Module 2 Flashcards
Describe the IAA’s definition of “Investment Adviser”
Section 202 (a) 11 “‘Investment adviser’ means any person who, for compensation, engages in the
business of advising others, either directly or through publications or writings, as to
the value of securities or as to the advisability of investing in, purchasing, or
selling securities, or who, for compensation and as part of a regular business,
issues or promulgates analyses or reports concerning securities; but does not
include ….”
- Advising others about the value of “securities” or about the advisability of investing in securities (or issues reports about securities)
- In the business; and
- For compensation
What does it mean that IA’s “give advice about securities”
Advice need not be about specific securities: includes the relative advantages and disadvantages of investing in securities versus other investments.
Includes advising others as to the selection or retention of an investment advisor.
Describe the entities that are excluded from the definition of an “investment advisor”.
Banks, certain publishers, Credit rating organizations, family offices, and broker-dealers are excluded.
Describe generally what a fiduciary is, and the significance of investment advisers as fiduciaries.
A fiduciary is someone who has undertaken to act for
and on behalf of another in a particular matter in
circumstances which give rise to a relationship of trust
and confidence.
IA fiduciary duty pre-exists the Advisers Act. The adviser’s fiduciary duty is enforced by the antifraud provisions of the Advisers Act.
It is incredibly significant because it requires seeking the clients interests and goals above their own.
Articulate the relationship between fiduciary duty and the antifraud provisions of the IAA.
An adviser’s fiduciary duty is enforced by the SEC through the Act’s antifraud
provisions: Sections 206(1) and (2) of the Act:
“It shall be unlawful for any investment adviser, by use of the mails or any means
or instrumentality of interstate commerce, directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud any client or prospective
client; [or]
(2) to engage in any transaction, practice, or course of business which operates as
a fraud or deceit upon any client or prospective client….”
What individuals are not Investment Advisors.
Lawyers, accountants, engineers and teachers, Government Securities Advisers, and others in the intent of the exclusion paragraph
What does it mean IA’s must be “in the business”?
Advice need only be given “on such a basis that it constitutes a business activity occurring with some regularity.”
Doesn’t have to be the principle business.
If holds itself out to the public as an IA or as providing advice about securities.
What does it mean IA’s work “for compensation”?
Includes the receipt of any economic benefit.
Need not charge a separate fee.
Compensation can be contingent and the recipient of the advice might not know of the compensation.
Why are Banks excluded from IA regulation?
Banks as defined in the Bank Holding Company Act of 1956 , that are not an investment company are not an IA’s.
Except when they serve or act as an investment adviser to a registered investment company. But if the services and actions are performed through a separately identifiable department or division and not the bank itself, the separate group shall be deemed to be the investment adviser.
“Bank” is defined in the Bank Holding Company Act of 1956, as any FDIC-insured
bank, or any U.S. institution that (a) accepts demand deposits and (b) is engaged
in the business of making commercial loans, but does not include credit unions,
foreign banks and certain other entities.
Why are lawyers, accountants, engineers and teachers are excluded from IA regulation?
Section 202(a)(11)(B): lawyers, accountants, engineers and teachers
“(B) any lawyer, accountant, engineer, or teacher whose performance of such
services is solely incidental to the practice of his profession;”
What is “solely incidental?” Factors include whether:
(i) the professional holds himself out as an investment adviser;
(ii) the advice is reasonably related to the professional services provided; and
(iii) the charge for advisory services is based on the same factors that determine
the professional’s usual charge.
Why are broker-dealers excluded from IA regulation?
any broker or dealer whose performance of such services is solely incidental
to the conduct of his business as a broker or dealer and who receives no special
compensation therefor;”
Solely incidental: Advice must be “provided in connection with and [must be]
reasonably related to the broker-dealer’s primary business of effecting securities
transactions.”
If investment advice is given by a brokerage employee, the advice must be:
(i) given within scope of that person’s employment with the broker-dealer.
(ii) incidental to her employer’s brokerage activities; and
(iii) for no “special compensation.”
Why are certain publishers excluded from IA regulation?
the publisher of any bona fide newspaper, news magazine or business or
financial publication of general and regular circulation;”
ref: Lowe v. SEC and SEC v. Park
What is SEC v. Lowe about?
Supreme Court: two things were clear:
Congress did not intend to exclude publications that were distributed by IAs
as a normal part of a business of serving their clients; primarily intended to
regulate the business of rendering personalized investment advice, including
publishing activities that are a normal incident thereto.
Congress did not seek to regulate the press through the licensing of
non-personalized publishing activities (1st Amendment* concerns).
*1st Amendment: Congress shall make no law … abridging the freedom of
speech, or of the press….”
Why are Government Securities Advisers excluded from IA regulation?
“(E) any person whose advice, analyses, or reports relate to no securities other
than securities which are direct obligations of or obligations guaranteed as to
principal or interest by the United States, or securities issued or guaranteed by
corporations in which the United States has a direct or indirect interest which shall
have been designated by the Secretary of the Treasury, pursuant to section
3(a)(12) of the Securities Exchange Act of 1934, as exempted securities for the
purposes of that Act;”
Why are Credit Rating Organizations excluded from IA regulation?
“(F) any nationally recognized statistical rating organization, as that term is defined
in section 3(a)(62) of the Securities Exchange Act of 1934, unless such
organization engages in issuing recommendations as to purchasing, selling, or
holding securities or in managing assets, consisting in whole or in part of
securities, on behalf of others;”
