Overview of the Investment Advisers Act of 1940

🧾 Overview of the Investment Advisers Act of 1940
📘 Essential Knowledge for the Series 65 Exam and Beyond

The Investment Advisers Act of 1940 is the foundational law regulating investment advisers at the federal level. Understanding the Act is critical for anyone preparing for the Series 65 exam — and for anyone planning to work as a Registered Investment Adviser (RIA). Here’s a structured and easy-to-digest overview of the Act.

🎯 1. Purpose of the Investment Advisers Act of 1940

The Act was created to:

• Protect investors from fraud and misrepresentation by investment advisers.
• Regulate those who provide investment advice for compensation.
• Establish fiduciary standards, ensuring advisers act in the best interests of their clients.

🎯 2. Who Must Register Under the Act

An entity or person must register as an investment adviser if they:

• Provide advice about securities.
• Are in the business of providing such advice.
• Receive compensation for providing the advice.

Remember:
👉 Advice + Business + Compensation = Investment Adviser = Registration required (unless exempt).

🎯 3. Who Is Excluded from the Definition of an Investment Adviser

The Act excludes certain entities, including:

• Banks and bank holding companies (when not advising registered investment companies).
• Lawyers, accountants, teachers, and engineers (if the advice is incidental to their profession).
• Broker-dealers (if advice is incidental and no special compensation is charged).
• Publishers of general and regular publications (like newspapers or newsletters) that do not tailor advice to individuals.

🎯 4. Key Definitions Under the Act

🎯 5. Key Requirements for Advisers

• Filing Form ADV:
  Part 1 (business information) and Part 2 (brochure for clients).
• Disclosure to Clients:
  • Conflicts of interest.
  • Methods of compensation.
  • Business practices.
• Fiduciary Duty:
  • Duty of loyalty and care.
  • Disclose conflicts honestly and fairly.
  • Seek best execution for clients.
• Recordkeeping Requirements:
  Advisers must maintain client communications, advertisements, and financial records for at least 5 years, and in an easily accessible location for the first 2 years.

🎯 6. Prohibited Practices

🚫 Investment advisers may NOT:

• Engage in fraudulent, deceptive, or manipulative acts.
• Misrepresent qualifications or experience.
• Omit material facts necessary to make statements not misleading.
• Act as principal or agent in a transaction with a client without proper disclosure and consent.

🎯 7. Custody Rules

An adviser is considered to have custody if they:

• Physically hold client funds or securities.
• Have authority to withdraw funds (e.g., for fee deductions).
• Have possession due to related-party arrangements.

Custody triggers additional requirements like:

• Surprise annual audits by an independent CPA.
• Qualified custodian use (e.g., broker-dealer, bank).
• Client notification regarding location of assets.

🎯 8. SEC Registration vs. State Registration

🎯 9. Enforcement and Penalties

The SEC has authority to:

• Conduct investigations and examinations.
• Impose civil penalties, fines, injunctions, and even criminal referrals.

Common Penalties:

• Fines
• Disgorgement of profits
• Loss of registration
• Bans from the industry

🚀 Key Takeaways for Series 65 Exam

• Always link “advice + business + compensation” = registration unless excluded.
• Fiduciary responsibility is core to everything an investment adviser does.
• Know the differences between exclusions (never an IA) and exemptions (IA but doesn’t have to register).
• Understand custody, substantial prepayment, and required disclosures.

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