13.1 Investment Advisers Act of 1940

The Investment Advisers Act of 1940 is the primary federal law regulating investment advisers. Understanding this act, including who qualifies as an investment adviser and who is excluded, is essential for the Series 65 exam.

Definition of Investment Adviser

Under Section 202(a)(11) of the Act, an "investment adviser" is any person who meets all three elements of the ABC Test:

Advice: Provides advice about securities.

Business: Engages in the activity as a regular business.

Compensation: Receives compensation (direct or indirect).

All three elements must be present for a person to be classified as an investment adviser.

Understanding Each Element

Advice About Securities:

Recommendations about specific securities.

Asset allocation advice involving securities.

Market timing advice.

Does NOT include advice solely about non-securities (real estate, commodities).

As a Business:

Regular activity, not isolated instances.

Holding oneself out to the public as an adviser.

Need not be full-time or primary occupation.

Compensation:

Any economic benefit (not just direct fees).

Commissions, salary, or portion of management fees.

Can be paid by someone other than the client.

Does NOT need to be separate line-item payment.

Exclusions from the Definition

The Act specifically excludes certain persons from the investment adviser definition. These exclusions are commonly tested on the exam.

Banks and Bank Holding Companies

Banks: Excluded, except to the extent a bank advises a registered investment company (a separately identifiable department or division can then be the adviser).

Bank Holding Companies: Excluded under the Advisers Act if not an investment company, with the same registered-investment-company exception; the Uniform Securities Act exclusion names only banks, savings institutions, and trust companies.

Trust Departments: Generally excluded if bank activity.

Professionals (LATE Exclusion)

Lawyers, Accountants, Teachers, and Engineers are excluded if:

Solely Incidental: Advice must be incidental to their primary profession.

No Separate Compensation: Cannot charge separately for investment advice.

No Holding Out: Cannot hold themselves out as investment advisers.

Example: An accountant who provides occasional investment advice during tax planning, without separate fees, is excluded. An accountant who advertises "investment advisory services" is NOT excluded.

Broker-Dealers

Broker-dealers are excluded if they meet both conditions:

Solely Incidental: Advice is incidental to brokerage business.

No Special Compensation: No separate or additional fee for advice.

On the Exam: This is a conjunctive test, both conditions must be met. Receiving a clearly identifiable fee for advice (even wrapped into commissions) makes the broker-dealer an investment adviser.

Publishers

Bona fide publishers are excluded if:

Publication is of general and regular circulation.

Not tailored to specific client circumstances.

Provides impersonal advice (not individualized).

Example: A financial magazine with stock recommendations is excluded. A newsletter sent only to paying subscribers with personalized advice is NOT excluded.

Other Exclusions

Government Securities Advisers: Advice only about U.S. government securities (Advisers Act exclusion; NASAA removed it from the 1956 Uniform Securities Act version the exam tests).

NRSROs: Nationally Recognized Statistical Rating Organizations.

Family Offices: Advise only family members (SEC Rule).

Exemptions vs. Exclusions

Exclusion: Not an investment adviser at all under the Act.

Exemption: Is an investment adviser but exempt from registration.

Understanding this distinction is critical, excluded persons are outside the definition entirely, while exempt advisers are still advisers but don't have to register.

Key Takeaways

1. The ABC Test requires Advice + Business + Compensation, all three.

2. LATE professionals (Lawyers, Accountants, Teachers, Engineers) are excluded if advice is solely incidental.

3. Broker-dealers are excluded only if advice is incidental AND no special compensation received.

4. Publishers of general circulation are excluded; personalized newsletters are not.

5. Exclusion means "not an adviser"; exemption means "adviser but doesn't register".