Investment Advisers Act of 1940

The Investment Advisers Act of 1940 is a U.S. federal law that defines and regulates investment advisers, establishes fiduciary duties, and sets registration and disclosure requirements to protect investors and promote market integrity.

Key takeaways

• Establishes a fiduciary duty: advisers must act in clients’ best interests (duty of loyalty and care).
• Advisers generally must register with either the SEC or state securities regulators depending on assets under management (AUM) and client types.
• Requires full and fair disclosure of material facts and steps to avoid or disclose conflicts of interest.
• Defines who is an investment adviser by the nature of the advice, the compensation method, and whether investment advice is the adviser’s principal professional activity.
• Dodd‑Frank reforms expanded oversight, including increased scrutiny of advisers to private funds.

Why it was enacted

The Act grew out of reforms following the 1929 stock market crash and the Great Depression. Earlier measures (for example, the Securities Act of 1933 and related SEC actions) aimed to reduce fraud and increase transparency. Congress passed the Advisers Act to regulate individuals and firms that provide investment advice and to complement the Investment Company Act of 1940, which governs investment companies such as mutual funds.

Who is covered (definition and criteria)

The Act covers persons and firms that:
* Provide advice or recommendations regarding securities,
* Are compensated for that advice (fees, commissions, or other payment), and
* Make investment advice a primary professional activity or hold themselves out as advisers.

Advice that is merely incidental to another business may fall outside the Act. Whether a financial planner, accountant, or other professional is an “investment adviser” depends on the facts and how they present and are compensated for their advice.

Fiduciary responsibilities

Advisers subject to the Act must:
* Put clients’ interests ahead of their own (duty of loyalty).
* Exercise care, using reasonable diligence and competence in making recommendations (duty of care).
* Disclose material conflicts of interest and other material facts to clients.
* Seek “best execution” when placing trades—striving for the best combination of price and transaction cost for clients.
* Avoid prohibited practices such as front‑running client trades or excessive trading for the sake of commissions (churning).

Registration and oversight

Which regulator oversees an adviser generally depends on AUM and client type:
* SEC registration: generally required for advisers above applicable AUM thresholds and for those advising registered investment companies or (after Dodd‑Frank) many private funds.
* State registration: typically applies to smaller advisers or those below the SEC threshold.

Thresholds and specific rules have changed over time (for example, Dodd‑Frank adjusted registration rules and closed certain exemptions). Advisers also must meet qualification requirements that may include licensing or representative exams.

Enforcement and updates

The SEC and state securities regulators enforce the Advisers Act and related rules. The Act has been amended and interpreted over decades; notable updates include Dodd‑Frank changes that expanded regulation of advisers to private funds and modified registration thresholds.

Bottom line

The Investment Advisers Act of 1940 creates a framework requiring investment advisers to act as fiduciaries, register with the appropriate regulator, and disclose material information and conflicts to clients. Its purpose is investor protection through transparency, accountability, and professional standards for those who provide investment advice.