Laws, Regulations, and Ethics

The Investment Advisers Act of 1940 is the primary federal law governing investment advisers and establishes the adviser's fiduciary duty to clients.

The Uniform Securities Act is model state 'blue-sky' law adopted by states to regulate securities, broker-dealers, agents, investment advisers, and adviser representatives at the state level.

The state securities regulator is called the Administrator and has broad authority to make rules, investigate, and issue orders in the public interest.

Antifraud provisions apply to any person who offers, sells, or advises on securities, whether or not that person is registered.

An investment adviser is defined by a three-prong test: providing advice about securities, as a business, for compensation.

Advisers with $110 million or more in assets under management generally register with the SEC (federal covered advisers); smaller advisers generally register with the states.

An investment adviser representative (IAR) is an individual associated with an adviser who gives advice or solicits clients; purely clerical staff are excluded.

An IAR's registration is tied to association with a specific firm, so changing firms requires updating or re-establishing registration.

Investment advisers owe a fiduciary duty, the highest standard, requiring them to act in the client's best interest and place client interests ahead of their own.

The fiduciary duty includes a duty of loyalty and a duty of care, plus full and fair disclosure of material conflicts of interest.

A suitability standard only requires that a recommendation be appropriate for the client's profile, without the same loyalty and conflict-management obligations.

The distinction between the adviser fiduciary standard and a suitability standard is heavily tested.

Form ADV Part 2 (the brochure) discloses the adviser's services, fees, conflicts of interest, and disciplinary history and must be delivered before or at the time of contract.

Advisers with custody of client assets must use a qualified custodian, ensure clients receive account statements, and may face surprise independent verification.

Advisers must maintain accurate books and records for a set minimum period, commonly five years, with recent records readily accessible.

Exercising discretion over a client account generally requires prior written authorization from the client.

Trading on material nonpublic (inside) information, or tipping others, is prohibited insider trading.

Borrowing money or securities from a client who is not a lending institution is a prohibited conflict of interest.

Performance-based fees are generally prohibited except for qualified clients meeting income or net worth thresholds.

Agency cross transactions require prior written client consent and disclosure; selling away and unfounded guarantees of performance are prohibited.