Investment Management

The Scope of Investment Management

Investment management encompasses a spectrum of activities that together constitute the complete professional management of a client's investment portfolio from initial engagement through ongoing stewardship.

The process begins with client assessment — understanding the investor's financial objectives, risk tolerance, time horizon, liquidity needs, tax circumstances, and any unique constraints or preferences that will shape the investment mandate. This assessment is documented in the investment policy statement — the foundational governing document of the managed portfolio that translates the client's investment profile into specific, actionable portfolio construction guidance.

With the investment policy statement established, the investment manager develops capital market expectations — forward-looking estimates of the expected return, risk, and correlation characteristics of the available asset classes — and uses these expectations to identify the strategic asset allocation on the efficient frontier that best reflects the client's risk-return objectives. The strategic asset allocation is the most consequential investment management decision — empirically documented as the primary driver of long-run portfolio return variability by the Brinson, Hood, and Beebower 1986 study.

Security selection within each asset class — choosing specific equities, fixed income instruments, mutual funds, exchange-traded funds, and alternative investments to populate the strategic allocation — is the implementation layer of investment management. The choice between active management — seeking alpha through superior security selection — and passive management — capturing asset class returns through low-cost index funds and exchange-traded funds — is one of the most consequential implementation decisions in investment management, with the empirical evidence strongly supporting passive approaches for most asset classes after accounting for the fee drag of active management.

Ongoing monitoring and portfolio rebalancing maintain the portfolio's alignment with the strategic allocation and the client's evolving circumstances — reviewing performance against benchmarks, assessing whether the client's investment policy statement remains appropriate as their life circumstances change, and executing rebalancing trades to restore strategic allocation targets when market movements cause actual weights to drift materially from intended targets.

Active Versus Passive Investment Management

The distinction between active and passive investment management is one of the most directly and extensively tested concepts in the Series 65 examination curriculum — requiring candidates to understand the philosophical premises, practical mechanics, and empirical evidence relevant to each approach.

Active investment management seeks to generate alpha — returns above a specified benchmark index — through superior security selection, tactical asset allocation, or both. Active managers conduct fundamental analysis of individual securities, macroeconomic analysis of sectors and geographies, and quantitative analysis of valuation metrics and return momentum — seeking to identify securities that the market has mispriced and that offer expected returns above what their systematic risk justifies in the Capital Asset Pricing Model framework.

The premise of active management is that markets are not fully efficient — that there exist systematic mispricings in security prices that skilled managers can identify and exploit consistently enough after fees to generate positive alpha for their clients. The efficient market hypothesis — particularly in its semi-strong form, which holds that all publicly available information is already reflected in current market prices — challenges this premise, arguing that the mispricings active managers seek to exploit do not exist in a persistent and exploitable form.

The empirical evidence on active management is extensive and broadly consistent — the majority of actively managed equity funds underperform their benchmark index after fees over any sufficiently long evaluation period. Research by S&P Dow Jones Indices through the SPIVA scorecard consistently finds that more than seventy percent of actively managed large-cap equity funds underperform the S&P 500 over ten-year and fifteen-year periods after fees — with the underperformance primarily attributable to management fees, transaction costs, and the difficulty of consistently identifying genuinely mispriced securities in efficiently priced large-cap markets.

Passive investment management — through low-cost index funds and exchange-traded funds that track broad market indices — provides diversified exposure to entire asset classes at minimal cost, with minimal transaction costs, minimal tracking error, and dramatically lower management fees than active strategies. BlackRock — the world's largest asset manager by assets under management — is the leading example of this passive shift, having built its iShares exchange-traded fund franchise into the dominant platform for low-cost index investing while simultaneously running one of the largest active and institutional asset management businesses in the world. The lower cost of passive management means that passive investors capture more of the gross market return than active investors who pay higher fees for the opportunity to potentially outperform — an opportunity that the empirical evidence suggests most active managers fail to consistently realise.

Discretionary Versus Non-Discretionary Investment Management

An important practical and regulatory distinction in investment management is whether the manager has discretionary authority over the client's portfolio — the ability to execute investment decisions without obtaining specific client approval for each transaction — or operates on a non-discretionary basis — requiring client approval before executing any trade.

Discretionary investment management is the standard model for institutional portfolio management and most retail investment advisory relationships — the investment adviser constructs and manages the portfolio in accordance with the investment policy statement and executes trades as professional judgment dictates without consulting the client before each transaction. Discretionary authority enables more efficient portfolio management — allowing the adviser to respond promptly to market developments, execute rebalancing trades systematically, and implement investment strategies consistently across client accounts.

Non-discretionary investment management — in which the adviser provides recommendations and the client approves each transaction before execution — is more common in certain retail contexts, particularly where clients want to remain closely involved in investment decisions or where the relationship involves a small number of significant individual securities transactions rather than continuous portfolio management.

The fiduciary duty of registered investment advisers under the Investment Advisers Act of 1940 applies equally in both contexts — whether operating with discretionary or non-discretionary authority, the investment adviser must act as a fiduciary in the client's best interest at all times, disclosing all material conflicts of interest and providing investment advice tailored to the client's specific and documented investment objectives.

Institutional Versus Retail Investment Management

Investment management clients are broadly divided into two categories — institutional and retail — each with different characteristics, different investment needs, and different regulatory treatment.

Institutional investment management serves organisations that invest on behalf of their constituents — pension funds managing retirement assets for employees, endowments managing long-term capital for universities and non-profits, insurance companies managing investment portfolios to fund future insurance obligations, sovereign wealth funds managing national reserves, and foundations managing charitable assets. Institutional investors typically have larger asset bases, longer investment horizons, more sophisticated understanding of investment markets, and greater access to alternative investments including private equity, hedge funds, and direct lending — accessing investment strategies unavailable to most retail investors.

Retail investment management serves individual investors and families — managing personal investment portfolios, retirement accounts, education funding accounts, and other personal financial assets. Retail investors typically have smaller portfolios, greater sensitivity to liquidity needs, more complex tax circumstances at the individual level, and less familiarity with sophisticated investment instruments than institutional investors. The regulatory framework is correspondingly more protective for retail investors — requiring greater disclosure, imposing on broker-dealers' recommendations the best interest obligation of Regulation Best Interest, and in the case of registered investment advisers imposing the full fiduciary duty that places the client's interests above all others.

Wealth management — the comprehensive advisory model serving high-net-worth and ultra-high-net-worth individuals — occupies a position between institutional and conventional retail investment management, providing institutional-quality portfolio construction and access to alternative investments alongside the comprehensive financial planning, tax strategy, and estate planning services that complex individual financial situations require. Morgan Stanley and J.P. Morgan illustrate how this model operates at scale within diversified financial institutions — each runs a wealth management division applying institutional-grade investment management discipline to individual client portfolios, alongside a separate institutional asset management arm serving pension funds, endowments, and other large investors directly, so that the same firm can appear on both sides of the institutional-retail divide described above.

Investment Management and the Regulatory Framework

Investment management conducted for compensation is investment advisory activity subject to the registration and conduct requirements of the Investment Advisers Act of 1940. Investment managers — whether individuals operating as sole practitioners or large firms managing trillions of dollars — who provide portfolio management services for compensation are investment advisers under Section 202(a)(11) of the Act and generally register with the Securities and Exchange Commission once they manage one hundred million dollars or more in regulatory assets under management, registration with the Commission being optional from one hundred million dollars and required from one hundred and ten million dollars, or with the applicable state securities regulator below one hundred million dollars, subject to exceptions such as the adviser to a registered investment company, which registers with the Commission whatever its assets.

Registered investment advisers providing investment management services are subject to the comprehensive fiduciary duty derived from Section 206 of the Investment Advisers Act — requiring continuous loyalty to the client's best interests, disclosure of all material conflicts of interest, and care in the provision of investment advice tailored to each client's specific circumstances. The SEC's 2019 fiduciary interpretation — Release IA-5248 — confirmed that this duty applies continuously throughout the investment management relationship including when executing portfolio trades, selecting broker-dealers for trade execution, voting proxies on behalf of client accounts, and managing all other aspects of the investment mandate.

Individual investment managers working within registered investment advisory firms generally must register as investment adviser representatives — although at a firm registered with the SEC a supervised person is an investment adviser representative only if more than five of the person's clients, and more than ten percent of them, are natural persons other than qualified clients, so that a manager serving only institutions need not register as one — typically requiring passage of the Series 65 examination or the Series 66 examination as the primary state law qualification — and comply with applicable conduct standards on an ongoing basis.

The Form ADV brochure delivered to clients discloses the investment manager's services, fee schedule, investment strategies, conflicts of interest, and disciplinary history — providing the transparency that enables clients to make informed decisions about whether to engage a specific investment manager and to evaluate the ongoing appropriateness of the investment management relationship.

Investment Advisory Contracts and Assignment

An investment manager's relationship with each client rests on a contract, and Section 205(a) of the Investment Advisers Act controls certain of its terms for every adviser registered or required to be registered with the Commission. The contract must provide, in substance, that the adviser will not assign it without the consent of the other party to the contract. A client who selected a particular manager cannot therefore find the management of the account handed to a different firm without having agreed to the change.

The Act gives assignment a wide meaning. Under Section 202(a)(1), assignment includes any direct or indirect transfer or hypothecation of an advisory contract by the adviser, and also any transfer of a controlling block of the adviser's outstanding voting securities by a security holder of the adviser. When the owners of an investment management firm sell a controlling stake to a new owner, the firm's advisory contracts are assigned even though its name, its personnel and the client accounts remain exactly as they were.

The Commission's Rule 202(a)(1)-1 sets the limit of that reach: a transaction that does not result in a change of actual control or management of the adviser is not an assignment for purposes of Section 205(a)(2). A reorganisation that places the adviser under a new holding company owned by the same people, with the same managers in charge, therefore needs no client consent. Where the adviser is a partnership, the contract must also provide that the adviser will notify the client of any change in the membership of the partnership within a reasonable time after the change, and the death or withdrawal of members holding only a minority interest in the business, or the admission of members who will hold only a minority interest, is not treated as an assignment.

Asset-Based and Performance-Related Advisory Fees

Section 205(a)(1) generally forbids the contract of an adviser registered or required to be registered with the Commission to pay the adviser a share of the capital gains upon, or capital appreciation of, the client's funds, but Section 205(b) marks out fee structures that the prohibition does not reach. The most common is the ordinary asset-based fee: the prohibition is not to be construed to bar compensation based on the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date. A fee of one percent a year of the account's average value is therefore lawful with any client.

A second exception allows a performance-related fee, commonly called a fulcrum fee, in a contract with a registered investment company, or with another person where the contract relates to the investment of more than one million dollars of assets, trusts, governmental plans, collective trust funds and certain separate accounts being excepted. The fee must be based on the asset value of the fund averaged over a specified period, and it must increase and decrease proportionately with the fund's investment performance over a specified period in relation to the investment record of an appropriate index of securities prices or another measure the Commission specifies. A fee that rises when the fund beats its index but never falls when the fund trails it does not qualify. Section 205(c) fixes the point from which increases and decreases are measured as the fee paid or earned when the fund's performance is equivalent to that of the index.

The Commission's Rule 205-1 defines both sides of that comparison as total returns. A fund's investment performance is the change in its net asset value per share plus the value of its distributions, treated as reinvested, and an index's investment record is the change in the level of the index plus the cash distributions on the securities that make up the index, treated as reinvested at least as frequently as the end of each calendar quarter.

Advisory Contracts of Registered Funds

When the client is a registered investment company, the management contract is governed by Section 15(a) of the Investment Company Act. Section 205(d) of the Advisers Act takes a registered investment company's contract outside the assignment and partnership provisions of Section 205(a), because the fund statute deals with those matters itself. Section 15(a) makes it unlawful for any person to serve or act as investment adviser of a registered fund except under a written contract that has been approved by the vote of a majority of the fund's outstanding voting securities, and the requirement applies whether the contract is made with the fund or with the fund's own investment adviser. A subadviser engaged by the principal adviser to manage part of the portfolio therefore also needs a contract approved by the fund's shareholders.

The contract must precisely describe all compensation to be paid under it. It must provide, in substance, that it may be terminated at any time, without the payment of any penalty, by the fund's board of directors or by the vote of a majority of the fund's outstanding voting securities, on not more than sixty days' written notice to the adviser. The fund can therefore always remove its manager on short notice, and the manager cannot entrench its position with a termination fee or a long notice period written into the contract.

The contract must also provide, in substance, for its automatic termination in the event of its assignment, a term the Investment Company Act defines, as the Advisers Act does, to include the transfer of a controlling block of the assignor's outstanding voting securities. A contract that continues for more than two years from its execution must be specifically approved at least annually by the board or by the shareholders, and Section 15(c) adds a requirement that the terms of the contract and any renewal be approved by a majority of the directors who are not parties to the contract or interested persons of any party.

Fund Management Fees and Section 36(b)

The fees a fund pays its manager are subject to a separate federal standard. Section 36(b) of the Investment Company Act provides that the investment adviser of a registered investment company is deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by the fund or its shareholders to the adviser or to an affiliated person of the adviser. An action for breach of that duty may be brought by the Commission, or by a shareholder of the fund on the fund's behalf. The plaintiff need not allege or prove that any defendant engaged in personal misconduct, but the plaintiff bears the burden of proving the breach of fiduciary duty.

The section confines the remedy closely. An action may be brought only against the recipient of the compensation or payments, no damages are recoverable for any period earlier than one year before the action was instituted, and any award is limited to the actual damages resulting from the breach and may not exceed the compensation or payments received from the fund or its shareholders. Approval of the fee by the fund's board, and any approval or ratification by its shareholders, is given such consideration by the court as it deems appropriate under all the circumstances.

In Jones v. Harris Associates, decided in 2010, the Supreme Court adopted the standard stated in Gartenberg v. Merrill Lynch Asset Management: to be liable under Section 36(b), an adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining. The Court used the range of fees that arm's length bargaining might produce as the benchmark for reviewing a challenged fee, and held that comparisons between the fees an adviser charges its funds and the fees it charges its independent clients are to receive the weight they merit in light of the similarities and differences between the services those clients require.

Investment Managers of Employee Benefit Plans

Pension plans governed by the Employee Retirement Income Security Act of 1974 commonly hand the management of their assets to outside managers, and ERISA defines precisely who may take that role. Under Section 3(38), an investment manager is a fiduciary, other than a trustee or named fiduciary of the plan, who has the power to manage, acquire or dispose of plan assets and who is registered as an investment adviser under the Investment Advisers Act, or is a state-registered adviser barred from Commission registration by its size that has filed a copy of its state registration form with the Secretary of Labor, or is a bank, or is an insurance company qualified to perform those services under the laws of more than one state.

The definition adds a condition that no registration can supply: the manager must have acknowledged in writing that it is a fiduciary with respect to the plan. A firm that manages plan assets without giving that written acknowledgment is not an investment manager within the meaning of the Act, whatever its registration, and the relief that the appointment of an investment manager gives the plan's trustees is not available.

That relief is substantial. Section 402(c)(3) allows a plan to provide that a named fiduciary with responsibility for the control or management of plan assets may appoint one or more investment managers to manage plan assets, including the power to acquire and dispose of them. Section 405(d) then provides that no trustee is liable for the acts or omissions of an investment manager so appointed, or is under any obligation to invest or otherwise manage any plan asset that is subject to that manager's management. The trustee remains liable for its own acts, and the Department of Labor's interpretive guidance states that the fiduciary who made the appointment should review the manager's performance at reasonable intervals. Appointing a qualifying investment manager is therefore how a plan's trustees transfer responsibility for investment decisions, and not merely the work of making them.

Managed Account Programmes and Rule 3a-4

A managed account programme, in which a sponsor offers many clients discretionary management by one manager following similar strategies, can resemble an unregistered investment company. Rule 3a-4 under the Investment Company Act provides that a programme under which discretionary investment advisory services are provided to clients will not be deemed an investment company if it has the characteristics the rule sets out, each of which preserves the individual character of a client's own portfolio.

Each client's account must be managed on the basis of that client's financial situation and investment objectives and in accordance with any reasonable restrictions the client imposes. The client must be able to designate particular securities or types of securities that should not be bought for the account, or that should be sold if held in it, although the rule does not require that a client be able to insist that particular securities be bought. At least annually the sponsor contacts the client to ask whether these have changed and whether the client wishes to impose or modify restrictions, at least quarterly it notifies the client in writing to make contact if anything has changed, and the sponsor and knowledgeable personnel of the manager must be reasonably available to the client for consultation.

The client also keeps the incidents of owning the securities. The sponsor provides, at least quarterly, a statement describing all activity in the account, including transactions, contributions, withdrawals, fees and expenses, and the value of the account at the beginning and end of the period. With respect to the securities and funds in the account, each client keeps, to the same extent as if they were held outside the programme, the right to withdraw securities or cash, to vote securities or delegate that vote, to receive a confirmation of each transaction and the documents the law requires to be given to security holders, and to proceed directly as a security holder against the issuer of any security in the account without having to join the sponsor or any other client.

Proxy Voting Authority

Where a client gives an investment manager authority to vote the securities in the account, voting becomes part of the management mandate. Rule 206(4)-6 under the Advisers Act makes it a fraudulent, deceptive or manipulative act for a registered adviser to exercise voting authority with respect to client securities unless it has adopted and implemented written policies and procedures reasonably designed to ensure that it votes client securities in the best interest of clients, and those procedures must include how the adviser addresses material conflicts that may arise between its own interests and those of its clients. The rule attaches to the exercise of voting authority, so an adviser whose clients keep the right to vote their own securities is not exercising the authority it governs.

The rule also requires two disclosures. The adviser must disclose to clients how they may obtain information from it about how it voted their securities, and it must describe its proxy voting policies and procedures to clients and, on request, furnish a copy of them to the requesting client. The rule does not require the adviser to send every client a record of every vote; it requires that clients be told how to obtain that information.

The books and records rule, Rule 204-2, adds a record of the voting itself. An adviser that exercises voting authority must keep copies of its proxy voting policies and procedures, a copy of each proxy statement it receives regarding client securities, a record of each vote cast on behalf of a client, a copy of any document it created that was material to deciding how to vote or that records the basis for that decision, and each written client request for voting information together with any written response. The adviser may rely on a third party to keep proxy statements and records of votes if it has the third party's undertaking to provide copies promptly on request, and it may rely on obtaining proxy statements from the Commission's EDGAR system.

Codes of Ethics and Personal Trading

An investment manager's employees know what the firm is about to buy or sell for clients, which creates an opportunity to trade ahead of them. Rule 204A-1 requires every adviser registered or required to be registered with the Commission to establish, maintain and enforce a written code of ethics that sets a standard of business conduct reflecting the fiduciary obligations of the adviser and its supervised persons, requires compliance with the federal securities laws, requires violations of the code to be reported promptly to the chief compliance officer, and requires each supervised person to acknowledge in writing receipt of the code and any amendments.

The reporting provisions apply to access persons: supervised persons who have access to nonpublic information about clients' purchases or sales of securities or about the portfolio holdings of a fund the adviser advises, or who are involved in making securities recommendations to clients or have access to such recommendations that are nonpublic. Where providing investment advice is the adviser's primary business, all of its directors, officers and partners are presumed to be access persons. Each access person submits a holdings report no later than ten days after becoming an access person and at least once in every twelve-month period after that, and a transactions report no later than thirty days after the end of each calendar quarter.

The reports cover reportable securities, a term that excludes direct obligations of the United States government, bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt, shares of money market funds, and shares of open-end funds other than funds the adviser advises and funds whose adviser or principal underwriter controls, is controlled by or is under common control with the adviser. An employee's shares in a mutual fund that the employee's own firm manages are therefore reportable, while shares in an unaffiliated mutual fund are not. Separately, the code must require access persons to obtain the adviser's approval before they acquire beneficial ownership of any security in an initial public offering or in a limited offering, such as a private placement under Rule 506.

Pooled Investment Vehicles and Rule 206(4)-8

When an investment manager advises a fund on the basis of the fund's own investment objectives rather than the individual objectives of its investors, Rule 202(a)(30)-1 allows the manager to treat the fund as a single client, and the investors stand outside the advisory relationship. Rule 206(4)-8 under the Advisers Act addresses the investors directly. It makes it a fraudulent, deceptive or manipulative act for any investment adviser to a pooled investment vehicle to make an untrue statement of a material fact, or to omit a material fact necessary to make its statements not misleading, to any investor or prospective investor in the vehicle, or otherwise to engage in any act, practice or course of business that is fraudulent, deceptive or manipulative with respect to any such investor or prospective investor.

The rule reaches statements made to prospective investors as well as to existing ones, so it covers the offering documents and presentations by which a manager raises money for a fund as well as the account statements, performance reports and other communications that existing investors receive. Through its prohibition of fraudulent, deceptive or manipulative acts, practices and courses of business, it also reaches conduct toward investors that involves no statement at all.

For the rule's purposes, a pooled investment vehicle means any investment company as defined in Section 3(a) of the Investment Company Act, which takes in registered mutual funds and other registered funds, together with any company that would be an investment company but for the exclusions in Section 3(c)(1) or Section 3(c)(7) of that Act, the exclusions on which hedge funds, private equity funds and other private funds commonly rely. The rule therefore protects the investors in a private fund that sits entirely outside the Investment Company Act's registration regime, as well as the shareholders of a registered fund.

Holding Out: Registration and the Investment Counsel Title

Section 208 of the Advisers Act controls how an investment manager may describe itself. Under Section 208(a), it is unlawful for a registered adviser to represent or imply in any manner whatsoever that it has been sponsored, recommended or approved, or that its abilities or qualifications have in any respect been passed upon, by the United States or any agency or officer of it. Section 208(b) preserves a statement that a person is registered under the Act, if the statement is true in fact and the effect of the registration is not misrepresented. A manager may tell clients that it is registered with the Commission, but it may not present that registration as an endorsement of its skill.

Section 208(c) restricts one professional title. A registered adviser may represent that it is an investment counsel, or use the name investment counsel as descriptive of its business, only if its principal business consists of acting as investment adviser and a substantial part of its business consists of rendering investment supervisory services. The Act defines investment supervisory services in Section 202(a)(13) as the giving of continuous advice as to the investment of funds on the basis of the individual needs of each client. A firm whose advisory work is a sideline to another principal business, or whose advice does not include continuous supervision of individual clients' funds, may not use the title.

Section 208(d) closes the route around these and every other prohibition of the Act. It makes it unlawful for any person to do indirectly, or through or by any other person, any act or thing that it would be unlawful for that person to do directly under the Act or the rules under it. An adviser cannot escape a prohibition by having an affiliate, a solicitor or a nominee do on its behalf what it could not lawfully do itself.

Internet Investment Advisers

Most investment managers with less than one hundred million dollars in regulatory assets under management are prohibited from registering with the Commission and register with the states instead, but Rule 203A-2(e) lifts that prohibition for advisers whose business is not tied to any particular state because they advise clients online. Adopted in 2002 and substantially amended in 2024, the rule permits an internet investment adviser to register with the Commission if it provides investment advice to all of its clients exclusively through an operational interactive website at all times while it relies on the exemption.

The 2024 amendments, which carried a compliance date of March 31, 2025, eliminated the former de minimis exception that had allowed an internet adviser to have fewer than fifteen clients advised by other means in the preceding twelve months. Under the amended rule an adviser that advises even one client other than through its website cannot rely on the exemption, although it may still register with the Commission on any other basis for which it qualifies.

The rule defines an operational interactive website as a website, mobile application or similar digital platform through which the adviser provides digital investment advisory services on an ongoing basis to more than one client, temporary technological outages of de minimis duration being disregarded. A digital investment advisory service is advice generated by the platform's software-based models, algorithms or applications on the basis of personal information that each client supplies through the platform, so a website that only collects information for a person to act on, without generating advice from it, does not meet the definition. The adviser must also keep, in an easily accessible place for at least five years from the filing of a Form ADV representing its eligibility, a record demonstrating that it advises its clients exclusively through an operational interactive website.

Agency Cross Transactions

An investment manager affiliated with a broker-dealer will sometimes find that a client's sale can be matched with another customer's purchase through the affiliated broker, which then earns a commission from both sides. Section 206(3) of the Advisers Act makes it unlawful for an adviser, acting as broker for a person other than the client, knowingly to effect a sale or purchase for the client's account without disclosing in writing before completion of the transaction the capacity in which it is acting and obtaining the client's consent to the transaction. Rule 206(3)-2 sets out conditions under which an agency cross transaction, one in which the adviser or a person controlling, controlled by or under common control with it acts as broker for both the advisory client and the person on the other side of the trade, is deemed to comply.

In place of a consent to each transaction, the rule allows the client to execute one written consent prospectively authorising agency cross transactions, provided the consent is obtained after full written disclosure that the adviser will act as broker for, receive commissions from, and have a potentially conflicting division of loyalties and responsibilities regarding, both parties to the transactions. The adviser must send a written confirmation at or before completion of each transaction, and at least annually a statement of the total number of agency cross transactions since the last statement and the total commissions or other remuneration received on them. Every confirmation and statement must state conspicuously that the client may revoke the consent at any time by written notice.

Two limits remain. The rule is unavailable for any transaction that the adviser, or a person controlling, controlled by or under common control with it, recommended to both the seller and the purchaser. And the rule does not relieve the adviser of its duty to act in the best interest of the client, including the duty to seek the best price and execution for the particular transaction, or of any disclosure obligation under Section 206(1) or Section 206(2).

Interim Advisory Contracts for Funds

Because a new fund advisory contract ordinarily needs the approval of a majority of the fund's outstanding voting securities, the end of a contract could leave a fund without a manager while a shareholder vote is arranged. Rule 15a-4 under the Investment Company Act fills that gap by allowing the adviser to act under an interim contract: a written advisory contract that has not been approved by the fund's shareholders and that lasts no more than one hundred and fifty days after the previous contract terminates.

The conditions depend on how the previous contract ended. Where it was terminated by the board or the shareholders, ended through a failure to renew it, or ended through an assignment in connection with which neither the adviser nor a controlling person of the adviser received money or other benefit, the compensation under the interim contract may be no greater than under the previous contract, and the board, including a majority of the directors who are not interested persons of the fund, must approve the interim contract within ten business days after the termination.

Where the contract ended through an assignment in connection with which the adviser or a controlling person received money or other benefit, as on a paid sale of the adviser's business, the conditions are stricter. The board, including a majority of its independent directors, must vote in person to approve the interim contract before the previous contract terminates and must determine that the scope and quality of services will be at least equivalent. The interim contract must be terminable by the board or the shareholders without penalty on not more than ten calendar days' written notice, and the compensation earned under it must be held in an interest-bearing escrow account. If the shareholders approve a contract with the adviser by the end of the one hundred and fifty day period, the escrowed amount and its interest are paid to the adviser; if they do not, the adviser receives only the lesser of its costs of performing the interim contract, with interest on that amount, and the total amount in escrow.

Examination Relevance and Key Takeaways

Investment management is tested on the Series 65 examination as the primary professional activity of registered investment advisers — in the context of the fiduciary duty framework, the investment policy statement, active versus passive management, discretionary versus non-discretionary authority, and the regulatory requirements applicable to investment management professionals.

The key points to retain are these.

Investment management is the professional discipline of building and managing investment portfolios to achieve specified financial objectives within defined risk parameters for the benefit of investors — encompassing client assessment, investment policy statement development, strategic asset allocation, security selection, portfolio construction, ongoing monitoring, and rebalancing. Active management seeks alpha through superior security selection and tactical allocation — the empirical evidence shows the majority of actively managed funds underperform benchmark indices after fees. Passive management through low-cost index exchange-traded funds captures asset class returns at minimal cost — the dominant approach by evidence, with BlackRock the clearest illustration of a firm built around it at scale.

Discretionary investment management allows the adviser to execute trades without specific client approval per transaction — non-discretionary requires client approval before execution. Institutional clients — pension funds, endowments, foundations, insurance companies — have larger assets, longer horizons, and greater access to alternative investments. Retail clients — individuals and families — receive greater regulatory protection through the adviser's fiduciary duty and, for broker-dealer recommendations, Regulation Best Interest. Firms such as Morgan Stanley and J.P. Morgan serve both categories at once through separate institutional and wealth management divisions.

Investment managers are investment advisers under the Investment Advisers Act of 1940 — generally registering with the SEC from one hundred million dollars in regulatory assets under management, optionally below one hundred and ten million dollars and mandatorily from that level, and with state regulators below one hundred million dollars. The fiduciary duty requires continuous loyalty and care throughout the investment management relationship. Individual investment managers who advise individual clients generally register as investment adviser representatives — typically requiring the Series 65 or Series 66 examination — and comply with Form ADV disclosure requirements.