Exclusions from the Investment Adviser Definition
Now that you understand what makes someone an investment adviser, you need to know who is carved out of that definition entirely. The Uniform Securities Act (USA) provides seven specific exclusions, and the distinction between an exclusion and an exemption matters on the exam.
Exclusions vs. Exemptions
This is a critical distinction:
| Concept | Meaning | Obligations |
|---|---|---|
| Exclusion | The person is NOT an investment adviser at all; the definition does not apply | No investment adviser (IA) obligations whatsoever |
| Exemption | The person IS an investment adviser but is excused from registration | Still an IA, still subject to antifraud provisions |
Exclusions are found in Section 401(f)(1)-(7). Exemptions from registration are in Section 201(c) (covered in the next section on registration requirements).
The Seven Exclusions
| # | Excluded Person | Key Condition |
|---|---|---|
| (1) | Investment adviser representatives | Investment adviser representatives (IARs) are defined separately under Section 401(g) |
| (2) | Banks, savings institutions, and trust companies | Excluded entirely; but bank holding companies are NOT excluded |
| (3) | Lawyers, accountants, engineers, and teachers | ONLY if advisory services are solely incidental to their profession |
| (4) | Broker-dealers and their agents | ONLY if advisory services are solely incidental to broker-dealer (BD) business AND they receive no special compensation |
| (5) | Publishers of bona fide publications | ONLY if the publication does NOT provide advice based on each client's specific investment situation |
| (6) | Federal covered advisers | IAs registered with the Securities and Exchange Commission (SEC) under Investment Advisers Act (IAA) Section 203 |
| (7) | Other persons designated by the Administrator | The Administrator may exclude other persons by rule or order |
Memory Aid: L.A.T.E.
- L - Lawyers
- A - Accountants
- T - Teachers
- E - Engineers
Excluded from the IA definition when advice is incidental to their profession and they receive no special compensation for it.
The "Solely Incidental" Standard (Exclusions 3 and 4)
Two of the most tested exclusions depend on whether the advisory services are solely incidental to the person's primary business.
Professionals (Exclusion 3)
For lawyers, accountants, engineers, and teachers, investment advice must be solely incidental to their primary professional practice:
- A lawyer who drafts an estate plan and mentions that certain investments may be suitable - EXCLUDED (advice is incidental to legal practice)
- A lawyer who holds themselves out as a financial planner or charges separately for investment advice - NOT excluded (advice is no longer solely incidental)
- An accountant who prepares a tax return and suggests tax-efficient investments in passing - EXCLUDED
- An accountant who advertises portfolio management services - NOT excluded
Broker-Dealers (Exclusion 4)
For broker-dealers, TWO conditions must be met:
- Advisory services must be solely incidental to the BD business, AND
- The BD must receive no special compensation for advisory services
"Special compensation" means any fee or payment specifically for investment advice, separate from normal commissions earned on securities transactions:
- A BD that earns commissions on trades and provides investment guidance along the way - EXCLUDED (incidental advice, no special compensation)
- A BD that charges a separate fee for a financial plan or portfolio analysis - NOT excluded (special compensation destroys the exclusion)
Exam Tip: Gotchas
Financial planners and others who hold themselves out as providing investment advisory services may NOT claim that their services are "solely incidental" to another activity. Holding yourself out as an adviser is strong evidence that advisory services are more than incidental. This prevents professionals from marketing advisory services while claiming exclusion.
The Publisher Exclusion (Exclusion 5)
The publisher exclusion applies to publications of general and regular circulation - whether in hard copy, electronic, or other form. The key test is whether the advice is impersonal or personalized:
| Type of Publication | Excluded? | Why |
|---|---|---|
| Newsletter recommending stocks to all subscribers equally | Yes | General, impersonal advice |
| Service providing personalized portfolio recommendations | No | Tailored to individual situations |
| "Tipster sheet" distributed free to attract paying clients | No | Designed to solicit advisory business |
The critical question: Is the advice one-size-fits-all (excluded) or tailored to the individual (not excluded)?
Exam Tip: Gotchas
The publisher exclusion does NOT protect a person who provides personalized investment advice disguised as a "newsletter." If the content is tailored to the subscriber's specific investment situation, the publisher exclusion is lost regardless of the format.
The Federal Covered Adviser Exclusion (Exclusion 6)
A federal covered adviser is an IA registered with the SEC under IAA Section 203. Federal covered advisers are excluded from the state definition of IA; they are not state-registered IAs.
However, this exclusion does NOT mean federal covered advisers are free from all state oversight. States can still:
- Require notice filings and collect fees
- Enforce antifraud provisions
- Register the adviser's IARs who have a place of business in the state
- Investigate and bring enforcement actions for fraud or deceit
Federal covered advisers are covered in detail in the state vs. federal registration section.