TENNESSEE SECURITIES DIVISION GUIDANCE ON THE DE MINIMIS EXEMPTION AND CUSTODY RULES

This
post
applies
to
Tennessee
investment
advisers
and
private
fund
managers
relying
on
the
de
minimis
exemption
from
registration
under
Tennessee
securities
law.
On
July
10,
2025,
the
Tennessee
Securities
Division
published

a
new
interpretation
significantly
affecting
how
this
exemption
interacts
with
custody
requirements.
This
advisory
outlines
the
Securities
Division’s
new
position
and
discusses
alternative
compliance
strategies
fund
managers
may
consider.

Many
Tennessee
investment
advisers
have
relied
on
the
“de
minimis
exemption”
under
Tennessee
Securities
Rule
0780-04-03-.05(1)(b)
to
avoid
registration.
This
exemption
applies
to
advisers
with
fewer
than
15
clients
(counting
each
fund
as
one
client)
who
do
not
hold
themselves
out
publicly
as
investment
advisers.
Firms
historically
understood
and
interpreted
this
exemption
as
removing
them
from
the
definition
of
“investment
adviser,”
thereby
exempting
them
from
registration
and
all
other
requirements
applicable
to
investment
advisers,
including
the
Tennessee
Custody
Rule
(Rule
0780-04-03-.07).
However,
as
discussed
below,
the
Tennessee
Securities
Division
has
recently
taken
a
different
position.

The
Securities
Division’s
New
Position

On
July
10,
2025,
the
Securities
Division
released
an
interpretation
asserting
that
the
de
minimis
exemption
does
not,
and
never
did,
exempt
advisers
from
the
Tennessee
Custody
Rule
(Rule
0780-04-03-.07).
The
Securities
Division
further
asserted
that
only

registered
investment
advisers
can
rely
on
the
Tennessee
Custody
Rule
to
satisfy
custody
requirements.

Custody
is
a
significant
issue
for
private
fund
managers
because
of
the
typical
legal
structure
of
private
funds.
A
private
fund
manager
typically
also
serves
as
the
fund’s
general
partner,
managing
member,
or
comparable
role.
This
position
inherently
grants
the
adviser
legal
ownership
of
or
direct
access
to
the
fund’s
bank
and
brokerage
accounts,
including
the
authority
to
wire
funds,
execute
trades,
and
deduct
advisory
fees.
Regulators,
including
the
Tennessee
Securities
Division,
have
traditionally
taken
the
position
that
having
this
level
of
access
and
authority
generally
constitutes
“custody”
of
client
assets.

By
claiming
that
private
fund
managers
relying
upon
the
de
minimis
exemption
must
comply
with
the
Tennessee
Custody
Rule
and
simultaneously
claiming
that
such
compliance
is
not
possible
for
fund
managers
exempt
from
registration
under
the
de
minimis
rule,
the
Securities
Division’s
new
position
effectively
requires
a
Tennessee-based
private
fund
manager
to
either
(i)
register
with
the
Securities
Division
(unless
it
is
an
SEC-registered
investment
adviser
that
complies
with
SEC
Rule
206(4)-2),
or
(ii)
qualify
for
a
separate
exemption
such
as
the
Private
Fund
Exemption.

The
Private
Fund
Exemption

The
Securities
Division’s
guidance
directs
firms
toward
the
“Private
Fund
Exemption”
under
Tennessee
Securities
Rule
0780-04-03-.05(1)(c).
For
advisers
who
provide
advice
solely
to
one
or
more
qualifying
private
funds,
this
exemption
relieves
them
from
registration
requirements
and
from
the
Tennessee
Custody
Rule’s
compliance
obligations.
However,
it
introduces
a
separate
set
of
conditions
that
may
be
incompatible
with
the
operations
of
many
smaller
firms.

To
qualify
for
this
exemption,
a
private
fund
adviser
must
meet
several
requirements.
First,
neither
the
adviser
nor
any
of
its
control
persons
may
be
subject
to
a
“bad
actor”
disqualification
under
SEC
Rule
506(d)
of
Regulation
D.
Second,
the
adviser
must
file
exempt
reporting
adviser
reports
on
Form
ADV
electronically
through
the
Investment
Adviser
Registration
Depository
(IARD)
system.
Third,
the
adviser
must
pay
an
initial
reporting
fee
of
$150
to
the
Securities
Division,
followed
by
an
annual
renewal
fee
of
$150.

Additional
requirements
apply
to
advisers
managing
3(c)(1)
funds
that
are
not
venture
capital
funds.
For
these
advisers,
the
exemption
requires
all
fund
investors
to
meet
the
definition
of
a
“qualified
client”
at
the
time
they
purchase
securities.
Under
Rule
205-3
of
the
Investment
Advisers
Act
of
1940,
a
“qualified
client”
is
a
natural
person
who
either
(i)
has
a
net
worth
exceeding
$2.2
million
(excluding
the
value
of
their
primary
residence),
or
(ii)
has
at
least
$1.1
million
of
assets
under
management
with
the
adviser
immediately
after
the
investment.
At
the
time
of
purchase,
the
adviser
must
also
provide
each
beneficial
owner
with
written
disclosures
that
outline:
(i)
any
services
provided
directly
to
the
individual,
(ii)
the
duties
owed
by
the
adviser
to
the
fund
and
its
investors,
(iii)
any
material
conflicts
of
interest,
and
(iv)
any
other
material
information
affecting
the
owner’s
rights
or
responsibilities.
The
adviser
must
also
obtain
audited
financial
statements
for
the
fund
each
year
and
deliver
a
copy
directly
to
each
investor.

For
firms
managing
existing
funds,
there
is
a
grandfathering
provision
for
3(c)(1)
funds
that
already
have
investors
who
are
not
qualified
clients.
If
the
fund
existed
before
December
25,
2023,
and
had
at
least
one
investor
who
was
not
a
qualified
client
as
of
that
date,
it
may
retain
its
exempt
status
under
certain
conditions.
After
that
date,
the
fund
may
not
accept
any
additional
investors
who
do
not
meet
the
qualified
client
standard.
Furthermore,
the
adviser
must
still
provide
the
mandated
written
disclosures
regarding
services
and
duties
to
all
existing
beneficial
owners
and
must
deliver
annual
audited
financial
statements
to
them.

While
the
Private
Fund
Exemption
offers
an
alternative
to
registration
and
custody
requirements,
it
imposes
its
own
compliance
obligations.
For
many
smaller
funds,
the
requirement
to
limit
the
investor
pool
to
qualified
clients,
combined
with
the
costs
of
annual
financial
statement
audits,
may
significantly
impact
the
fund’s
economic
viability
and
business
model.

Legal
Uncertainties
Regarding
the
Securities
Division’s
Position

The
Securities
Division’s
interpretation
is
inconsistent
with
the
plain
text
of
Tennessee’s
securities
regulations.
Under
Tennessee
Securities
Rule
0780-04-03-.05(1)(b),
individuals
or
firms
meeting
the
de
minimis
criteria
(having
fewer
than
fifteen
clients
in
the
preceding
twelve
months
and
not
holding
themselves
out
publicly
as
investment
advisers)
are
explicitly
stated
to
be
“exempted
from
the
definition
of
investment
adviser
.
.
.
[and]
the
registration
requirements
for
investment
advisers.”

The
Tennessee
Custody
Rule
(Rule
0780-04-03-.07)
expressly
limits
its
application
to
“any
investment
adviser
in
this
state”
who
has
custody
or
possession
of
client
funds
or
securities.
If
a
firm
is
expressly
excluded
from
the
definition
of
an
investment
adviser
by
one
rule,
under
traditional
principles
of
regulatory
interpretation,
a
neighboring
regulation
explicitly
governing
the
conduct
of
an
“investment
adviser”
would
not
apply
to
that
firm.

The
Securities
Division
attempts
to
anchor
its
position
in
the
anti-fraud
statute
(Tenn.
Code
Ann.
§
48-1-121(b)(3)),
which
prohibits
any
person
“who
receives
any
consideration
from
another
person
primarily
for
advising
the
other
person
as
to
the
value
of
securities
or
their
purchase
or
sale,
whether
through
the
issuance
of
analyses
or
reports
or
otherwise”
from
having
custody
of
client
funds
or
securities
unless
expressly
permitted
by
rule.
The
Securities
Division
states
that
“[t]he
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.”
[Emphasis
added.]
Essentially,
the
Securities
Division
is
taking
the
view
that
being
excluded
from
the
definition
of
an
investment
adviser
(as
is
the
case
for
a
fund
manager
relying
upon
the
de
minimis
rule)
is
not
sufficient
to
avoid
Tennessee’s
custody
requirements.
This
is
a
novel
interpretation
of
Tennessee’s
securities
laws
that
remains
untested.

Compliance
Options
for
Tennessee
Investment
Advisers

Firms
should
carefully
consider
both
legal
and
practical
factors
in
this
regulatory
environment
in
consultation
with
legal
counsel.
Each
firm
must
evaluate
its
specific
circumstances,
compliance
costs,
and
potential
regulatory
exposure
when
determining
its
approach.
The
primary
options
include:

• 
  Option
  1
  –
  Comply
  with
  the
  Securities
  Division’s
  Interpretation.
  Fully
  complying
  with
  the
  Tennessee
  Custody
  Rule
  or
  qualifying
  for
  the
  Private
  Fund
  Exemption
  minimizes
  regulatory
  enforcement
  risk
  and
  provides
  greater
  operational
  certainty.
  However,
  this
  approach
  introduces
  significant
  administrative
  burdens
  and
  annual
  audit
  costs
  and
  may
  require
  limiting
  investments
  to
  qualified
  clients
  or
  registered
  investment
  companies.
• 
  Option
  2
  –
  Maintain
  Current
  Operations
  Based
  on
  Textual
  Interpretation.
  Continuing
  current
  operations
  based
  on
  the
  plain
  language
  of
  the
  exemption
  avoids
  immediate
  compliance
  costs
  and
  preserves
  operational
  flexibility.
  However,
  this
  approach
  carries
  regulatory
  enforcement
  risks
  and
  may
  require
  defending
  the
  position
  through
  administrative
  proceedings
  or
  litigation.
  Firms
  choosing
  this
  path
  should
  consult
  legal
  counsel
  and
  maintain
  detailed
  documentation
  of
  their
  legal
  analysis
  and
  good-faith
  reliance
  on
  the
  regulatory
  text.

The
appropriate
decision
depends
on
each
firm’s
specific
circumstances,
including
risk
tolerance,
financial
capability,
investor
composition,
and
business
model.
Given
the
complexity
and
potential
consequences
of
this
decision,
firms
should
consult
with
qualified
Tennessee
securities
counsel
before
determining
their
compliance
approach.

This
post
is
current
as
of
March
24,
2026.
Regulatory
interpretations
and
requirements
may
change.
Firms
should
monitor
developments
and
consult
with
legal
counsel
regarding
ongoing
compliance
obligations.