Investment Advisers Act of 1940

The Investment Advisers Act of 1940 emerged from a comprehensive SEC study of the investment trust and investment company industries that Congress commissioned following the market collapse of the early 1930s. The study documented widespread abuses by investment counsel firms and prompted Congress to establish federal oversight of the advisory profession.

The Act defines an investment adviser broadly as any person who, for compensation, engages in the business of advising others regarding securities. This expansive definition captures registered investment advisers (RIAs), hedge fund managers, separately managed account managers, financial planners who provide securities advice, and robo-advisory platforms. Certain categories are excluded — including broker-dealers whose advice is incidental to brokerage services, lawyers and accountants whose advice is incidental to their profession, and publishers of bona fide financial publications.

Registration is the Act's primary mechanism for regulatory oversight. Advisers with assets under management of $110 million or more must register with the SEC and file Form ADV, a public disclosure document describing the adviser's business, investment strategies, fee arrangements, disciplinary history, and potential conflicts of interest. Smaller advisers generally register at the state level under parallel state laws. Form ADV Part 2 — the client brochure — must be written in plain English and delivered to clients at the start of the relationship and annually thereafter.

The fiduciary standard is the Act's most consequential substantive requirement. Investment advisers owe clients a fiduciary duty of loyalty and care — they must act in clients' best interests, disclose all material conflicts of interest, and avoid placing their own interests ahead of clients'. This standard is more demanding than the suitability standard historically applied to broker-dealers (though the SEC's Regulation Best Interest, adopted in 2019, raised conduct expectations for broker-dealers as well).

Anti-fraud provisions under the Act broadly prohibit advisers from engaging in any deceptive practice in connection with advisory services. Performance fee arrangements, advertising standards (recently modernized through the SEC's Marketing Rule effective 2022), and custody arrangements for client assets are all governed by rules promulgated under the Act. The SEC conducts periodic examinations of registered advisers to assess compliance.