The Investment Advisers Act of 1940 defines an investment adviser as any person who, for compensation, engages in the business of advising others as too the value of securities or the advisability of investing in securities or, as part of regular business, issues analyses or reports concerning securities.
Any person who is considered an investment adviser will be subject to the Investment Adviser Act of 1940 and be required to register with either the SEC or the States. A person would be considered an investment adviser if they engaged in these three activities:
- Provides investment advice, reports, or analysis with respect to securities;
- Is in the business of providing advice or analysis; and
- Receives compensation, directly or indirectly, for these services.
Defining Investment Advice
In Release IA-1092, the SEC maintains that a person who gives advice, whether in oral or written form, and issues reports, analysis, and recommendations about specific securities is an investment adviser if that person is in the business of doing so and receives compensation for the advice. This definition includes financial planners, pension consultants, and entertainment representatives.
Financial planners are considered investment advisers when they make recommendations regarding a person’s financial resources or platform analyses that concern securities if such services are performed as part of a business and for compensation. Under this interpretation, the SEC holds that there is no such thing as a “comprehensive financial plan” that does not involve securities.
Pension consultants are considered investment advisers when they advise employee benefit plans on how to fund their plans with securities or on the selection, performance, and retention of investment managers.
Sports and Entertainment Representatives
Sports and entertainment representatives are considered investment advisers when they provide financially related services to entertainers and athletes that include advice related to investments, tax planning, budgeting, and money management. However, a sports and entertainment representative that secures a favorable contract for their client and receives a commission for it is not considered an investment adviser. It is only when they perform any of the activities mentioned above that they are considered an investment adviser.
In the Business of Giving Advice
To be considered in the business of giving advice, a person needs to give advice on a regular basis such that it constitutes a business activity conducted with some regularity and advertises investment advisory services and presents themselves to the public as an investment adviser or as one who provides investment advice.
For the definition of investment adviser, commission is defined as any economic benefit received as a result of providing investment advice. This includes fees or commissions paid by the customer or on behalf of the customer from a 3rd party source. It doesn’t matter where the payment comes from, as long as they are receiving compensation for their advice, it is considered commission.
For exclusions from investment adviser registration, check out Exclusions from Investment Advisor Registration blog.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.