Securities Industry Regulations - Investment Advisors Act of 1940

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. Your Practice

    More Reasons for Advisors to Be Wary of the SEC

    It looks like the SEC is expanding its oversight regarding RIA compliance in the coming months. Here's why RIAs should expect more federal check-ins.
  2. Your Practice

    Is Greater Oversight of RIAs Coming?

    RIAs may be entering an era of greater oversight by the Securities and Exchange Commission. Here's why.
  3. Your Practice

    How to Avoid Advisors Who've Been Disciplined

    It's not hard to find out if a potential financial planner has a shady past. Here's why it's so important to check an advisor's credentials and history.
  4. Products and Investments

    Here's How to Duck a FINRA Slap on L Shares

    Regular and L-share annuity contracts come with back-end surrender charges that clients should know. Here's how to steer clear of any compliance trouble.
  5. Professionals

    The Difference Between Series 63, 65 and 66

    After passing the first core examination, usually the FINRA Series 6 or Series 7, one hurdle remains. That’s the Series 63, 65 or 66.
  6. Professionals

    The Basics of Financial Securities Licenses

    The Financial Industry Regulatory Authority (FINRA) offers several licenses that correspond to specific businesses or investments.
  7. Financial Advisor Technology

    Robo-Advisors Face Regulatory Scrutiny

    FINRA and other regulators are starting to put robo-advisors under a microscope. Here's what they are focusing on.
  8. FA

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
  9. Your Clients

    Events in 2016 That'll Alter Your Retirement Plans

    Retirement savers who are trying to see what lies ahead can expect these changes affecting their retirement plans in 2016.
  10. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
RELATED TERMS
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
RELATED FAQS
  1. Are hedge funds regulated by FINRA?

    Discover how FINRA's authority extends to hedge funds, an alternative investment vehicle, and learn what rules these funds ... Read Answer >>
  2. How are variable annuities regulated?

    Discover the various rules that the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority ... Read Answer >>
  3. Do financial advisors need to pass the Series 7 exam?

    Learn about the various securities licensing exams, such as the Series 7 exam, and which licenses are required for financial ... Read Answer >>
  4. Is a financial advisor required to have a degree?

    Discover the minimum educational requirements and financial licenses needed to become a financial advisor in the modern corporate ... Read Answer >>
  5. Do financial advisors need to be approved by FINRA?

    Learn about whether a financial advisor may be required to be approved by FINRA, and what exams a financial advisor needs ... Read Answer >>
  6. How does a broker decide which customers are eligible to open a margin account?

    Learn how brokers have the sole discretion to determine which customers can open margin accounts, and understand the rules ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center