Definitions of Investment Advisers

The whole unit on one sheet: the ABC test, the exclusions, how an IA registers, and where the state/federal line falls.

What Is the ABC Test?

• An investment adviser is anyone who, for compensation, is in the business of advising others about the value of securities or the advisability of buying or selling securities.
• All three prongs must be present: Advice about securities, as a Business, for Compensation.
• Compensation is read broadly: fees, commissions, subscription fees, or any economic benefit, including third-party pay. "I don't charge for advice" still counts if commissions flow.
• Holding yourself out as providing advisory services satisfies the business prong on its own, so a planner offering "total financial planning" is an IA.

Who Is Excluded from the IA Definition?

• Excluded means not an IA at all: no registration, no Form ADV, no IA conduct duties. Exempt means still an IA, excused only from registration. Neither escapes antifraud, because the advisory antifraud provision reaches any person paid to advise others about securities.
• Banks, savings institutions, and trust companies are excluded; bank holding companies are NOT.
• Broker-dealers are excluded only if advice is solely incidental to the brokerage business AND they take no special compensation.
• Publishers are excluded only for impersonal advice. There is no circulation test, so a narrow newsletter can qualify, but personalized recommendations disguised as a newsletter lose it. A subscription fee does not defeat it.
• Federal covered advisers are excluded from the STATE IA definition.

Which Numbers Matter Most?

What Is the Memory Aid for the Excluded Professionals?

• L: Lawyers
• A: Accountants
• T: Teachers
• E: Engineers

They are excluded when advice is solely incidental to their profession. The no special compensation condition is NOT part of this exclusion; it belongs to the broker-dealer exclusion.

How Does an Adviser Register or Notice-File?

• Two registration exemptions, both requiring no place of business in the state: institutional clients only, or de minimis (5 or fewer non-institutional clients in the prior 12 months).
• Register by filing Form ADV, a consent to service of process, and fees. Form ADV runs Part 1 (firm information, for regulators), Part 2A (client brochure), Part 2B (brochure supplement), and Part 3 / Form CRS.
• The consent to service of process is filed once, is irrevocable, and survives after registration ends.
• Federal covered advisers notice-file with the state (Form ADV copy plus fees) and never state-register, with no notice filing if their only in-state clients are institutional.
• A successor may register for the unexpired portion of the year, even before it exists, with no additional fee.
• Switching: 90 days to apply to the SEC after the Form ADV amendment reporting eligibility, and 180 days to file Form ADV-W after fiscal year end once no longer eligible. Both regimes apply during the overlap.

What Comes After Registration?

• The Administrator may set minimum financial requirements and, for advisers with custody or discretionary authority, require a surety bond. An appropriate cash-or-securities deposit must be accepted as a substitute.
• Registered advisers keep prescribed records, answer reasonable examinations in or out of state, and furnish the client disclosures the Administrator requires.
• A material inaccuracy in a filed document requires a prompt correcting amendment.
• IA qualification denials rest only on the adviser's own qualifications or those of the individuals representing it; broker-dealer experience does not automatically qualify someone.
• IA advertising: testimonials and endorsements are conditional, not banned; gross performance never stands alone, so net must appear with at least equal prominence.

Which Gotchas Trip Students Up?

• All three ABC prongs are required. Free advice, one-time help, or non-securities advice each kills the definition.
• Excluded versus exempt: neither owes registration, and both still answer to antifraud. "Excluded, therefore antifraud does not reach him" is a wrong answer.
• Special compensation destroys a broker-dealer's exclusion; a separate financial-plan fee makes the firm an IA.
• Federal covered means notice filing only. States can collect fees, regulate in-state IARs, and enforce antifraud, but cannot register the adviser itself.
• The buffer is $90M to $110M, not $95M to $105M, and any in-state office defeats both registration exemptions.

One-Breath Recap

An investment adviser gives Advice about securities, as a Business, for Compensation, and missing any one prong means no IA. L.A.T.E. professionals whose advice is solely incidental, banks, broker-dealers with incidental uncompensated advice, and impersonal publishers are excluded from the definition. Advisers with no in-state office who are either institutional-only or de minimis are merely exempt from registration. Excluded and exempt persons alike remain bound by the antifraud provisions, which reach anyone paid for securities advice. Register with Form ADV plus a once-filed irrevocable consent to service of process; state versus federal turns on assets under management, and federal covered advisers only notice-file. Registered advisers also face ongoing financial, bonding, recordkeeping, disclosure, and examination duties.

Need more than the recap? Read the full Definitions of Investment Advisers unit.