Purpose
The Investment Advisors Act of 1940 was enacted to protect the public by requiring those who provide investment advice for compensation to register as advisors with the Securities and Exchange Commission (SEC). The provisions of the act set out both required and prohibited behaviors for advisors who meet the following definition:

Definitions

  • Investment Advisor: an individual or entity who for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

  • IA 1092: IA 1092 was issued in 1987 as a result of the increased activity in financial planning and investment advice. It essentially refined the definition of an investment advisor to include:
    • Pension consultants and advisors to athletes and entertainers are considered to be providers of investment advice.

    • Firms that recommend investment advisors may have to register themselves.

    • An investment advisor does not have to give advice as his/her principal business activity - simply doing so with some regularity is enough to require registration.

    • If a registered representative of a broker-dealer sets up a separate business entity to provide financial planning or investment advice for a fee, he/she may not rely on the broker-dealer exemption from registration; this is known as a statutory investment advisor.

    • Compensation does not have to be monetary to fall under the definition - receipt of products, services or discounts is also considered compensation.

  • Investment Advisor Representatives: Employees of investment advisors must register as investment advisor representatives if they perform any of these functions:
    • Making investment recommendations or giving securities advice
    • Managing client accounts or portfolios
    • Soliciting or offering investment advisory services
    • Supervising employees who perform any of the above

Investment advisor employees who have only clerical duties do not have to register as investment advisor representatives.

Investment Company Act of 1940

Related Articles
  1. Personal Finance

    Not Every Financial Advisor Gives Impartial Advice

    Some financial advisors provide advice that benefits them rather than you.
  2. Personal Finance

    Hiring An Advisor? Ask These 8 Questions First

    Asking these eight questions can help you avoid choosing the wrong financial advisor.
  3. Tech

    Things That Keep Financial Advisors Up at Night

    Financial advisor worries include the changing technology landscape, the emergence of robo-advisors, government regulation and financial crisis fallouts.
  4. Personal Finance

    How to Select a Financial Advisor to Work With

    If you are looking to engage a professional advisor, consider these important criteria.
  5. Financial Advisor

    Why Financial Advisors Disagree

    Financial advisors sometimes offer conflicting opinions that can be confusing for many investors.
  6. Financial Advisor

    A Financial Advisor’s Job Is Not to Beat the Market

    Understand what the real job responsibilities of a financial advisor are, and why they do not include picking investments that beat the market.
  7. Financial Advisor

    Choosing the Right Financial Advisor

    The right financial advisor for one person may not be right for another.
  8. Personal Finance

    What You Should Know Before You Hire an Advisor

    Hiring a financial advisor can be an important step in your financial journey. Just make sure you understand who they are and what they do first.
  9. Financial Advisor

    How to Interview Your Financial Advisor

    When it comes to choosing a financial advisor, investors have to do homework. That means interviewing multiple advisors and asking the tough questions.
  10. Financial Advisor

    What People Hate About Financial Advisors

    Advisors need to make a living too, but doing so by cutting corners at a client's expense isn't right. Here are the top complaints against advisors.
Frequently Asked Questions
  1. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  2. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
  3. What is a Wash Sale?

    The Wash-Sale rule was established to forbid a loss deduction of a security sold.
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center