Series 65

AAA

Regulation of Investment Advisors - Exclusions from IA Registration

At first glance, it seems that virtually all financial planners, stockbrokers, money managers, pension consultants, etc. would be covered under this definition. However, there are a number of exclusions that may apply:

  • Banks, or bank holding companies
  • Professionals, such as lawyers, accountants, teachers, etc., whose advice is incidental to their profession and who receive no special compensation for making recommendations
  • Publishers of bona fide newspapers, magazines or financial publications of a general and regular circulation
  • Government securities advisers
  • Broker-dealers and their registered representatives whose advisery services are incidental to the securities business and who receive no special compensation for making recommendations

This last exception may seem illogical, since stockbrokers seem to be the major dispensers of investment advice. However, their job function is investment sales; therefore, the investment advice they give is considered incidental to that role. Also, broker-dealers and their representatives are regulated by the Securities Exchange Act of 1934.

Others who are exempt from registration include:

  • IAs whose clients are all residents of the state of the IA's principal office and who do not provide advice on securities traded on any national exchange
  • IAs whose only clients are insurance companies
  • IAs who qualify for the private-adviser exemption (i.e., less than 15 clients, do not hold themselves out to the public as investment advisers and do not advise registered investment companies)

Exclusions versus exemptions
It is important to understand the difference between exclusions and exemptions as applied to investment adviser registration requirements. A person excluded from IA regulations means that person does not fall within the definition of an IA under federal or state standards. An exemption means the person does meet the definition of an IA, but under the applicable federal or state standard is exempt from registration requirements.

For instance, under the federal Investment Advisers Act of 1940, bank holding companies are excluded from the definition of investment adviser.

An example of an exemption from registration requirements under the federal law - despite meeting the definition of investment adviser - would be an adviser to a church employee pension plan.


Look Out!
You can expect at least one question on the "out of state" clients. One of the options may be "IAs whose only clients are banks"; but remember it is IAs whose only clients are insurance companies that are exempt - not those with other institutional clients.

SEC Investment Adviser Releases IA 770 & 1092
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