The Investment Advisers Act of 1940 (the “Advisers Act”) is the single most important piece of legislation for investment adviser firms. There are many rules or regulations of the Advisers Act that an investment adviser firm ought to know cold. In addition, investment advisers must know the rules and regulations enacted under the Advisers Act by the SEC.
In later posts, we will spend time looking at the various sections of Advisers Act and how investment adviser firms work with the rules provided. Today’s post will cover the some of the central themes of the Advisers Act and why we have the law in the first place.
So, thank you for joining us again for this week’s post. Here is what we will be covering:
- Why do we have the Advisers Act?
- Who is an “investment adviser” under the Advisers Act?
- Who must register under the Advisers Act?
- How does an investment adviser register under the Advisers Act?
Why do we have the Advisers Act?
The Advisers Act was the last in a series of federal statutes intended to eliminate abuses in the securities industry that Congress believed contributed to the stock market crash of 1929 and the depression of the 1930s. Following these events, Congress, through an SEC report, determined that there was a significant problem in the financial industry where, either consciously or, more likely, unconsciously, there was a prejudice by advisers favoring their own financial interests.
Who is an “investment adviser” under the Advisers Act?
As a starting point we consider who is considered an investment adviser under the Advisers Act. “Investment adviser” is a defined term in section 202(a)(11) of the Advisers Act:
any person who, for compensation, engages in the business of advising others, either directly or indirectly 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 analyses or reports concerning securities.
As such, the definition consists of three elements:
- First, the entity must be engaged “in the business” of providing advice or of issuing analysis or reports concerning securities.
- Second, the advice, analysis, or report must be with respect to “the value of securities” or on the “advisability of investing in, purchasing or selling securities.”
- Third, the advice, analysis, or report must be provided in return for “compensation”.
A firm or person must satisfy all three elements to fall within the definition of “investment adviser,” which the SEC staff has explained that the Advisers Act applies to financial planners, pension consultants and other persons who, as a part of some other financially related services, provide investment advice.
Who must register under the Advisers Act?
A firm or person that falls within the definition of “investment adviser” (and is not eligible for one of the exclusions) must register under the Advisers Act, unless it
- is prohibited from registering under the Advisers Act because it is a smaller firm regulated by one or more of the states or
- qualifies for an exception from the Advisers Act’s registration requirement.
All advisers, registered or not, are subject to the Advisers Act’s anti-fraud provisions.
Working off the above, there are two things we need to focus on prohibitions and exceptions.
Prohibitions
Most small advisers and “mid-sized advisers” are subject to state regulation of advisers and are prohibited from registering with the SEC. Most large investment advisers (unless an exemption is available) must register with the SEC, and state adviser laws are preempted for these advisers. In other words, you can’t register with the SEC unless you meet certain minimum requirements. Here is an example of what of the exemptions from this prohibition:
- Non-U.S. Advisers. Investment advisers whose principal office and place of business is outside the United States are not prohibited from registering with the SEC and thus are not subject to the assets under management thresholds. A non-U.S. adviser giving advice to U.S. persons must register with the SEC (and thus may avoid registration with state regulators), unless an exemption from registration is available (in which case it may be subject to state registration requirements).
Exceptions
The Advisers Act provides several exemptions from registration. The exemptions are voluntary; advisers eligible for them can nonetheless register with the SEC. In other words, these are individuals or entities that meet the definition of an investment adviser and are not prohibited from registration but are not required to do so. For example, investment advisers whose only clients are insurance companies have an exception from registration. You should also note that certain small fund advisers and private equity fund advisers are exempt from registration.
How does an investment adviser register under the Advisers Act?
Although many individuals who are employed by advisers fall within the definition of “investment adviser,” the SEC generally does not require those individuals to register as advisers with the SEC. Instead, the advisory firm must register with the SEC. The adviser’s registration covers its employees and other persons under its control, provided that their advisory activities are undertaken on the adviser’s behalf. Applicants for registration under the Act must file Form ADV with the SEC. Within 45 days the SEC must grant registration or institute an administrative proceeding to determine whether registration should be denied.
Closing Thoughts
Again, the Advisers Act is the fundamental set of laws governing investment advisers and should be known in depth by every investment adviser, in particular the firm’s Chief Compliance Officer. We covered definitions and registration issues in this post but will be doing a deep dive into different areas of the Advisers Act throughout later posts.
Our investment adviser firms should really work to understand the Advisers inside and out. It is also important that these professionals have at least a general understanding of the other major acts governing securities and financial services in the United States, and this includes the following acts:
- The Securities Act of 1933,
- The Securities and Exchange Act of 1934,
- Trust Indenture Act of 1939,
- Sarbanes-Oxley Act of 2002,
- Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012,
- Jumpstart Our Business Startups Act of 2012, and
- the SEC’s associated rules and regulations.
About the Author
Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets.
Michael is also the founder of FinProLaw, an online learning platform where Michael has created courses designed for investment adviser compliance professionals. These courses include:
- Investment Adviser Compliance Essential for Chief Compliance Officers
- Foundations of Investment Adviser Compliance
- What is a “Security”?
- Investment Adviser Marketing Rule
- Regulation A – Exemption from Registration
- Regulation Crowdfunding – Exemption from Registration
- Regulation D – Exemption from Registration
Investment adviser firms who are also clients of United Atlantic Legal Services can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw to learn more.
Please visit Michael’s website to learn more about Michael and his insights into the investment adviser industry. He can also be found on LinkedIn.