Table of Contents
SERIES 65 | FINANCIAL REGULATION COURSES
The Investment Advisers Act of 1940 is the primary federal statute governing registration, conduct, and oversight of investment advisers in the United States — imposing a comprehensive fiduciary duty on registered advisers, mandating disclosure through Form ADV, and conferring on the Securities and Exchange Commission broad examination, enforcement, and rulemaking authority.
The Act was enacted on August 22, 1940 as one of four landmark federal securities statutes adopted in the decade following the Great Depression — alongside the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940 — in direct response to a comprehensive SEC study that documented widespread conflicts of interest, inadequate disclosure, and abusive practices in the advisory industry that Congress determined required federal regulatory intervention.
The Investment Advisers Act of 1940 is the foundational statute of the Series 65 examination curriculum — virtually every topic tested on the Series 65 derives from or connects to the Act's requirements — making thorough understanding of its structure, key provisions, and regulatory framework essential for every candidate sitting for the Uniform Investment Adviser Law Examination.
The Investment Advisers Act of 1940 was enacted on August 22, 1940 as one of four landmark federal securities statutes adopted in the decade following the Great Depression.
The Securities Act of 1933 — the first of these statutes — established the registration and disclosure requirements governing the public offer and sale of securities, imposing liability on issuers, underwriters, and others who make material misstatements in connection with public offerings.
The Securities Exchange Act of 1934 — the second statute — created the Securities and Exchange Commission and established the regulatory framework governing secondary market trading, broker-dealer conduct, and reporting obligations of publicly traded companies.
The Investment Company Act of 1940 — enacted on the same day as the Advisers Act — defined the responsibilities and requirements for investment companies offering publicly traded investment products.
The Investment Advisers Act of 1940 — the fourth and final pillar — completed the federal securities regulatory framework by establishing oversight of those who provide advice about investing in those same securities.
All four statutes were direct responses to a comprehensive SEC study mandated by the Public Utility Holding Company Act of 1935 that documented widespread conflicts of interest, inadequate disclosure, and abusive practices in the advisory and investment company industry. The SEC's study found that investment advisers — who had proliferated during the 1920s bull market — operated without any federal regulatory framework, charging fees for advice without disclosing conflicts of interest and generally exploiting the trust that clients placed in them without any legal obligation to act in those clients' best interests.
Congress responded by enacting the Investment Advisers Act — recognising, in the words of the Supreme Court in SEC v. Capital Gains Research Bureau in 1963, the delicate fiduciary nature of an investment advisory relationship and the congressional intent to eliminate or at least expose all conflicts of interest which might incline an investment adviser to render advice that was not disinterested.
Section 202(a)(11) of the Investment Advisers Act contains the legally controlling definition of investment adviser that determines who is subject to the Act's requirements.
An investment adviser is defined as 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.
This definition is satisfied when three conditions are simultaneously met — the person provides advice or analysis concerning securities, the advice is provided for compensation, and the advisory activities are conducted as part of a regular business rather than an isolated occasional occurrence. Failing to satisfy any one of the three conditions removes a person from investment adviser status under the Act.
Section 202(a)(11) also specifies several categories of persons explicitly excluded from the investment adviser definition — including banks and bank holding companies, lawyers, accountants, engineers, and teachers whose investment advice is solely incidental to their primary professional practice, broker-dealers whose advisory services are solely incidental to their brokerage business and who receive no special compensation for advisory services, and publishers of bona fide newspapers, news magazines, or business or financial publications of general and regular circulation.
Section 203 of the Investment Advisers Act requires every investment adviser who uses interstate commerce in conducting their advisory business to register with the SEC unless specifically exempted from registration by the statute or by SEC rules adopted thereunder.
The registration threshold dividing SEC registration from state registration has been amended several times since the Act's original enactment. The National Securities Markets Improvement Act of 1996 added Section 203A to the Act, initially exempting advisers with less than twenty-five million dollars in assets under management from SEC registration if required to register under applicable state law.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 substantially amended Section 203A — increasing the threshold so that advisers with one hundred million dollars or more in regulatory assets under management must register with the SEC, while advisers below that threshold register with their state securities regulators.
Advisers with regulatory assets under management between one hundred million dollars and one hundred and ten million dollars may register with either the SEC or their home state regulator. Advisers above one hundred and ten million dollars must register with the SEC. Advisers operating in fifteen or more states may elect federal registration regardless of their assets under management level.
Certain categories of investment advisers are exempt from registration under Section 203(b) and rules adopted thereunder — including the venture capital fund adviser exemption, the private fund adviser exemption for advisers managing less than one hundred and fifty million dollars in private fund assets, and the foreign private adviser exemption for advisers with minimal United States clients and assets.
Section 206 of the Investment Advisers Act is the most consequential provision of the statute — establishing the anti-fraud framework through which the comprehensive fiduciary duty of investment advisers is made enforceable and creating the primary legal basis for SEC enforcement actions against advisers who harm their clients.
Section 206(1) makes it unlawful for any investment adviser — whether registered or exempt from registration — to employ any device, scheme, or artifice to defraud any client or prospective client.
Section 206(2) makes it unlawful for any investment adviser to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.
Section 206(3) requires investment advisers acting as principals to disclose that fact to the client and obtain the client's consent before completing any transaction in which the adviser buys securities from or sells securities to the client for the adviser's own account.
Section 206(4) grants the SEC rulemaking authority to adopt rules defining fraudulent, deceptive, or manipulative acts, practices, or courses of business — the authority under which the SEC has adopted many of its most important rules governing adviser conduct including the Marketing Rule at Rule 206(4)-1 and the Compliance Rule at Rule 206(4)-7.
The fiduciary duty imposed on investment advisers is derived from Section 206. The Supreme Court confirmed in SEC v. Capital Gains Research Bureau in 1963 that Section 206 establishes federal fiduciary standards to govern the conduct of investment advisers. This fiduciary duty is imposed by operation of law because of the nature of the advisory relationship — it cannot be waived or contracted away by agreement between the adviser and the client.
The fiduciary duty derived from Section 206 encompasses two primary obligations that together define the comprehensive standard of conduct applicable to all registered investment advisers.
The duty of loyalty requires the investment adviser to act in the best interests of the client and to avoid placing the adviser's own interests or the interests of third parties above those of the client. An adviser who recommends an investment that generates higher compensation for the adviser without full and fair disclosure to the client has violated the duty of loyalty regardless of whether the recommendation is otherwise sound.
The duty of care requires the investment adviser to provide advice that is in the best interests of the client based on a reasonable understanding of the client's objectives, financial situation, and individual circumstances. The duty of care requires the adviser to have a reasonable basis for any investment recommendation, to seek best execution for client transactions, and to monitor client portfolios on an ongoing basis when the relationship is a discretionary advisory arrangement.
The SEC's 2019 fiduciary interpretation — Release IA-5248 — clarified that the fiduciary duty is a principles-based obligation that applies throughout the entire advisory relationship — not merely at the moment of specific recommendations. An adviser owes fiduciary duties continuously, including when selecting service providers, determining how to vote proxies, and managing the overall advisory relationship.
Section 204 of the Investment Advisers Act grants the SEC authority to adopt rules requiring registered investment advisers to maintain books and records in a specified manner and for specified periods, and to submit reports and other information to the SEC as the Commission deems necessary or appropriate.
The SEC's recordkeeping rules adopted under Section 204 require registered investment advisers to maintain extensive records including client agreements, client correspondence, trade blotters, financial records, advertising materials, and compliance records — for periods of five years for most record types with the most recent two years maintained in an easily accessible location.
The recordkeeping requirements serve the SEC's examination function — when the SEC conducts examinations of registered investment advisers through its Office of Examinations, examiners review the adviser's books and records to assess compliance with the Act's requirements, the accuracy of disclosures made to clients, and whether the adviser's actual practices are consistent with its disclosed policies and procedures.
Section 211 of the Investment Advisers Act grants the SEC broad rulemaking authority to adopt rules and regulations necessary or appropriate in the public interest or for the protection of investors to carry out the purposes of the Act.
The most examination-relevant rules adopted under the Investment Advisers Act include the Brochure Rule — Rule 204-3 — requiring advisers to deliver the Form ADV Part 2 brochure to clients and prospective clients; the Custody Rule — Rule 206(4)-2 — governing the safekeeping of client assets; the Marketing Rule — Rule 206(4)-1 — governing investment adviser advertising and performance presentations; the Compliance Rule — Rule 206(4)-7 — requiring registered investment advisers to adopt and implement written compliance policies and procedures and to designate a chief compliance officer; and the Code of Ethics Rule — Rule 204A-1 — requiring advisers to adopt a code of ethics governing the personal trading and professional conduct of their employees.
Form ADV is the primary registration and disclosure document filed by registered investment advisers with the SEC or state securities regulators and provided to clients and prospective clients as the adviser's disclosure brochure.
Form ADV Part 1 is a standardised form filed electronically through the Investment Adviser Registration Depository that collects information about the adviser's business, ownership structure, clients, employees, affiliations, and disciplinary history. Part 1 information is publicly accessible through the SEC's Investment Adviser Public Disclosure database at adviserinfo.sec.gov.
Form ADV Part 2A — the brochure — is a narrative disclosure document written in plain English that describes the adviser's services, fee schedule, investment strategies, conflicts of interest, and other material information. The brochure must be delivered to prospective clients before or at the time of entering into an advisory agreement and must be updated and offered to existing clients annually.
Form ADV Part 2B — the brochure supplement — provides disclosure about the specific investment adviser representatives who will provide services to the client, including their educational background, professional credentials, outside business activities, and disciplinary history.
The Investment Advisers Act of 1940 has been amended several times since its original enactment — with two amendments particularly significant for the modern regulatory framework.
The National Securities Markets Improvement Act of 1996 fundamentally restructured the registration framework by dividing regulatory jurisdiction between the SEC and state regulators — creating the federal covered adviser concept and establishing the assets under management threshold system that allocates advisers between federal and state registration.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 substantially expanded the SEC's authority — increasing the SEC registration threshold to one hundred million dollars, eliminating the private adviser exemption that had allowed many hedge fund advisers to avoid registration, creating new registration requirements for private fund and venture capital fund advisers, and directing the SEC to study the standards of conduct applicable to broker-dealers and investment advisers — a study that ultimately led to the adoption of Regulation Best Interest in 2019.
The Investment Advisers Act of 1940 is the foundational statute of the Series 65 examination — tested across virtually every topic in the curriculum including the definition of investment adviser, fiduciary duty, registration requirements, Form ADV disclosure, conduct standards, and the distinction between investment advisers and broker-dealers.
The key points to retain are these.
The Investment Advisers Act of 1940 was enacted August 22, 1940 — the fourth pillar of federal securities regulation alongside the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. Section 202(a)(11) defines investment adviser as any person who for compensation engages in the business of advising others about securities — requiring all three conditions of advice about securities, for compensation, and as part of a regular business to be satisfied simultaneously.
Section 203 establishes registration requirements — advisers with one hundred and ten million dollars or more in regulatory assets under management must register with the SEC, those below one hundred million dollars register with state regulators. Section 206 establishes the anti-fraud provisions from which the comprehensive fiduciary duty is derived — imposing duties of loyalty and care that apply continuously throughout the advisory relationship and cannot be waived by contract.
The duty of loyalty requires the adviser to act in the client's best interests and avoid placing the adviser's interests above the client's. The duty of care requires advice tailored to the client's specific circumstances and ongoing monitoring of the advisory relationship. Form ADV — Parts 1, 2A, and 2B — is the primary registration and disclosure document. The Dodd-Frank Act of 2010 raised the SEC registration threshold to one hundred million dollars and expanded the Act's scope to cover private fund advisers. The SEC's 2019 fiduciary interpretation — Release IA-5248 — confirmed that the fiduciary duty is a continuous relationship-wide obligation applying throughout the entire advisory relationship.
