Quick Answer
An investment adviser is anyone who, for compensation, is in the business of advising others on securities, the ABC test. Certain persons, like the LATE professionals and banks themselves, are excluded even if they meet that test. Assets under management then decide whether an adviser registers with the SEC as a federal covered adviser or with the state.
Before you can understand how investment advisers are regulated, you need to know exactly who qualifies as one, and who does not.
Who Counts as an Investment Adviser Under the USA?
Under the Uniform Securities Act (USA), an investment adviser is any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities.
This definition hinges on a three-part test. All three elements must be met:
| Element | What It Means | Key Detail |
|---|---|---|
| Advice | Provides advice or analyses about securities | Includes recommendations, reports, and analyses, not just "buy/sell" calls |
| In the business | Provides such advice on a regular basis | Does not need to be the primary business; just ongoing and consistent |
| Compensation | Receives any economic benefit for the advice | Not limited to direct fees; includes commissions, soft dollars, or any form of value |
Memory Aid: ABC
- Advice (about securities)
- Business (in the regular business of providing it)
- Compensation (any economic benefit, direct or indirect)
Exam Tip: Gotchas
- A planner who charges the client nothing for advice can still meet the compensation element. Ask who pays the planner anything because of the advice, not only what the client pays.
- "In the business" does not mean investment advice must be the person's primary occupation. A CPA who regularly advises clients on securities selections as part of financial planning is "in the business," even if tax work generates most of the revenue.
What Counts as Compensation?
The Uniform Securities Act (USA) definition says only that the adviser acts "for compensation." It does not say who must pay, and it sets no dollar minimum. So the C in ABC is met when the person receives any economic benefit because of the securities advice.
| Payment | Counts as compensation? | Why |
|---|---|---|
| Advisory fee paid by the client | Yes | The most direct form |
| Commission from a product provider | Yes | The payer is a third party, not the client |
| Referral fee from a fund company | Yes | The planner is paid because recommendations send clients to the product |
| Soft dollars (research or services received) | Yes | Value received is a benefit even when no cash changes hands |
| A small amount | Yes | The definition has no dollar minimum |
Worked example: A certified financial planner charges clients no separate fee for securities advice. Fund companies pay the planner a referral fee whenever a client invests on the planner's recommendation. The client paid nothing, but the planner is still paid for steering clients to securities, so the compensation element is met.
Two wrong arguments appear often on the exam:
- "The client must be the one paying." The definition does not say that. A payment from a third party counts.
- "A referral fee is a marketing expense, not advisory pay." Relabeling the payment does not change why it was paid. The definition has no marketing-expense exception.
Who Is Excluded From the IA Definition Under the USA?
Certain persons are specifically excluded from the investment adviser definition, even if they technically meet the three-part test:
| Excluded Person | Condition |
|---|---|
| Banks, savings institutions, and trust companies | But NOT their subsidiaries or affiliates |
| Lawyers, accountants, engineers, teachers | Only if advice is solely incidental to their profession |
| Broker-dealers and their agents | Only if advice is solely incidental to brokerage and they receive no special compensation |
| Publishers | Under the USA, must not render advice based on each client's specific investment situation (the Investment Advisers Act of 1940 uses the separate "general and regular circulation" standard) |
| Investment adviser representatives (IARs) | Excluded from the separate adviser (firm-level) definition; regulated under their own IAR provisions |
| Federal covered advisers | Registered with the SEC, not the state |
| Other persons | Excluded by state 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 solely incidental to their profession. (The "no special compensation" condition belongs to the separate broker-dealer exclusion, not to the LATE professionals.)
Exam Tip: Gotchas
- The "solely incidental" language is key. A lawyer who holds herself out as providing investment advisory services or charges separately for securities advice loses the exclusion, even though she is a lawyer. The advice must be a natural byproduct of the primary professional service, not a standalone offering.
- Under the USA, bank subsidiaries and affiliates are NOT excluded. Only the bank, savings institution, or trust company itself qualifies for the exclusion. The exam may try to trick you by describing a "subsidiary of a major bank" providing advisory services.
- A subscription or access fee does not defeat the publisher exclusion. The test is whether the advice is tailored to each client's specific situation, not whether readers pay for the publication.
Who Is a Federal Covered Adviser?
Under the Uniform Securities Act, a federal covered adviser is an investment adviser registered with the SEC under the Advisers Act rather than with the state. The primary dividing line is assets under management (AUM):
| AUM Level | Registration | Notes |
|---|---|---|
| $110M+ | Must register with the SEC | Becomes a federal covered adviser |
| $100M to under $110M | May register with the SEC | Optional registration buffer; not yet required |
| $25M - under $100M | Generally registers with the state | MUST register with the SEC instead if home state doesn't require IA registration or doesn't examine registered advisers (a mandatory federal fallback, not optional) |
| Below $25M | Must register with the state | Prohibited from SEC registration, except an adviser to a registered investment company, which registers with the SEC at any AUM |
Registered-investment-company advisers must register with the SEC regardless of AUM. A business development company (BDC) adviser must register with the SEC once it has at least $25M in AUM (not truly "regardless of AUM" like a registered-investment-company adviser, but not subject to the $100M/$110M mid-sized buffer either).
These advisers are merely eligible to register with the SEC regardless of AUM (not required to):
- Pension consultants advising plans with $200M+ in aggregate plan assets
- Advisers that control, are controlled by, or are under common control with an SEC-registered adviser, PROVIDED they also share the same principal office and place of business
- A newly formed/currently unregistered adviser with a reasonable expectation of becoming eligible for SEC registration within 120 days (does NOT cover an existing state registrant merely anticipating future eligibility)
- Multi-state advisers required to register in 15+ states
- Internet advisers providing advice exclusively through an interactive website
Exam Tip: Gotchas
- A small AUM figure alone does not decide where an adviser registers. An adviser with $15M that advises a mutual fund (a registered investment company) registers with the SEC, not the state. Read the stem for a fund client before you apply the AUM lines.
- The bright line is $110M for mandatory SEC registration, with a $100M-under-$110M buffer where SEC registration is optional. These mid-size advisers below $100M generally register at the state level. The exception: an adviser whose home state doesn't require IA registration or doesn't examine registered advisers MUST register with the SEC starting at $25M, not merely "may."
- Registering with the SEC does not lock an adviser in forever. Once SEC-registered, an adviser is not required to withdraw and switch back to state registration until its AUM drops below $90M, a buffer below the $100M/$110M registration line, not a mirror of it.
- NRSROs are NOT a current SEC-registration exemption category. Older materials sometimes list them; the current regardless-of-AUM path is registered-investment-company advisers (mandatory, no AUM floor) and BDC advisers (mandatory once at $25M+ AUM), plus the pension-consultant/affiliated/120-day/multi-state/internet-adviser list above (optional).
What Should You Check on Exam Day?
- Can you name all three parts of the ABC test, and explain why "compensation" reaches referral fees and soft dollars, not just direct fees?
- Do you know why a bank subsidiary is NOT covered by the bank exclusion, even though the bank itself is?
- Can you state the "solely incidental" standard for lawyers, accountants, teachers, and engineers, and recognize when a professional loses that exclusion?
- Do you know the AUM lines: state-only below $25M, generally state from $25M to under $100M, the optional SEC buffer at $100M to under $110M, and mandatory SEC registration at $110M+?
- Can you distinguish registered-investment-company advisers (must register with the SEC regardless of AUM) from BDC advisers (must register once at $25M+ AUM) from the merely-eligible categories (pension consultants, affiliated, 120-day, multi-state, internet advisers)?