Definitions
Before you can understand how investment advisers are regulated, you need to know exactly who qualifies as one, and who does not.
The Investment Adviser Definition (Uniform Securities Act (USA) Section 401)
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.
Exclusions from the IA Definition (USA Section 401)
Certain persons are specifically excluded from the investment adviser definition, even if they technically meet the three-part test:
| Excluded Person | Condition |
|---|---|
| Banks and bank holding companies | But NOT bank subsidiaries or affiliates |
| Lawyers, accountants, engineers, teachers | Only if advice is solely incidental to their profession |
| Broker-dealers | Only if advice is solely incidental to brokerage and they receive no special compensation |
| Publishers | Must be bona fide newspapers, magazines, or financial publications of general and regular circulation |
| 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 incidental to their profession and they receive no special compensation for it.
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.
- Bank subsidiaries and affiliates are NOT excluded. Only the bank itself and bank holding companies qualify for the exclusion. The exam may try to trick you by describing a "subsidiary of a major bank" providing advisory services.
Federal Covered Adviser (Investment Advisers Act (IAA) Section 202)
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 |
|---|---|---|
| $100M+ | Must register with the SEC | Becomes a federal covered adviser |
| $25M - $100M | Generally registers with the state | May register with SEC if home state doesn't require registration or doesn't examine |
| Below $25M | Must register with the state | Prohibited from SEC registration (with narrow exceptions) |
Certain advisers must register with the SEC regardless of AUM:
- Advisers to registered investment companies (mutual funds)
- Advisers that are nationally recognized statistical rating organizations (NRSROs)
- Certain pension consultants
- Advisers expecting to be eligible for SEC registration within 120 days
- Multi-state advisers required to register in 15+ states
Exam Tip: Gotchas
The $100M threshold is the bright line. But watch for the $25M-$100M "buffer zone." These mid-size advisers generally register at the state level. The notable exception: advisers based in New York may register with the SEC at $25M because New York does not examine state-registered advisers.