We just learned about investment advisers, which are businesses that provide investment advice on a regular basis in return for compensation. The natural persons (human beings) who work for investment advisers are called investment adviser representatives (IARs).
Here’s the legal definition of an IAR:
That’s a lot of language, so let’s unpack it into the main ideas.
The definition starts by listing the types of people who can fall under IAR regulation.
Partners, officers, and directors are senior leaders in a business. The definition includes them so that executive-level employees can be regulated even if they don’t personally give advice to clients.
For example, Mary Callahan Erdoes, the CEO (Chief Executive Officer) of JP Morgan Asset Management, likely isn’t creating day-to-day investment recommendations for clients. A CEO is responsible for the organization’s overall direction and success. Even so, she is registered as an IAR of the investment adviser that employs her (JP Morgan Asset Management).
The definition also covers any other individual employed by or associated with:
For now, assume investment adviser firms (not the IARs) are either:
The rules and regulations of the Uniform Securities Act (USA) apply to state-registered advisers. The rules and regulations of the Investment Advisers Act of 1940 apply to federal-covered advisers.
For the exam, you’ll need to know why an investment adviser firm would be state-registered or federal-covered (covered later) and be aware that the Investment Advisers Act of 1940 exists. The Series 63 is primarily focused on state rules and regulations.
No matter what type of investment adviser an IAR works for, IARs are always registered with the state. There is no such thing as a federal-covered IAR.
Even though IARs register at the state level, some protocols and rules can differ depending on whether the IAR works for a state-registered adviser or a federal-covered adviser. Those differences are covered later in the Achievable materials.
The definition ends with five activities. If a person performs any of these for an adviser, they generally must register as an IAR:
Let’s look at each one.
Makes any recommendations or otherwise renders advice regarding securities
This is the most straightforward category. Many IARs provide investment advice as part of their job. That advice might be as simple as recommending one security to buy or sell, or as broad as building a complete financial plan.
Manages accounts or portfolios of clients
Some IARs give occasional guidance, while others actively manage a client’s investments. Investors who don’t have the time, patience, or knowledge to manage their own money often hire professionals to do it.
In many cases, portfolio management happens through discretionary accounts, which allow IARs to make investment decisions for clients without getting explicit approval before each trade. To do this, the client must grant authority, typically through a power of attorney (a document that gives legal authority to a third party to act on behalf of another individual).
Determines which recommendation or advice regarding securities should be given
Many investment adviser firms create internal guidance for their IARs, such as lists of securities that are approved for recommendation. These lists may be narrow or broad, and they often exclude very aggressive or highly speculative investments.
This approach helps limit recommendations that could expose clients to excessive risk (for example, penny stocks). Investment advisers and IARs must act in a fiduciary capacity, meaning they must put the client’s interests first and act in the client’s best interest. Fiduciaries can be held legally liable for recommendations that are not consistent with that duty.
Because of this, employees who design recommendation protocols or create approved lists for other IARs generally must register as IARs, even if they don’t personally advise clients.
Solicits, offers, or negotiates for the sale of or sells investment advisory services
Financial firms may offer both brokerage services and advisory services.
Supervises employees who perform any of the foregoing
Supervision counts too. Leaders at an investment adviser who supervise or manage IARs (or others performing IAR activities) are also required to be regulated and registered as IARs.
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