Before you can understand how investment advisers are regulated, you need to know exactly who qualifies as one, and who does not.
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.
Who Counts as an Investment Adviser Under the 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
- "Compensation" is interpreted extremely broadly. If a financial planner receives a referral fee for steering clients toward certain products, that counts as compensation. It does not have to be a direct advisory fee. The exam loves testing this distinction.
- "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.
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 federal Advisers Act 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.
Who Is a Federal Covered Adviser Under the Advisers Act?
A federal covered adviser is an investment adviser registered with the SEC rather than 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 (with narrow exceptions) |
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
- 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 that separate state-only (below $25M), the generally-state zone ($25M to under $100M, with a mandatory SEC exception for certain home states), the optional SEC buffer ($100M to under $110M), and mandatory SEC registration ($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)?
- Do you know the $90M floor that determines when an SEC-registered adviser must withdraw and register with a state instead?