Investment advisers chapter recap

Exam Essentials — Regulation of Investment Advisers (Top 5)

1. The ABC test. An investment adviser is a person who (A) provides advice about securities, (B) is in the business of providing such advice, and (C) receives compensation. All three prongs must be met. Compensation can be direct or indirect, monetary or in-kind.

2. Solely incidental exception. A broker-dealer, lawyer, accountant, teacher, or engineer who provides incidental investment advice without separate compensation is excluded from the IA definition. Receiving any specific charge for advice destroys the exclusion.

3. Federal-covered vs. state-registered. Federal-covered advisers notice-file with states; states cannot require their full registration. State-registered advisers (smaller AUM, no federal trigger) register through IARD and meet state financial requirements.

4. State de minimis exclusion. An adviser with NO place of business in a state and 5 or fewer non-institutional clients in that state during the prior 12 months is excluded from state IA registration there. Both prongs must be met.

5. Form ADV. Part 1 is the regulator's form (fact-based, used by examiners). Part 2A is the firm brochure delivered to clients before or at the time the advisory contract is signed. Part 2B is the IAR brochure supplement. Books and records must be kept for 5 years and made available to the Administrator.

Common Traps — Don't Get Caught

• “Broker-dealers can never be IAs.” Wrong. A BD that receives separate compensation for advice (advisory wrap fee, asset-based fee, financial-planning charge) loses the BD exclusion and is an investment adviser.
• “Federal-covered advisers don't deal with the state at all.” Wrong. They notice-file, pay state fees, register their in-state IARs, and remain subject to state antifraud authority under USA §101.
• “De minimis means 5 clients of any kind.” Wrong. The 5-client limit applies to non-institutional (retail) clients only. Sales to banks, insurance companies, and other institutional investors don't count toward the 5.
• “A publisher of a tailored financial newsletter is not an IA.” Wrong. The publisher exclusion applies only to general-circulation, impersonal, and regular-publication publications. Tailored advice destroys the exclusion (Lowe v. SEC).
• “Form ADV Part 2A is filed but not delivered.” Wrong. Part 2A IS the brochure delivered to clients at or before the advisory contract is signed, and annually thereafter if material changes occur.
• “An adviser with discretion but no custody has no financial requirement.” Wrong. NASAA model rules impose a $10,000 net worth (or bond) for discretionary advisers without custody; $35,000 for advisers with custody.