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. Financial Advisor

    Is An Online Financial Advisor Right For You?

    Is an online adviser right for you? As with most questions in financial planning, the answer is 'it depends.' Here are a few thoughts to consider.
  2. 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.
  3. 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.
  4. 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.
  5. Retirement

    Are You Getting The Best Retirement Advice?

    What you need to know in order to check.
  6. Financial Advisor

    How Advisors Can Create Compliance Programs

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

    3 Digital Platforms FAs Should Keep on Their Radar

    Find out which digital platforms financial advisers should look to as the trend toward adviser-based digital advice continues into 2016.
  8. Financial Advisor

    Top SEC Exam Hacks for Financial Advisors

    These five tips will help financial advisors pass muster when the SEC comes knocking.
  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. Financial Advisor

    How to Train Your New Financial Advisor

    Once you've hired a new adviser, an equally important process begins: training them.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center