Investment Advisers Act
The Investment Advisers Act is a longstanding rule for all registered financial advisers in the U.S. But even 84 years later – in 2024 – the Securities and Exchange Commission (SEC) brought settlements against two registered advisers for failing to establish, maintain, and enforce written procedures under the Investment Advisers Act.
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The regulator has also issued fines against firms who have violated recordkeeping provisions of the Investment Advisers Act, such as with a $390 million fine against 26 firms.
So, what does the Investment Advisers Act entail? Understand more about how advisers need to register, conduct themselves, and report in order to maintain compliance.
What is the Investment Advisers Act?
The Investment Advisers Act stipulates what “financial advice” is, who is qualified to give it, and what the responsibilities of those investment advisers are in order to maintain the economy and market integrity.
Also known as the Advisers Act, it was established in 1940 to attract investments, promote trust in the sector, and generate sustainable economic growth.
Financial advisers are integral to the economy, as they heavily influence the decisions of retail and institutional investors – therefore, it is imperative that these advisers are properly qualified and informed to make tailored instructions. This legislation exists to set these minimum standards.
It also outlines the powers of regulators, such as the SEC, in conducting investigations and establishing tougher restrictions as conduct evolves. In fact, the Investment Advisers Act was updated in both 2010 and 2022 to reflect the developing investment advice environment
Rules of the Investment Advisers Act
The rules of the Investment Advisers Act detail when advisers must register, how they must conduct themselves, and what they are required to report to the SEC and public.
Registering
All advising entities and their associated persons must generally register with the SEC if they would like to:
- Get compensated for giving financial advice
- Be professionally associated with the regulated business
- Advise others about securities
- Work with U.S.–based banks and holdings
There are some exceptions, such as lawyers, accountants, engineers and teachers who are “advising” as part of their primary professional capacity. Upon application, the SEC will respond with an acceptance or denial within 45 working days.
Dodd Frank Updates
Previously, hedge fund and private equity fund managers were exempt from registering, and advisers managing less than $25 million in funds could register with their State instead of the SEC.
The Dodd Frank reforms in 2010 enforced both hedge fund and private equity registration. It also widened the scope for investment advisers who could register with their State if they managed less money than the minimum criteria.
The following section was also added to the Act:
‘‘An investment adviser registered under this title shall take such steps to safeguard client assets over which such adviser has custody, including, without limitation, verification of such assets by an independent public accountant, as the Commission may, by rule, prescribe.”
Conduct
The overarching rule in conduct is that investment advisers are bound by fiduciary duty. This means that they must act with good faith and make all the necessary disclosures when they are advising, to be sure that investors know the risks as well as the potential benefits.
In particular, it’s clear that investment advisers must put the client’s interests above their own (especially in terms of profit) because they have a duty of loyalty and care. This also prevents adverse activities like front running – if an adviser buys shares before convincing their client to also buy shares in the same company, they could make higher commissions or see their own share price rise.
Reporting
There are a few different types of reporting requirements within the Investment Advisers Act, particularly concerning disclosures and recordkeeping rules.
Investment Advisers must make certain disclosures to their clients to support them in making well–informed investment decisions. This includes client suitability, such as a comparison of potential investments, how they might look with the individual’s funds, and how they fit into the financial goals and risk tolerance levels.
However, there is also a requirement to report:
- Conflicts of interest
- Changes to business controllers, including Ultimate Beneficial Ownership under the Bank Secrecy Act
- Adviser disciplinary history and customer complaints
- Investment strategies and compensation structures
- Advertising practices and financial promotions
2022 rule changes
In 2022, new requirements were brought in to reflect the fact that new third-party service providers, also known as fintech’s, are playing a more prominent role in the market. This change applies stricter rules for regulated advisers who partner with, or outsource to, any of these third-party service providers.
It requires firms and their advisers to conduct a more detailed due diligence investigation and continued monitoring of these platforms, as well as introducing new recordkeeping requirements.
This aims to maintain the trust and integrity in the financial markets by ensuring that innovative new technology, which was previously unregulated, is protected by the same safeguards as other investment advice channels.
Alongside this, the 2022 amendments included the introduction of the Marketing Rule, which outlines how investment advisory firms can advertise their services. In the past couple of years, the SEC has taken action against firms who have violated the Rule, such as in September 2024 when it fined nine firms $1.24 million.
Compliance is key
In 2024, the SEC took its first enforcement action against a crypto firm, Galois Capital Management LLC, for allegedly breaking the “custody” rule. This rule requires a qualified custodian to maintain the investment fund under the Investment Advisers Act.
From June 2022 onwards, the firm placed crypto assets on online trading accounts and platforms, which were not qualified custodians. In November 2022, almost half of the fund price was wiped in about two weeks.
Therefore, it’s imperative for investment firms and their advisers to follow the rules around registration, conduct, and disclosures.
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