Definitions of Investment Advisers

This lesson works through each exclusion and exemption in turn, then contrasts excluded, exempt, exempt-reporting, and registered status so you can tell which paperwork rule applies to which adviser type.

What Is the Three-Prong Test for an Investment Adviser?

All three prongs must be met. Missing any single prong means the person is not an investment adviser.

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.

How Broadly Is Compensation 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.

Who Is Excluded From the Investment Adviser Definition?

Excluded persons are not investment advisers. They do not register.

What Does the L.A.T.E. Exclusion Cover?

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

What Are the Conditions for the Broker-Dealer Exclusion?

The BD exclusion requires two conditions:

1. Advisory services are solely incidental to the BD business
2. 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.

What Qualifies for the 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

Is the Government Securities Adviser Exclusion Available at the State Level?

• 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.

Which Advisers Are Exempt From State Registration?

Certain advisers are exempt from state registration. They still meet the IA definition but do not need to register.

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.
• Not the same test as notice filing. This 5-or-fewer-AND-no-office exemption decides whether a small, not-yet-registered adviser has to register with a state at all. It is a different question from the 6-or-more-OR-office test that decides whether an already SEC-registered federal covered adviser owes a particular state a notice filing (see Registration and Post-Registration). Easy to blend the two since the numbers sit next to each other.

How Do Exclusion, Exemption, ERA, and Registered Status Differ?

Think of it this way: ERAs are exempt from full SEC registration but must still file reports with the SEC, and they remain subject to SEC antifraud provisions. States, in turn, retain antifraud authority over all advisers operating within their borders, including federal covered advisers.

Exam Tip: Gotchas

• ERAs are still subject to SEC antifraud provisions, even though they are exempt from full registration.
• States retain antifraud authority over every adviser operating within their borders, federal covered or not.
• Exempt reporting advisers (ERAs) file Form ADV with abbreviated sections, even though they are not registered.
• Excluded persons are NOT investment advisers. Exempt persons ARE investment advisers who skip registration.

What Should You Check on Exam Day?

• Confirm all three ABC prongs (advice, business, compensation) before calling someone an investment adviser; missing any one prong means the person is not an IA.
• Remember compensation can be indirect and need not come from the client receiving the advice.
• Know the L.A.T.E. exclusion (lawyers, accountants, teachers, engineers) applies only when advice is solely incidental to the primary profession.
• Remember the broker-dealer exclusion needs both solely incidental advice and no special compensation; a wrap fee destroys it.
• Remember the publisher exclusion requires a bona fide publication with general, non-tailored advice.
• Remember banks must be domestic to qualify for the exclusion; foreign banks do not.
• Remember the government-securities adviser exclusion is federal-only; the USA does not contain it.
• Distinguish excluded (not an IA at all) from exempt (an IA that skips registration) from ERA (an IA that files a limited Form ADV).
• Remember the de minimis exemption requires both no office in the state and 5 or fewer retail clients there in the preceding 12 months.