Series 65

By Investopedia AAA

Regulation of Investment Advisors - Who Must Register As An Investment Adviser?

The Investment Advisers Act of 1940 was enacted to protect the public by requiring those who provide investment advice for compensation to register as advisers with the Securities and Exchange Commission (SEC). The Investment Advisers Act of 1940 is distinct from the Investment Company Act of 1940, which regulates mutual funds and other pooled funds invested on behalf of smaller investors.The provisions of the act set out both required and prohibited behaviors for advisers who meet the following definition:

An investment adviser (IA) is 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 analysis or reports concerning securities.

To translate that definition into plain English, we can break it down to three main components:

  1. Giving advice about securities
    • this includes references to securities in general, not just specific investment recommendations; for example, even advising a client to invest a set percentage in "stocks" is considered advice about securities
  2. Being in the business of giving that advice
    • this refers to presenting yourself as an investment adviser
  3. Being compensated for that advice
    • this includes receiving compensation of any kind, including fees, commissions, or a combination of the two - and the compensation does not have to be received directly from the client

 

Exam Tips and Tricks Many questions on the exam hinge on the components of the definition of an IA. Remember that all three of these criteria must be present to require registration as an investment adviser. For example, you might find a question where a professional, such as an accountant or an attorney, provides advice about asset allocation but does not charge a separate fee for this service. In that case, he/she is not being compensated for the advice and so is not required to register.
Exclusions from IA Registration

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