Investment Advisers Act of 1940

The Investment Advisers Act of 1940 is the primary federal law regulating investment advisers. Understanding this act—including who qualifies as an investment adviser and who is excluded—is essential for the Series 65 exam.

Definition of Investment Adviser

Under Section 202(a)(11) of the Act, an "investment adviser" is any person who meets all three elements of the ABC Test:

All three elements must be present for a person to be classified as an investment adviser.

Understanding Each Element

Advice About Securities:

• Recommendations about specific securities
• Asset allocation advice involving securities
• Market timing advice
• Does NOT include advice solely about non-securities (real estate, commodities)

As a Business:

• Regular activity, not isolated instances
• Holding oneself out to the public as an adviser
• Need not be full-time or primary occupation

Compensation:

• Any economic benefit (not just direct fees)
• Commissions, salary, or portion of management fees
• Can be paid by someone other than the client
• Does NOT need to be separate line-item payment

Exclusions from the Definition

The Act specifically excludes certain persons from the investment adviser definition. These exclusions are commonly tested on the exam.

Banks and Bank Holding Companies

Professionals (LATE Exclusion)

Lawyers, Accountants, Teachers, and Engineers are excluded if:

Example: An accountant who provides occasional investment advice during tax planning, without separate fees, is excluded. An accountant who advertises "investment advisory services" is NOT excluded.

Broker-Dealers

Broker-dealers are excluded if they meet both conditions:

On the Exam: This is a conjunctive test—both conditions must be met. Receiving a clearly identifiable fee for advice (even wrapped into commissions) makes the broker-dealer an investment adviser.

Publishers

Bona fide publishers are excluded if:

• Publication is of general and regular circulation
• Not tailored to specific client circumstances
• Provides impersonal advice (not individualized)

Example: A financial magazine with stock recommendations = excluded. A newsletter sent only to paying subscribers with personalized advice = NOT excluded.

Other Exclusions

Exemptions vs. Exclusions

Understanding this distinction is critical—excluded persons are outside the definition entirely, while exempt advisers are still advisers but don't have to register.

Key Takeaways

1. The ABC Test requires Advice + Business + Compensation—all three
2. LATE professionals (Lawyers, Accountants, Teachers, Engineers) are excluded if advice is solely incidental
3. Broker-dealers are excluded only if advice is incidental AND no special compensation received
4. Publishers of general circulation are excluded; personalized newsletters are not
5. Exclusion means "not an adviser"; exemption means "adviser but doesn't register"