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

Related Articles
  1. Tech

    How Much Does A Financial Advisor Earn?

    Several things factor into the salary of a financial advisor. Here's a look.
  2. Financial Advisor

    The Pros & Cons of a Financial Advisor Career

    Discover what a career as a financial adviser entails, and learn what pros and cons an individual faces when embarking on a career in this field.
  3. Financial Advisor

    5 Traits the Best Financial Advisors Share

    Discover what the best financial advisers share in terms of the traits they possess, and learn what clients value most in their advisers.
  4. Retirement

    The Risk of Offering Social Security Advice

    Savvy financial advisers will either need to gain Social Security advice expertise or find a source or partner to provide this vital service to clients.
  5. Personal Finance

    Career Advice: Financial Analyst Vs. Financial Adviser

    Read an in-depth review of the differences between a career as a financial Adviser versus a career as a Financial Analyst, including how to decide which is best.
  6. Financial Advisor

    4 Signs Your Financial Advisor Is Ripping You Off

    Pay attention to the habits of your financial adviser to avoid him ripping you off by commingling, churning, scamming or embezzling your money.
  7. Retirement

    Why Retirement Advice Is Better But Still Lacking

    With a multitude of resources available to savers and their advisers, you'd think that retirement planning would be a breeze. Here's why you'd be wrong.
  8. Financial Advisor

    How Advisors Can Create Compliance Programs

    Here's how investment advisers can set up a compliance program that adheres to SEC requirements.
  9. Financial Advisor

    Online Portfolio Management, DIY or Fee-Based Financial Advisor: Which Is Right For You?

    Should you use an online financial planning service, or do professional, fee-based financial planners justify their higher costs?
  10. Personal Finance

    What to Look for When Looking for Financial Advice

    Good financial advice is timeless and timely; it never goes out of style. Here's how to identify the best type of advice from an advisor.
Frequently Asked Questions
  1. What is arbitrage?

    Arbitrage is basically buying a security in one market and simultaneously selling it in another market at a higher price, ...
  2. What is the difference between upstream and downstream oil and gas operations?

    The closer to the end user a function or firm is, the further downstream it is said to be. Raw material extraction or production ...
  3. What is the difference between a capital expenditure and a revenue expenditure?

    Capital expenditures represent major investments of capital that a company makes to expand its business and generate additional ...
  4. What is the difference between revenue and income?

    Revenue is simply the total amount of cash generated by the sale of products or services associated with the company's primary ...
Trading Center