Key Takeaways
- Investment adviser must meet ALL three prongs: advice, about securities, for compensation.
- Compensation includes any economic benefit, not just direct fees.
- The 'LATE' exclusion applies to Lawyers, Accountants, Teachers, and Engineers when advice is incidental.
- Broker-dealers are excluded if advice is incidental and no special compensation is received.
- Publishers are excluded only for general circulation, non-personalized content.
- Banks and trust companies are excluded as they are separately regulated.
- Federal covered advisers register with SEC; state-registered advisers register with states.
- De minimis exemption allows advisers with 5 or fewer clients in a state to avoid registration.
Investment Adviser Definition
The Uniform Securities Act (USA) and Investment Advisers Act of 1940 define who qualifies as an investment adviser. Understanding these definitions is crucial for the Series 66 exam.
The Three-Prong Test
A person is an investment adviser if they meet ALL THREE criteria:
| Prong | Requirement | Key Points |
|---|---|---|
| 1. Advice | Gives advice or analyses about securities | Includes recommendations, research, opinions |
| 2. Business | Is in the business of giving advice | Regular activity, not isolated instances |
| 3. Compensation | Receives compensation for the advice | ANY economic benefit qualifies |
Critical: If ANY prong is missing, the person is NOT an investment adviser.
Understanding "Compensation"
Compensation is interpreted broadly under securities law:
- Direct fees (flat, hourly, AUM-based)
- Commissions on product sales
- Referral fees
- Soft dollar arrangements
- Discounts or free services
- ANY economic benefit received
Understanding "In the Business"
Being "in the business" means:
- Providing advice on a regular basis
- Holding yourself out as providing advice
- Receiving separate or special compensation for advice
Not in the business: Occasional advice given incidentally during other activities.
Exclusions from the Definition
These persons are NOT investment advisers under the USA (even if they meet all three prongs):
The LATE Exclusion
| Professional | Condition for Exclusion |
|---|---|
| Lawyers | Advice is incidental to legal practice |
| Accountants | Advice is incidental to accounting practice |
| Teachers | Advice is incidental to teaching profession |
| Engineers | Advice is incidental to engineering practice |
"Incidental" means:
- Not the primary service being provided
- Not holding out as an investment adviser
- Not charging separately for investment advice
Exam Trap: If a CPA charges separately for investment advice or holds out as an adviser, they ARE an investment adviser.
Other Exclusions
| Exclusion | Requirements |
|---|---|
| Banks and Trust Companies | State or federally regulated |
| Broker-Dealers | Advice incidental to BD activities, no special compensation |
| Publishers | General circulation, not tailored to individual clients |
| Newspaper/Magazine Columnists | General circulation, impersonal advice |
| Federal Covered Advisers | Registered with SEC (excluded from state definition) |
The Publisher's Exclusion
To qualify for the publisher's exclusion:
- Publication must be of general and regular circulation
- Content cannot be tailored to individual subscribers
- Publisher cannot provide personalized advice
- Must be bona fide publication (not a sham)
Example: A newsletter recommending specific stocks to all subscribers = excluded. Example: A service providing personalized stock picks = NOT excluded.
Federal vs. State Registration
SEC Registration (Federal Covered Advisers)
| Adviser Type | Registration |
|---|---|
| $110 million+ AUM | Must register with SEC |
| $100-110 million AUM | May register with SEC |
| Advisers to registered investment companies | Must register with SEC |
| Multi-state advisers (15+ states) | May register with SEC |
| Internet advisers | May register with SEC |
| Pension consultants ($200M+ advised) | Must register with SEC |
State Registration
| Adviser Type | Registration |
|---|---|
| Under $100 million AUM | State only |
| $100-110 million AUM | State or SEC (choice) |
| Place of business in state | Must register with that state |
Switching Thresholds
- SEC → State: When AUM falls below $90 million
- State → SEC: When AUM reaches $110 million
- Buffer zone: $100-110 million provides flexibility
De Minimis Exemption
An adviser may be exempt from state registration if they:
- Have no place of business in the state
- Have 5 or fewer clients in the state during the past 12 months
- Do not hold themselves out as advisers in that state
Counting Clients for De Minimis
Counted as ONE client:
- A corporation or business entity
- A trust (not individual beneficiaries)
- A married couple with joint account
NOT counted:
- Other advisers
- Institutional buyers
- Existing clients who relocate to the state (grace period)
Notice Filing for Federal Covered Advisers
While federal covered advisers don't register with states, they must:
- File copies of SEC filings with states where they have a place of business
- Pay state filing fees
- Submit to state antifraud authority
Exam Tip: The three-prong test requires ALL three elements. Remember LATE exclusions require advice to be INCIDENTAL. The de minimis exemption is 5 or fewer clients with no place of business.
A CPA prepares tax returns and occasionally recommends stocks to clients during their meetings. The CPA charges only for tax preparation. Is the CPA an investment adviser?
Which of the following would cause a broker-dealer to lose its exclusion from the investment adviser definition?
An investment adviser has $95 million in AUM and a place of business in one state. The adviser:
An adviser has no place of business in State A but has 7 clients there. The adviser:
11.2 Investment Adviser Registration
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