The Basics of Providing Investment Advice 


    Definition of “Investment Adviser”

    The first question you will face as a PFP is whether you are an “investment adviser” under federal securities regulations—specifically, the Investment Advisers Act of 1940 (the Advisers Act). The Advisers Act defines an “investment adviser” as a person or entity who:
    1. For compensation
    2. Is engaged in the business
    3. Of providing advice or issuing reports or analysis on securities
    This definition is more complex than most advisers realize. Federal courts and the SEC tend to interpret the above three elements broadly. For example, according to SEC Release IA-1092, you may be providing investment advice if, among other services, you:
    • Recommend asset allocation
    • Provide advice as to the selection or retention of an investment manager
    • Provide advice concerning securities, even if the advice is not related to specific securities or simply concerns the relative advantages and disadvantages of investing in securities in general compared to other investments
    • Are in the business of providing investment advice
    • Receive compensation, directly or indirectly, for any of the services above
    The above list is not all-inclusive. Whether or not you believe you are in the business of providing investment advice, all advisers who cover estate, tax, retirement, insurance and investment planning should educate themselves on what the SEC believes to be investment advice. Also consult your state securities laws or securities regulators as they may define investment adviser or investment advice differently than the SEC.

    If you meet the definition of an investment adviser, you will have to register as such with the SEC or state securities agency, unless you are either (i) excluded from the definition or (ii) otherwise exempted from SEC or state registration.


    Exclusions from Definition of “Investment Adviser”

    One pertinent exclusion is for accountants. Under the Advisers Act, lawyers, accountants, engineers and teachers do not fall under the definition of “investment adviser” if they give investment advice solely incidental to their professional practices. However, this exception is narrow and depends upon the relevant facts and circumstances. In addition, you will not be able use the exception if you provide investment advice apart from your other non IA related professional services. In determining whether you are excluded from the definition of “investment adviser,” the SEC considers the following three factors, any one of which could disqualify you from the exclusion: 

    • Whether your fee structure for investment advisory services is different from your fees for accounting services
    • Whether you hold yourself out to the public as an investment adviser or financial planner providing investment advice
    • Whether you give investment advice in connection with your accounting services.

    View SEC Release IA-1092, Applicability of the Investment Advisers Act to Financial Planners and Others Who Provide Investment Advisory Services as a Component of Other Financial Services for more information.

    Exemptions from SEC Registration

    Even if you meet the definition of investment adviser and cannot utilize an exclusion, you may not need to register with the SEC if your investment advisory business falls under certain exemptions. Two of the more frequently relied upon exemptions from SEC registration are:

    • Investment advisers who (i) had fewer than 15 advisory clients during the previous 12 months, (ii) do not advise any registered investment companies, and (iii) do not hold themselves out generally to the public as investment advisers.
    • State-regulated advisers with limited “assets under management.” The term “assets under management” means the securities portfolios with respect to which the investment adviser provides continuous and regular investment supervisory or management services.
    • A “securities portfolio” is an account where at least 50 percent of the total value consists of securities (stocks, bonds, mutual funds, etc.), cash and cash equivalents.
    • The entire market value of each securities portfolio for which the adviser provides “continuous and regular supervisory or management services” is included. Any portion of the account managed by another person, or that consists of real estate or a business managed on behalf of a client but not as an investment, is excluded.
    • A person provides “continuous and regular supervisory or management services” with respect to an account if the adviser (i) has discretionary authority over the account or (ii) has ongoing responsibility to recommend and arrange purchases and sales for the account. 

    Investment Advisers with Fewer than 15 Advisory Clients.  This exemption focuses on the number of clients to whom you provide investment advisory services (as distinguished from accounting services only clients). The number of advisory clients must be calculated in accordance with applicable rules under the Advisers Act. The following count as one client:

    • A natural person and any minor child of the natural person, any relative, spouse or relative of the spouse of the natural person who has the same principal residence, and all accounts or trusts of which the natural person and/or the persons referred to above are the only primary beneficiaries. 
    • A corporation, partnership, limited liability company or other legal organization to which you provide investment advice based on the organization’s investment objectives rather than the individual investment objectives of its owner(s).

    Two or more organizations owned by the same person(s) are counted as one client. Trusts are generally counted as separate clients even if they have a common trustee or some of the same beneficiaries. If the owner of a legal organization receives investment advice separate from the advice provided to the organization, the owner is counted as a separate client. You are not required to count as a client any person for whom you provide investment advice without compensation.

    State-Regulated Advisers with Limited Assets Under Management

    This SEC exemption covers small investment advisers. If you have assets under management of less than $25 million and you do not serve as an investment adviser to a registered investment company, you will generally not register with the SEC. Instead, you must register with the state in which you maintain your principal office, and you may need to register with states in which you maintain a threshold number of clients. If you manage assets between $25 million and $30 million as a state-registered investment adviser, you are permitted, but not required, to register with the SEC. This has benefit to advisers with clients in more than one state who might otherwise be required to maintain multiple state registrations.

    State Registration and Exemptions

    Each state has its own laws and regulations for investment advisers, which may mirror the framework under the Advisers Act but differ in the specific rules. States usually require persons who engage in the business of providing investment advice for compensation (and who have less then $25 million of assets under management) to register as an investment adviser. States also generally exempt from registration investment advisers who (i) do not have a place of business within the state and (ii) had fewer than six advisory clients (similar to the federal definition of “client”) who are residents of that state during the last 12 months. Known as the de minimus standard, this exemption may vary slightly from state to state in the number of clients which triggers registration, but in any case the de minimus state standard will be narrower than the federal exemption of 15 clients. States may also exempt investment advisers who have only banks, insurance companies or other qualifying entities as advisory clients.

    Importantly, states may still pursue enforcement actions for fraud and deceit against unregistered investment advisers.

    The AICPA has created a guide, The CPA’s Guide to Investment Advisory Business Models, to assist in walking you through these issues.

    Note to Reader:
    The content covered in The CPA’s Guide to Investment Adviser Registration is generally evergreen; however, changes pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”) will be made when studies and implementation of the Act are finalized. To keep apprised of movement with the Act’s studies and related implementation, visit aicpa.org/PFP/advocacy.

     




    A A A


     
    Copyright © 2006-2014 American Institute of CPAs.