Securities Lawyer Blog

knowledge itself is power

Regulation of Investment Advisers

The Investment Advisers Act of 1940 regulates non-broker-dealers who are in the business of rendering investment advice. Professional investment advisers frequently market their services by publishing advice through newsletters, blogs, or other publications. More commonly, investment advisers manage funds through an investment company, an investment partnership, or otherwise through custodial accounts.

Section 203(f) of the Investment Advisers Act gives the SEC the authority to hold hearings and impose sanctions against investment advisers and their associated persons who violate securities laws. Relevant sanctions range from censure to suspension. The Investment Advisers Act requires registration of all non-exempt investment advisers. In addition to registration, investment advisers must file periodic reports with the SEC and be available for periodic examination by the Commission. 

Section 206 of the Act prohibits material misrepresentations and fraudulent practices in connection with the rendering of investment advice. Section 206 applies negligent misstatements, as well as to those made with the intent to defraud. 

The Investment Advisers Act also regulates contracts between investment advisers and their clients. The Act permits the performance-based advisory fees for qualifying contracts. Qualifying contracts under 17 CFR 275.205-3 include the requirement that the client is financially sophisticated and must understand both the method of compensation and the risks presented by such a performance-based system. There are protections against assignment of the contract between the investor and the investment adviser to prevent a random change in the quality or nature of the advisory services. If the investment adviser is a partnership, the adviser must provide for notice within a reasonable time of all the changes to the composition of the partnership, including changes to key personnel often specified in the offering documents.