Table of Contents
SERIES 65 | FINANCIAL REGULATION COURSES
A registered investment advisor — abbreviated RIA — is a firm or individual that is registered with either the Securities and Exchange Commission or the applicable state securities regulators to provide investment advice to clients for compensation, and that is legally bound by a fiduciary duty to act in the client's best interest at all times, disclosing all material conflicts of interest and placing client interests above its own. The RIA framework is established under the Investment Advisers Act of 1940, which defines an investment adviser, specifies the registration requirements, prescribes the conduct standards governing the advisory relationship, and grants the SEC comprehensive examination and enforcement authority over registered advisers. The Series 65 examination — the Uniform Investment Adviser Law Examination — is the primary qualification required of individuals seeking to act as investment adviser representatives associated with registered investment advisory firms.
The Investment Advisers Act of 1940 is the federal statute that defines and regulates the investment advisory profession. Section 202(a)(11) of the Act defines an investment adviser as any person who, for compensation, engages in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who issues or promulgates analyses or reports concerning securities.
Three elements of this definition are conjunctive — all three must be present for the investment adviser definition to apply.
First, the person must provide advice about securities or issue securities analyses or reports.
Second, the person must be in the business of providing such advice — giving investment advice on a one-time or purely incidental basis does not constitute being in the business.
Third, the person must receive compensation for the advisory activity — compensation includes not only direct fees charged to clients but also any economic benefit received in connection with providing advisory services, including commissions, trailing payments, and referral arrangements.
Section 202(a)(11) also specifies certain categories of persons explicitly excluded from the definition of investment adviser, most importantly — and most examination-relevantly — a broker or dealer whose performance of investment advisory services is solely incidental to the conduct of its business as a broker or dealer and who receives no special compensation for those advisory services.
This broker-dealer exclusion is the provision that separates the broker-dealer framework from the investment adviser framework — a broker who recommends securities to customers but is compensated only through transaction commissions is excluded from the Advisers Act definition, while a broker who charges a separate advisory fee for investment guidance falls within it.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 substantially restructured the registration threshold framework by raising the minimum AUM required for SEC registration and directing smaller advisers to register with state authorities rather than the SEC. The current threshold structure, applicable annually at the time each adviser files its annual updating amendment to Form ADV, divides investment advisers into three categories.
Large investment advisers managing at least one hundred million dollars in regulatory assets under management are eligible to register with the SEC at the one hundred million dollar threshold and are required to register with the SEC once they reach one hundred and ten million dollars.
The regulatory AUM figure used for threshold purposes includes the market value of all securities portfolios for which the adviser provides continuous and regular supervisory or management services — including committed but uncalled capital in private fund contexts — rather than merely the deployed assets.
Mid-size investment advisers managing at least twenty-five million dollars but below one hundred million dollars in AUM typically register with the state securities administrator in the state where they maintain their principal office and place of business. A mid-size adviser that reaches one hundred and ten million dollars has ninety days from filing its annual updating amendment to register with the SEC. A federal-covered adviser whose AUM falls below ninety million dollars has one hundred and eighty days to withdraw its SEC registration and register with the appropriate state authorities.
Small investment advisers managing below twenty-five million dollars register with and are regulated by state securities administrators under the state investment adviser registration framework established by the Uniform Securities Act and implemented through state law in each jurisdiction. The North American Securities Administrators Association — NASAA — coordinates the state regulatory framework and administers the Series 65 and Series 66 examinations that qualify investment adviser representatives.
Certain investment advisers are eligible to register with the SEC regardless of AUM — including advisers to registered investment companies under the Investment Company Act of 1940, advisers with a principal office and place of business outside the United States, pension consultants advising pension plans with at least two hundred million dollars in assets, and advisers that would be required to register with fifteen or more state authorities. Advisers whose sole clients are private funds and who manage less than one hundred and fifty million dollars in United States private fund assets may qualify for the private fund adviser exemption under the Dodd-Frank Act, filing as exempt reporting advisers rather than full registrants while still subject to the anti-fraud provisions of the Advisers Act.
Every registered investment adviser — and every exempt reporting adviser — must file Form ADV with the SEC or the applicable state authority. Form ADV is the Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Adviser, and it serves two simultaneous purposes — the registration application with the regulatory authority and the mandatory disclosure document delivered to advisory clients.
Form ADV Part 1 contains organizational and operational information about the adviser — its business structure, ownership, services offered, client base, AUM, employees, disciplinary history, and affiliations with other financial industry participants. Part 1 information is filed electronically through the Investment Adviser Registration Depository — IARD — and is publicly accessible through the SEC's Investment Adviser Public Disclosure database at adviserinfo.sec.gov.
Form ADV Part 2 is the narrative brochure delivered to clients — divided into Part 2A, the Firm Brochure, and Part 2B, the Brochure Supplement for individual investment adviser representatives. The Firm Brochure must describe in plain English the adviser's services, fees and compensation, performance fee arrangements, methods of analysis and investment strategies, risks of those strategies, disciplinary information, conflicts of interest, brokerage practices including any soft dollar arrangements, the adviser's code of ethics, review of accounts, client referral arrangements, custody arrangements, investment discretion, and voting client securities. The Brochure Supplement for individual representatives discloses each representative's educational background, business experience, disciplinary history, and outside business activities.
Form ADV must be updated annually — within ninety days of the adviser's fiscal year-end — and must be amended promptly when material information changes. The annual updating amendment is also the occasion on which the AUM is reported and the registration threshold is evaluated. Advisers must deliver their current Firm Brochure to new clients before or at the time of entering the advisory agreement, and must offer to deliver the annual updated brochure to existing clients within one hundred and twenty days of fiscal year-end.
The fiduciary duty owed by registered investment advisers to their clients is the central characteristic distinguishing the RIA from the broker-dealer and is one of the most examined topics on the Series 65 examination. The fiduciary duty flows from the anti-fraud provisions of the Investment Advisers Act — specifically Sections 206(1) and 206(2) — which prohibit any investment adviser from employing any device, scheme, or artifice to defraud any client or prospective client, and from engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon any client.
The SEC confirmed in a 2019 interpretive release — Release No. IA-5248 — that the fiduciary duty arising from Sections 206(1) and 206(2) has two components that apply to the entire advisory relationship, not just individual recommendations.
The duty of care requires the adviser to provide investment advice in the client's best interest based on a reasonable understanding of the client's objectives, financial situation, and risk tolerance. It requires that the adviser have a reasonable basis for any advice given and that the advice be suitable for the specific client. It requires best execution — seeking the most favourable terms reasonably available for client transactions — and monitoring of the portfolio on an ongoing basis when the adviser has a continuing relationship with the client.
The duty of loyalty requires the adviser to eliminate, or at minimum fully disclose and obtain informed consent for, all material conflicts of interest that might cause the adviser to provide advice that is not in the client's best interest. Conflicts that must be disclosed include proprietary product recommendations, compensation arrangements with third parties for referrals, revenue sharing with broker-dealers for directing client brokerage, and any personal financial interest the adviser has in transactions recommended to clients.
The fiduciary standard applicable to RIAs is universally described as higher than the suitability standard that historically governed broker-dealer recommendations — the RIA must act in the client's best interest, not merely make suitable recommendations. Regulation Best Interest, adopted by the SEC under the Securities Exchange Act in 2019 and effective June 30, 2020, elevated broker-dealer standards for retail customer recommendations closer to the fiduciary standard by imposing a care obligation, a disclosure obligation, a conflict of interest obligation, and a compliance obligation — but the broker-dealer standard under Regulation Best Interest and the investment adviser fiduciary standard remain legally distinct frameworks under different statutes.
An investment adviser representative — IAR — is an individual associated with a registered investment advisory firm who provides investment advice to clients on behalf of the firm. IARs are not themselves registered as investment advisers — the firm is registered, and the IAR acts under the firm's registration. IARs must qualify through examination — in most states, the Series 65 examination administered by FINRA on behalf of NASAA is the standard qualification. States may waive the Series 65 requirement for individuals who hold certain professional designations — including the CFA, CFP, CPA, ChFC, or PFS — recognising that the professional examination programmes for these designations cover substantive investment analysis and fiduciary content.
IARs must register in each state where they have a place of business and provide advisory services, even when their employing firm is SEC-registered. State registration of IARs is administered through IARD.
SEC-registered investment advisers are subject to periodic examination by the SEC's Division of Examinations — formerly the Office of Compliance Inspections and Examinations. The examination programme reviews adviser compliance with the Advisers Act, the adequacy of compliance policies and procedures required under Advisers Act Rule 206(4)-7, the accuracy of Form ADV disclosures, the implementation of the fiduciary duty in client relationships, and the adequacy of books and records maintained under Advisers Act Rule 204-2.
Rule 206(4)-7 — the Compliance Rule — requires every SEC-registered investment adviser to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act, designate a Chief Compliance Officer responsible for administering those policies, and review them at least annually for adequacy and effectiveness.
Violations of the Advisers Act may result in SEC administrative proceedings, civil injunctive actions in federal court, and referrals for criminal prosecution by the Department of Justice. Civil penalties under the Advisers Act reach up to the greater of ten thousand dollars per violation or the gross amount of pecuniary gain resulting from the violation. Section 206 anti-fraud violations may also support disgorgement of profits and payment of prejudgment interest.
The registered investment adviser framework is tested throughout the Series 65 examination — including the definition of investment adviser, the registration thresholds, Form ADV, the fiduciary duty, and the distinction from broker-dealers.
The key points to retain are these.
A registered investment adviser is a firm registered under the Investment Advisers Act of 1940 that provides investment advice for compensation subject to a fiduciary duty to act in clients' best interests.
The three-element definition under Section 202(a)(11) requires that the person provide securities advice, be in the business of doing so, and receive compensation — broker-dealers whose advisory services are solely incidental to their brokerage business and who receive no special compensation are excluded.
The Dodd-Frank Act registration thresholds divide advisers into large — above one hundred and ten million dollars AUM — required to register with the SEC; mid-size — twenty-five to one hundred million dollars — registering with state authorities; and small — below twenty-five million dollars — registering with state authorities. Advisers with one hundred to one hundred and ten million dollars AUM may choose either federal or state registration. Form ADV Part 1 contains operational and organizational information filed with IARD and publicly accessible at adviserinfo.sec.gov.
Form ADV Part 2A is the Firm Brochure delivered to clients before or at the time of the advisory agreement. The fiduciary duty under Sections 206(1) and 206(2) comprises the duty of care — advice in the client's best interest based on reasonable understanding of the client's circumstances — and the duty of loyalty — elimination or full disclosure of all material conflicts of interest. Rule 206(4)-7 requires written compliance policies, a designated Chief Compliance Officer, and annual review. Investment adviser representatives qualify through the Series 65 examination in most states.
