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


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