Investment Advisers Act of 1940

The Investment Advisers Act of 1940 is the federal statute regulating the business of investment advice in the United States. It defines an investment adviser as any person who, for compensation, engages in the business of advising others about the value of securities or the advisability of investing in, purchasing, or selling them; it requires covered advisers to register (with the SEC or, for smaller firms, the states) and to disclose their services, fees, conflicts, and disciplinary history; and through its antifraud provisions it imposes the fiduciary duty — care and loyalty to the client — that distinguishes the advisory profession from securities sales. Firms registered under it are Registered Investment Advisers; the individuals advising on their behalf are investment adviser representatives.

The Act was the last of the New Deal securities statutes, born from an SEC study of the investment-counsel industry that Congress commissioned after the 1929 crash. Its architecture is deceptively simple: define the regulated activity broadly, exclude professions whose advice is incidental to something else, and require the rest to register and deal honestly. The definition's three elements — advice about securities, as a business, for compensation — are read expansively, which is why the question "am I an investment adviser?" catches financial planners, consultants, and newsletter writers who never expected securities law to apply to them.

The fiduciary duty is the Act's constitutional core, and its path is worth knowing: the statute never uses the word. Section 206 makes it unlawful for an adviser to employ any device, scheme, or artifice to defraud a client, and in SEC v. Capital Gains Research Bureau (1963) the Supreme Court held that this provision imposes a fiduciary standard — advisers must make full and fair disclosure of all material facts and conflicts. The SEC's 2019 interpretation restated the modern content: a duty of care (advice in the client's best interest, suitable, monitored per the agreement) and a duty of loyalty (no placing the adviser's interests ahead of the client's; conflicts eliminated or disclosed fully enough for informed consent).

The regulatory mechanics matter for consumers mainly through registration and disclosure. Since the Dodd-Frank Act, advisory firms generally register with the SEC once assets under management exceed $100 million, and with state securities regulators below that; either way the public window is Form ADV, filed and updated through the IAPD system at adviserinfo.sec.gov. The Act's rules also reach practice mechanics — custody of client assets, advertising and testimonials under the Marketing Rule, restrictions on performance-based fees for retail clients, and required compliance programs. The most consequential exclusion is for broker-dealers whose advice is "solely incidental" to brokerage and specially compensated advice — the century-old fault line that Regulation Best Interest now manages on the brokerage side.

For a client, the Act works through three touchpoints. First, registration: the firm files Form ADV, publicly viewable at adviserinfo.sec.gov, before doing business. Second, disclosure: Part 2 of the ADV — the plain-English brochure — must describe services, fees, conflicts, and discipline, and the client should receive it at or before engagement. Third, the ongoing fiduciary duty: advice must serve the client's best interest, and material conflicts must be eliminated or disclosed clearly enough that consent means something.

A hypothetical example of the duty in operation: an adviser can invest client money in a fund that pays the adviser's affiliate a fee — but only after full and fair disclosure of that conflict, and only if the investment still serves the client's best interest. Suppose the affiliate fund charges 0.75% while an equivalent unaffiliated fund charges 0.10% on the client's $200,000 — a $1,300-per-year difference. Absent a genuine advantage to the client, recommending the affiliated fund invites exactly the enforcement theory the Act was built for: a conflict exploited at the client's expense. (Numbers hypothetical, for illustration.)

Pros

• Created the fiduciary baseline for paid investment advice — the strongest client-protection standard in retail financial services.
• Form ADV makes an adviser's fees, conflicts, and disciplinary history public and free to check before hiring anyone.
• Its rules reach the practice details that hurt clients quietly — custody of assets, misleading advertising, performance-fee incentives.

Cons

• The exclusions — especially "solely incidental" brokerage advice — left a parallel sales channel outside the fiduciary standard, and the resulting two-standard confusion persists today.
• Registration is a compliance status, not a competence test; the Act screens for honesty obligations, not skill.
• Enforcement is largely after-the-fact — disclosure documents protect only the clients who read them.