A person who is excluded from the legal definition of an investment adviser isn’t subject to the registration, rules, or regulations that normally apply to advisory firms. The USA explicitly lists the following investment adviser exclusions:
Investment adviser representatives (IARs)
In a previous chapter, we covered how agents are excluded from the definition of a broker-dealer. The same idea applies here.
A natural person (a human being) who represents a business isn’t the business itself.
Certain professionals providing incidental advice
This is the specific language from the USA regarding this exclusion:
A lawyer, accountant, engineer, or teacher whose performance of these services is solely incidental to the practice of his profession [is excluded from the definition of an investment adviser]
The USA names four professions. Many test takers remember them as the LATE exclusion:
These professionals can give investment advice that is incidental to their main professional service and still avoid being treated as an investment adviser.
To keep the term clear, here’s the dictionary definition:
Example: A lawyer is hired to file a lawsuit and wins, resulting in the client receiving a large sum of money. The lawyer suggests investing the money in a safe, short-term security until the client decides on a long-term use.
On the surface, the lawyer seems to meet the investment adviser definition: advice about securities is being given, and the lawyer is being compensated by the client. The key question is why the client is paying the lawyer.
So, a lawyer, accountant, teacher, or engineer can be considered an investment adviser if the securities advice is a separate, non-incidental service. For example, if the lawyer starts offering financial plans involving securities as a separate paid service, the exclusion wouldn’t apply.
Broker-dealers and agents
A similar “incidental advice” exclusion exists for broker-dealers and agents. According to the USA:
A broker-dealer or its agent whose performance of these services is solely incidental to the conduct of its business as a broker-dealer and who receives no special compensation for them [is excluded from the definition of an investment adviser].
It’s common for advice to come up during a securities transaction. For example, a customer calls a registered agent to buy a security, asks whether it’s appropriate given their financial situation, and the agent recommends the trade. The customer buys the stock and pays a commission.
This can look like investment advice for compensation, but the type of compensation matters.
Because the commission is treated as payment for execution (not payment for advice), the exclusion can apply.
However, broker-dealers and/or agents can still be treated as investment advisers. If an advisory fee is charged in addition to the commission, the exclusion doesn’t apply. In that case, to be compliant, the broker-dealer and agent should be dual-registered as an investment adviser and IAR (respectively).
Media programs
According to the USA:
A publisher of any bona fide newspaper, news column, newsletter, news magazine, or business or financial publication or service, whether communicated in hard copy form, or by electronic means, or otherwise, that does not consist of the rendering of advice on the basis of the specific investment situation of each client [is excluded from the definition of an investment adviser]
Many media programs discuss securities, especially online. This can include newspapers, newsletters, blogs, and other digital publications. The USA also includes “radio, television programs, or other electronic communications,” which can cover TV and radio shows as well as platforms like YouTube and TikTok.
The key requirement is that the advice must be general in nature, meaning it isn’t based on a specific person’s investment situation.
For example, this is general:
“I recommend senior citizens invest a significant amount of their portfolio in Treasury bonds”
A specific security is mentioned, but no specific client’s facts are being analyzed.
This is not general:
“I’m speaking with Jade today, who is 40 years old and has two children. She works full time, and makes a combined annual income of $125,000 with her spouse. Her current portfolio is invested entirely in very safe debt securities, and I recommend she invest 50% of her portfolio in the Fidelity Large Cap Stock Fund.”
The more the recommendation is tailored to an individual’s situation, the less likely the media exclusion applies*.
*You’ve probably seen some real-world examples that seem to contradict this. For example, Dave Ramsey and Suze Orman provide financial advice (many times involving securities) to specific people. Neither is currently registered; Ramsey has no history of registration and Orman hasn’t been registered since 1991. Try to separate the “real world” from the exam. There are a lot of “gray areas” the exam doesn’t cover that may apply to these types of media programs.
Federal-covered advisers
In a previous chapter, we discussed the difference between state-registered and federal-covered advisers. If an adviser is registered with the Securities and Exchange Commission (SEC), they’re excluded from the definition of an adviser under state law.
Federal-covered advisers are still subject to some state-specific rules and obligations, including notice filing requirements and investigations related to fraud. Even so, they generally don’t have to register with the state administrator and largely avoid state-level regulation.
Banks and savings institutions
Generally speaking, banks and savings institutions are excluded from most securities laws and regulations. The USA makes it clear the bank must be US-based, so the exclusion doesn’t apply to foreign banks.
However, this exclusion does not apply to bank holding companies (as discussed in a previous chapter). If you need a refresher, follow the link.
Any person designated by the administrator
The USA gives state administrators broad enforcement authority. Several times throughout the law, language like this appears:
“Such other persons not within the intent of this subsection as the [Administrator] may by rule or order designate.”
In practical terms, this means the state administrator can designate additional exclusions by rule or order, even if the person or entity isn’t specifically listed in the USA.
The same concept applies to institutional investors; the state administrator may recognize any person as an institution.
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