6.5. Investment Advisers Act of 1940

As mentioned earlier, the Investment Advisers Act of 1940 requires the registration of people and companies giving investment advice to the public for a fee. This stands in contrast to the Securities Exchange Act of 1934, which regulates firms and individuals acting as broker-dealers and earning their revenue through commissions and markups.

Whether an adviser must register under the Investment Advisers Act of 1940 depends on whether the adviser answers yes to all three of the following questions:

• Does it provide investment advice? First and foremost, does someone give advice relating to the purchase, sale, or management of investments?

• Is the adviser actually in the business of providing advice? Incidental advice, given in the course of offering other non-investment advice, does not require someone to register. The act specifically notes that lawyers, accountants, engineers, or teachers who are giving this advice as part of a broader job description are exempt from registration.

• Is the adviser compensated for giving investment advice? If someone is compensated for providing investment advice, as opposed to receiving compensation for primarily providing another service, it would indicate the need for registration.

Specifically exempted from registration under the Investment Advisers Act of 1940 are:

• Broker-dealers whose advice is incidental to the conduct of