Tennessee Securities Division Guidance on the De Minimis Exemption and Custody Rules

This post is co-authored by Alexander Davie.

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.