Investment advisers serve an important role by helping people make informed decisions about investment opportunities. Because of the large impact that an advisor can have on a person’s wealth, however, the Investment Advisers Act was passed to better regulate the profession. If you give investment advice in any form professionally, you may be required to register with the SEC and comply with the Investment Advisers Act. An investment lawyer from Priori Legal can help you better understand your responsibilities under this key law.
Understanding the Investment Advisers Act
The Investment Advisers Act governs investment advisers and requires them to be registered with the government. Under amendments to the Investment Advisers Act, any investment adviser managing over $25 million dollars in investments must register with the SEC, but even those with investments valued at less than $25 million must register with state authorities where they operate. The Investment Advisers Act also establishes disclosures that investment advisers must give to prospective clients and works to eradicate fraud in the profession.
Who Must Register as an Investment Adviser?
Just about any person who advises people, pension funds, and institutions on investment matters must register as an investment adviser with the SEC or state securities agencies as Registered Investment Advisors (RIAs) under the Investment Advisers Act. This does not include professionals whose investment advice to clients is incidental to the professional relationship, such as lawyers, accountants, engineers, publishers, bankers, or teachers, so long as the investment advice is incidental to some other job task that must be carried out.
Registration is done at both the individual and firm level, which means that both companies and advisors working at such firms must register separately. For individuals, this process can be quite complex and includes taking the Series 65 Exam (the Investment Adviser Law Examination) or another more specialized certification exam.
Defining Investment Advisers
An investment adviser is defined in the Act as any person who gives advice on the “value of securities or as to the advisability of investing in, purchasing, or selling securities… [or gives] analyses or reports concerning securities” as a part of their regular business activities. Securities considered investments under this Act include stocks, bonds, notes, mutual funds, money market funds, and certificates of deposit, but not real estate, contracts, or other tradable goods.
There are several exceptions that will allow a person to avoid registration as would typically be required under the registration requirement:
Investment advisers who do not provide advice on securities listed on national exchanges and operate solely in the state where they have an office, serving only clients domiciled in that state
Investment advisers whose clients are only insurance companies
Investment advisers who only manage private funds that hold less than $100 million in assets from U.S. investors
The Brochure Rule
Under the “brochure rule” of the Investment Advisers Act, all registered investment advisers must fill out Form ADV Part 2A and Part 2B in the format of a brochure and a brochure supplement describing their business practices, conflicts of interest, and background of themselves and other advisory personnel. This brochure must be given to all prospective clients before entering into an investment advisory contract. In addition, advisers must disclose any material changes to the brochure to all current clients.
Are investment advisers allowed to charge performance fees?
No. Performance-based fees that are dependent on the returns of capital gains or appreciation in the client's account are illegal under the Investment Advisers Act.
Do fintech companies that provide automated investment advice need to register?
Yes. These so-called robo-advisors still must be registered with the SEC. While robo-advisement fintech companies may not need to have as many RIAs individually registered, they are still considered investment advisers as companies, and must register as such.
Can investment advisers use testimonials on their website?
No. This is illegal under the Investment Advisers Act. In fact, you cannot invite clients to post public commentaries directly on your websites, blogs, or social media sites. You can, however post an aggregate review created by an independent third party on your websites, so long as it updates in real time (such as connecting your website with Yelp). If you are not sure if a particular post would be legal, it can help to discuss the specifics with an investment lawyer.