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.
Investment adviser exclusions fall into three categories:
The only exclusion unique to the Investment Advisers Act is:
Advisers only providing advice on US Government securities
Most investment advisers give guidance on many types of securities. However, advisers who only provide services related to US Government securities (for example, Treasury bonds) are excluded from the definition of an investment adviser.
As a result, if an adviser meets this definition and is under federal jurisdiction, they don’t have to register as a federal-covered adviser.
There are three exclusions unique to the USA:
Investment adviser representatives (IARs)
This works like the broker-dealer/agent relationship. In a previous chapter, we covered how agents are excluded from the definition of a broker-dealer. Agents are registered employees of a broker-dealer, not the broker-dealer itself.
The same idea applies here: an IAR is a natural person (a human being) who represents an investment adviser. The IAR isn’t the investment adviser firm.
Federal-covered advisers
If an adviser is registered with the SEC, state law excludes them from the state definition of an investment adviser.
That doesn’t mean states have no authority at all. Federal-covered advisers can still be subject to certain state requirements, such as:
Even so, they generally don’t have to register with the state administrator and largely avoid state-level registration.
Any person designated by the administrator
The USA gives state administrators broad authority when enforcing securities laws. You’ll see language like this in several places:
“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 administrator can exclude additional persons from the definition of an investment adviser by rule or order, even if those persons aren’t specifically listed in the USA.
A similar idea applies to institutional investors: the administrator may recognize any person as an institution.
The following exclusions exist at both the federal level (under the Investment Advisers Act of 1940) and the state level (under the USA):
Although most of the quoted language is pulled from the USA, similar language exists in the Investment Advisers Act of 1940.
Certain professionals providing incidental advice
Here’s the USA language for 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 and still avoid being treated as investment advisers, as long as the advice is incidental to their professional services.
Here’s a common way this shows up. A lawyer is hired to file a lawsuit and wins, and the client receives 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 plan.
At first glance, it may look like the lawyer meets the definition of an investment adviser (they gave securities-related advice while being compensated). The key question is why the client is paying them. If the client is paying for legal services and the securities advice is truly “on the side,” the LATE exclusion can apply.
This exclusion has limits. A lawyer, accountant, teacher, or engineer can still be considered an investment adviser if the securities advice is not incidental. For example, if the lawyer starts offering financial plans involving securities as a separate service and the client pays specifically for that advice, the advice is no longer incidental.
Broker-dealers and agents
A similar “incidental advice” exclusion applies to broker-dealers and agents. The USA states:
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 completes the purchase and pays a commission.
This can feel similar to investment adviser activity: advice is given and the customer pays money. The difference is what the payment is for. A commission is compensation for executing the transaction. Commissions are typically charged whether the trade is:
So the commission is treated as the cost of completing the transaction, not “special compensation” for advice.
This exclusion also has limits. If the broker-dealer or agent charges an advisory fee 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
The USA excludes:
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]
Today, this can include many formats: newspapers, newsletters, blogs, and other digital publications. The USA also includes “radio, television programs, or other electronic communications,” which can cover everything from TV and radio shows to YouTube and TikTok channels.
The key requirement is that the advice must be general in nature, meaning it isn’t tailored to 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 is being advised.
This would not be 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 tied to an individual’s facts and circumstances, the less likely the 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.
Banks and savings institutions
In general, banks and savings institutions are excluded from many securities laws and regulations. Under the USA, the bank must be US-based, so the exclusion doesn’t apply to foreign banks.
In practice, if it sounds like a US-based bank, it’s probably excluded. However, this exclusion does not apply to bank holding companies (as discussed in a previous chapter). If you need a refresher, follow the link.
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