Investment advisers that are prohibited from registering with the Commission (e.g. advisers that do not have assets under management of $25 million) generally must register with the state(s) in which they transact advisory business (e.g., have advisory clients or have a place of business), unless they are exempt from investment adviser regulation under state law. These advisers will be regulated primarily under state law administered by state securities authorities, rather than federal law administered by the SEC.

An adviser should check with each state in which it proposes to transact business, not just the state in which the adviser is located, for information about investment adviser regulation. The names and addresses of the appropriate regulating official for each state can be obtained by contacting the North American Securities Administrators Association, Inc., One Massachusetts Ave., N.W., Washington, D.C. 20001, telephone (202) 737-0900.

Most provisions of the Advisers Act and Commission rules apply solely to SEC-registered advisers, and therefore are not applicable to state-registered advisers. Thus, state-registered advisers are not required to file and amend Form ADV with the Commission under Rule 204-1; comply with the SEC's books and recordkeeping requirements under Rule 204-2; or deliver a brochure to clients under Rule 204-3. State investment adviser laws, however, may impose substantially the same requirements. For example, many state laws require advisers to register by filing Form ADV with the state.

State-registered advisers are subject to Section 206 of the Advisers Act, which prohibits fraudulent conduct. The Commission has authority to bring enforcement actions against state-registered advisers for fraud. Other provisions of the Advisers Act that apply to state-registered advisers include:

• Section 204A, which requires advisers to establish, maintain, and enforce written procedures reasonably designed to prevent the misuse of material nonpublic information;

• Section 205, which contains prohibitions on advisory contracts that (i) contain certain performance fee arrangements, (ii) permit an assignment of the advisory contract to be made without the consent of the client, and (iii) fail to require an adviser that is a partnership to notify clients of a change in the membership of the partnership. (The exemption provided in Rule 205-3 for certain performance fee arrangements, however, is available to all advisers, including state-registered advisers); and

• Section 206(3), which makes it unlawful for any investment adviser acting as principal for its own account to knowingly sell any security to, or purchase any security from, a client, without disclosing to the client in writing before the completion of the transaction the capacity in which the adviser is acting and obtaining the client's consent. (The exemption provided in Rule 206(3)-2 from the prohibitions of Section 206(3), however, is available to all advisers, including state-registered advisers.)