What is the Investment Advisers Act of 1940?

The Investment Advisers Act of 1940 is a government law in the United States that sets rules for investment advisers and spells out their duties.

The Act sets the rules for monitoring people who give investment advice to pension funds, individuals, and groups. It was partly inspired by a 1935 report to Congress by the Securities and Exchange Commission (SEC) on investment trusts and companies. It says what kinds of financial advice are and who needs to be registered with state and federal regulators to give it.

How to Understand the 1940 Investment Advisers Act

The stock market crash of 1929 and the terrible years that followed, known as the Great Depression, were the leading causes of the Investment Advisers Act of 1940 and many other critical financial laws of the 1930s and 1940s. The Securities Act of 1933 was passed in response to these terrible events. This law clarified financial records and made it illegal to lie about or commit fraud in the securities markets.

A 1935 SEC report to Congress warned of the dangers of some investment counselors and pushed for rules to govern those who gave investment help. The Public Utility Holding Act of 1935 was passed the same year as the report. This law lets the SEC look into investment trusts.

These events led Congress to work on the Investment Advisers Act and the Investment Company Act of 1940. This related bill clarified what investment companies need to do and how they should do it when they offer publicly traded investment goods like unit investment trusts, open-end mutual funds, and closed-end mutual funds.

It is the fiduciary duty of financial advisors.

As part of the Investment Advisers Act of 1940, investment advisers are required to follow a fiduciary standard. Depending on the size and scope of their business, they may be controlled by the SEC or state securities regulators.

The Act spells out very clearly what a trustee is. It says that the expert has to put the client’s needs ahead of their own, which is called a duty of loyalty and duty of care.

For instance, the adviser can’t buy stocks for their account before buying them for a client (this is called “front-running”). They also can’t make trades that could lead to higher commissions for themselves or their investment company (called “churning”).8 Also, the adviser must do their best to ensure that their financial advice is based on correct and complete information. In other words, they must ensure the analysis is complete and correct as much as possible.

The adviser must follow a “best execution” standard when making deals. This means they must look for securities that can be traded quickly and cheaply.

When you are a guardian, avoiding conflicts of interest is essential. The advisor must make any possible conflicts of interest clear, and the client’s needs must always come first.

Setting Criteria for Advisors

The Investment Advisers Act defines who is and isn’t an adviser based on the type of advice given, how the person is paid, and whether or not giving investment advice is their primary job duty. It’s also possible for someone to be called an investment adviser if they make a client think they are one by advertising themselves in a certain way.

As per the Act, anyone giving help or suggestions on securities (as opposed to other investments) is considered an adviser. However, people who give advice not related to their job might not be called advisers. Financial managers and accountants are two examples of people who might or might not be advisers.

In Title 15 of the United States Code, you can find the full rules for the Investment Advisers Act of 1940.

The Investment Advisers Act of 1940 says that most advisers don’t need to register with the SEC. The only ones who do are those who control at least $100 million in assets or work for a registered investment company.

Getting licensed as a financial adviser

The agency advisors must register mainly depending on how much money they manage and whether they only work with people or businesses. Before the changes in 2010, advisers who were in charge of at least $25 million in assets or who gave help to investment firms had to register with the SEC—usually, advisers who handle smaller amounts of money file with the state’s securities authority.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 changed those amounts. This meant that many advisers who had previously registered with the SEC could now do so with their state regulators instead since they were in charge of less money than the new federal rules needed. The Dodd-Frank Act, on the other hand, made people who work with private funds like hedge funds and private equity funds register. Before, these advisers didn’t have to be registered, even though they often handled large amounts of money for clients.

Conclusion

• According to the Investment Planners Act of 1940, financial planners must initially act in their clients’ best interests.
• As part of their duty to care for and be loyal to their clients, the Act says that the adviser has to have “the affirmative duty of ‘utmost good faith’ and full and fair disclosure of material facts.”
• Because of the Act, investment advisers must pass a qualifying exam and sign up with a regulatory group.