Regulation of Investment Advisors and Investment Advisor Representatives - Additional Information

  • If a broker-dealer both effects transactions and offers investment advice for special compensation, then he or she must register as an investment advisor as well.
     
  • De Minimus: The National Securities Markets Improvement Act of 1996 mandates that an investment advisor that has fewer than six clients in a state (in a 12-month period), and has no physical address in the state where the clients are located, is not required to register as an investment advisor in the state in which the clients reside.
     
  • The USA also states that an investment advisor is prohibited "from employing an individual who is prohibited from such employment or association by the administrator". Violation of this provision does not result in strict liability. To be liable, the investment advisor must have known or should have known of the administrator's order to the individual suspended or barred.
     
  • An investment advisor may conduct business with institutional clients in different states than where it is registered, if:
    • the investment advisor has no physical address in that state, but is registered in another state.
       
    • the client the investment advisor is providing advice to is an institutional client (i.e. bank, another investment advisor, benefit plans with assets greater than $1 million, and/or government).

Exam Tips and Tricks
The De Minimus exemption could easily show up on the exam, so remember: for registration exemption, an investment advisor must have fewer than six clients in 12 months and must not
have a physical address in the state.

Exam Tips and Tricks
Exam questions will often refer to definitions or regulations for either the USA or the Investment Advisers Act of 1940. Most of the requirements are similar, but make sure you read the question carefully, since there may be differences. Here are examples of each type of question:

Which of the following are defined as "Investment Advisors" under the USA?

  1. General circulation newspaper with an Investing column
  2. Publisher of an investment newsletter that offers specific advice for clients in certain circumstances
  3. Individual who charges a fee for giving clients advice about securities
  4. Lawyer who advises a pension client about investments at no charge
  1. I & IV
  2. III & IV
  3. I & III
  4. II & III
     

Which of the following are defined as federal covered investment advisors? An engineer who provides investment advice for a fee to 20 of his colleagues A stockbroker who gives a free financial plan to her clients An investment advisor whose only clients are insurance companies An investment advisor whose only clients are lawyers I & IV III & IV I, II & III I, II, III & IV

While there are some common exclusions between the two definitions (such as publishers of general investing information and professionals who give incidental advice), there are differences in the definitions. Question 1 is very straightforward and the correct answer is "d". Question 2 is more difficult. The first instinct may be to exclude III & IV, due to the exclusion of professionals. However, there is no exclusion for providing advice to attorneys, only insurance companies, so the correct answer is "a" - the engineer who has more than 15 clients does not qualify for the private advisor exemption and the investment advisor to attorneys also doesn't qualify for exemption.

The Federal and State Registration Process


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