months back,” and you will be ready for every version of this question the exam can ask.