Quick Answer
An investment adviser meets all three prongs (advice, business, compensation). Certain persons are excluded from the definition (lawyers, accountants, teachers, engineers, banks, broker-dealers, publishers), others are exempt from registration (de minimis, private fund). Assets-under-management thresholds split state versus federal registration, with a mid-size band and a buffer.
The whole unit on one sheet: who is an investment adviser, who escapes the definition, who skips registration, and the numbers that decide state versus federal oversight.
The One-Liners That Win Points
- All three prongs must be met. Missing any one prong means the person is not an investment adviser (IA).
- Compensation can be indirect and need not come from the person receiving advice. A third-party referral fee still satisfies the compensation prong.
- Excluded persons are NOT investment advisers; exempt persons ARE investment advisers who simply skip registration.
- The lawyer / accountant / teacher / engineer (L.A.T.E.) exclusion applies only when advice is solely incidental to the profession. Marketing financial planning as a separate offering loses it.
- Broker-dealer (BD) exclusion needs two conditions: advice solely incidental to the BD business AND no special compensation. A wrap fee is special compensation and destroys the exclusion.
- Publisher exclusion requires a bona fide publication of general, regular circulation with non-tailored advice; personalized portfolios lose it.
- Banks must be domestic to claim the exclusion; foreign banks do NOT qualify.
- Advice solely on U.S. Government securities is excluded under federal law but NOT under state law.
- Federal covered advisers only notice file with states; they do not register at the state level.
- Antifraud provisions apply to everyone (excluded, exempt, and registered alike). No one gets a free pass to commit fraud.
Numbers to Lock In
| Item | Value |
|---|---|
| Under $25 million assets under management (AUM) | Must register with the state (barred from SEC) |
| $25 million to $100 million ("mid-size adviser") | Registers with the state of the principal office (SEC only if the state does not examine) |
| $100 million to $110 million | Eligible but not required to register with SEC |
| $110 million and above | Must register with SEC as a federal covered adviser |
| The $90 million / $110 million buffer | Register with SEC at $110M, only de-register at $90M (prevents constant switching) |
| De minimis exemption | No place of business in the state AND 5 or fewer retail clients in the preceding 12 months |
| Notice-filing client trigger | Place of business OR 6 or more clients resident in the state |
| Private fund adviser exempt reporting cap | AUM under $150 million (venture capital fund adviser has no cap) |
Top Gotchas
- The ABC test is all-or-nothing. Advice, business, and compensation are cumulative; the exam plants scenarios where one prong quietly fails.
- Exclusion vs. exemption is a favorite trap. An excluded person (bank, L.A.T.E., BD, publisher) is not an IA at all; an exempt person (de minimis, private fund) IS an IA who skips registration.
- De minimis requires BOTH conditions. No place of business AND 5 or fewer retail clients. An office in the state kills the exemption regardless of client count; institutional clients do not count toward the cap.
- A mutual fund advisory contract means federal covered, period, even at $10M AUM. The AUM test does not apply.
- Federal covered = notice filing, not registration. The SEC stays the primary regulator, but the state keeps antifraud authority.
- The government-securities exclusion is federal only. An adviser solely on Treasuries may still have to register at the state level.
Memory Aid: The ABC Prongs of an Adviser
- Advice (about securities)
- Business (in the regular business of providing it)
- Compensation (any economic benefit, direct or indirect)
One-Breath Recap
An investment adviser is anyone who clears the ABC test: advice about securities, as a regular business, for any compensation, direct or indirect. Some persons are excluded from the definition outright (lawyers, accountants, teachers, engineers when incidental; domestic banks; broker-dealers with no special compensation; publishers of general circulation), while others meet the definition but are exempt from registering (de minimis, private fund advisers). Registration splits on assets under management: under $25 million is state-only, $25 million to $100 million is the mid-size state band, and $110 million and above is federal covered, with a $90 million / $110 million buffer that stops firms from flipping back and forth. Federal covered advisers only notice file with the states, and antifraud follows everyone no matter their status.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Investment Adviser Regulation unit for the complete lesson.