Module 1

Question 1

Describe the origins and historical context of the Investment Advisers Act (IAA)

Answer 1

SEC performed study on the functions and activities of investment trusts and companies.

The study noted that the IA business was only stand alone post WWI, expanded rapidly in the 1930s, ran rampant with fraud before the Great Depression.

Most fraud was untraceable so desires for regulation was low.

Question 2

Articulate the concerns that lead to the enactment of the IAA

Answer 2

Reducing tipster organizations and “heads I win, tails you lose” profit-sharing arrangements.

Removing ALL conflicts of interest between advisers and clients.

The SEC noted that if advice results in financial benefit to the adviser, that there may be tinged advice.

Protect against subconscious prejudice.

Question 3

Describe the goals and objectives of the IAA

Answer 3

1. Emphasized need to prohibit intentional and negligent fraud.
2. Desire to preserve the personalized character of the services of IAs.
3. Congressional recognition of the delicate fiduciary nature of an investment advisory relationship; and
4. A Congressional intent to eliminate, or at least expose, all conflicts of interest which might incline an IA – consciously or unconsciously – to render advice that was not disinterested.

Dual Purpose:
A. Protect the public from frauds and misrepresentations of unscrupulous tipsters and touts
B. Safeguard the honest IAs against the stigma of those individuals.

Question 4

What was the criticism of the original 1944 IAA?

Answer 4

Derided as a “continuing census” and for being the “most inadequate” of the federal securities laws.