Definitions of Investment Advisers
Understanding who is (and who isn't) an investment adviser is one of the most frequently tested areas on the Series 65. This topic covers the three-prong test that defines an investment adviser, the categories of persons excluded from the definition, and the exemptions that let certain advisers skip registration.
The Three-Prong Test (Investment Advisers Act (IAA) Section 202(a)(11) / Uniform Securities Act (USA) Section 401)
All three prongs must be met. Missing any single prong means the person is not an investment adviser.
| Prong | Requirement | Key Details |
|---|---|---|
| 1. Advice | Provides advice or analyses concerning securities | Recommendations, asset allocation, market analysis |
| 2. Business | As part of a regular business | Need not be the principal activity; done with regularity |
| 3. Compensation | Receives any form of compensation | Direct or indirect; need not come from the client |
Memory Aid: ABC
- Advice (about securities)
- Business (in the regular business of providing it)
- Compensation (any economic benefit, direct or indirect)
Think of it this way: The three-prong test filters out casual advice (no business regularity) and free commentary (no compensation) from professional advisory relationships that warrant regulatory oversight.
Compensation Is Broadly Defined
- Any economic benefit counts (fees, commissions, referral fees, soft dollars)
- Compensation does not need to come directly from the person receiving advice
- Example: A third-party referral fee from a recommended manager still satisfies the compensation prong
- A financial planner who receives no direct payment for securities advice but earns commissions from product sales still meets the compensation prong
Exam Tip: Gotchas
- All three prongs must be met. Missing one prong = not an investment adviser.
- Compensation can be indirect. Any economic benefit (fees, commissions, referral fees, soft dollars) counts.
- Compensation from a third party still counts. It does not have to come from the person receiving advice.
Exclusions from the Investment Adviser (IA) Definition
Excluded persons are not investment advisers. They do not register and do not file Form ADV. However, antifraud provisions still apply to excluded persons.
| Exclusion | Critical Requirements |
|---|---|
| Lawyers, Accountants, Teachers, Engineers (L.A.T.E.) | Advisory services solely incidental to their professional practice |
| Broker-dealers (BDs) | Advisory services solely incidental to BD business AND receives no special compensation for advice |
| Publishers | Bona fide publications of general and regular circulation; advice not tailored to specific client situations |
| Banks and savings institutions | Must be a domestic (U.S.-organized) bank; foreign banks do NOT qualify |
| Federal covered advisers | Excluded from the state IA definition (regulated by SEC, not states) |
The L.A.T.E. Exclusion
Memory Aid:
- L - Lawyers
- A - Accountants
- T - Teachers
- E - Engineers
The exclusion applies only when advisory services are "solely incidental" to the person's primary professional practice, meaning the advisory activity is a byproduct of their main service, not a separate or stand-alone offering.
- A lawyer who begins marketing financial planning services as a separate offering loses the exclusion, even if they hold a law license
- The test is whether the advice is incidental to the profession, not whether the person holds a professional credential
Broker-Dealer Exclusion
The BD exclusion requires two conditions:
- Advisory services are solely incidental to the BD business
- The BD receives no special compensation for the advice
If a BD charges a separate advisory fee (e.g., a wrap account fee), it becomes an IA regardless of how incidental the advice appears.
Publisher Exclusion
- Must be a bona fide publication of general and regular circulation
- Advice must not be tailored to a specific client's situation
- A newsletter recommending stocks to all subscribers qualifies; a service creating personalized portfolios does not
Federal-Only Exclusion: Government Securities Advisers
- A person who provides advice solely on U.S. Government securities is excluded under federal law (IAA) but NOT under state law (USA)
- The USA does not contain this exclusion
- An adviser who advises solely on Treasuries may still meet the IA definition at the state level and need to register
Exam Tip: Gotchas
- BD exclusion has two conditions. Solely incidental advice AND no special compensation. A wrap fee = special compensation, destroying the exclusion.
- Publisher exclusion requires general, non-tailored advice. Personalized portfolio recommendations lose the exclusion.
- Banks must be domestic. Foreign banks do NOT qualify for the exclusion.
- Government securities adviser exclusion is federal only. The state may still require registration.
Exemptions from State Registration
Certain advisers are exempt from state registration. They still meet the IA definition but do not need to register. Antifraud provisions still apply.
| Exemption | Conditions |
|---|---|
| No office in state + de minimis clients | No place of business in the state AND 5 or fewer retail clients in the state during the preceding 12 months |
| Federal covered adviser | Registered with SEC; only notice files with states |
| Private fund adviser | Solely advises private funds; acts as an exempt reporting adviser (ERA) at federal level; state may grant parallel exemption |
Key details:
- The de minimis exemption counts only retail clients (individuals); institutional clients are generally not counted
- The "no office" requirement means no physical location in the state from which advisory services are provided
- The de minimis rule requires both conditions: no office AND 5 or fewer clients. Having an office in the state eliminates the exemption regardless of client count
Exam Tip: Gotchas
- De minimis requires BOTH conditions. No place of business AND 5 or fewer retail clients. An office in the state kills the exemption.
- Institutional clients do not count toward the de minimis cap. Only retail clients count.
Exclusion vs. Exemption vs. ERA vs. Registered
| Status | Is an IA? | Must Register? | Files Form ADV? | Subject to Antifraud? |
|---|---|---|---|---|
| Excluded (bank, L.A.T.E., BD, publisher) | No | No | No | Yes |
| Exempt (de minimis, private fund adviser) | Yes | No | No | Yes |
| ERA (exempt reporting adviser: private fund / VC adviser) | Yes | No | Yes (Part 1 only) | Yes |
| Registered IA (state or federal) | Yes | Yes | Yes (full) | Yes |
Think of it this way: Regardless of your status, antifraud always applies. No one gets a free pass to commit fraud. The only question is how much paperwork you file and whether you carry the "investment adviser" label.
Exam Tip: Gotchas
- Every category is subject to antifraud. There is no exception.
- Exempt reporting advisers (ERAs) file a limited Form ADV (Part 1 only), even though they are not registered.
- Excluded persons are NOT investment advisers. Exempt persons ARE investment advisers who skip registration.