The Investment Advisers Act of 1940 is a cornerstone in U.S. federal law, meticulously regulating and defining the pivotal role of an investment adviser. This transformative law, borne out of the scrutiny of the SEC in a 1935 report to Congress on investment practices, establishes rigorous legal and ethical standards for professionals advising on investments for pension funds, individuals, and institutions. It outlines the criteria that classify advisory activities and mandates who must secure registration with regulatory bodies to dispense investment counsel.
Key Takeaways
- Adherence to the Investment Advisers Act of 1940 necessitates that financial advisers exercise fiduciary duty and prioritize their clients’ interests above their own.
- The Act enforces an
Related Terms: fiduciary duty, assets under management, investment companies, Dodd-Frank Act.
References
- U.S. Congress. “Investment Advisers Act of 1940”, Pages 1, 7.
- U.S. Congress. “Investment Advisers Act of 1940”, Page 33.
- Office of the Federal Register. “Federal Register, Vol. 51, No. 187, 17 CFR Part 275”, Page 34229.
- U.S. Congress. “Investment Advisers Act of 1940”, Pages 7-9.
- U.S. Congress. “Public Utility Holding Company Act of 1935”, Page 2.
- U.S. Congress. “Investment Company Act of 1940”.
- U.S. Securities and Exchange Commission. “Compliance Issues Related to Best Execution by Investment Advisers”, Pages 1-2.
- U.S. Securities and Exchange Commission. “Churning”.
- U.S. Congress. “Investment Advisers Act of 1940”, Page 3.
- U.S. Code. “15 USC Chapter 2D Subchapter II: Investment Advisers”.
- Electronic Code of Federal Regulations. “Part 275—Rules and Regulations, Investment Advisers Act of 1940”.
- U.S. Securities and Exchange Commission. “Transition of Mid-Sized Investment Advisers From Federal to State Registration”, Pages 1-2.
- U.S. Securities and Exchange Commission. “SEC Adopts Dodd-Frank Act Amendments to Investment Advisers Act”.
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is the primary purpose of the Investment Advisers Act of 1940?
- [x] To regulate the practices of investment advisers
- [ ] To regulate securities exchanges
- [ ] To oversee mutual fund companies
- [ ] To implement banking regulations
## Who enforces the Investment Advisers Act of 1940?
- [ ] The Federal Deposit Insurance Corporation (FDIC)
- [ ] The Consumer Financial Protection Bureau (CFPB)
- [x] The U.S. Securities and Exchange Commission (SEC)
- [ ] The Financial Crimes Enforcement Network (FinCEN)
## According to the Investment Advisers Act of 1940, what must investment advisers register with the SEC?
- [ ] When their assets under management are below $25 million
- [x] When their assets under management are over $100 million
- [ ] When fewer than 10 clients are served
- [ ] When they advise on non-securities assets
## Which section of the Investment Advisers Act of 1940 primarily concerns the fiduciary duty of investment advisers?
- [ ] Section 203A
- [ ] Section 204
- [x] Section 206
- [ ] Section 210
## What type of conduct is explicitly prohibited under the anti-fraud provisions of the Investment Advisers Act of 1940?
- [ ] Short selling
- [ ] Day trading
- [x] Misrepresentation of qualifications or services
- [ ] Trading on multiple accounts
## Under the Investment Advisers Act of 1940, which entity must maintain a code of ethics?
- [ ] Only state-registered advisers
- [ ] All financial institutions
- [x] Registered investment advisers (RIA)
- [ ] All publicly traded companies
## One of the key reporting requirements of the Act includes periodic filings known as what?
- [ ] Form DFA
- [ ] Form PF
- [x] Form ADV
- [ ] Form K-1
## According to the Investment Advisers Act of 1940, investment advisers are required to have what type of arrangements with their clients?
- [ ] Oral agreements only
- [ ] Only hand-shake agreements
- [ ] Implicit understandings
- [x] Written contracts
## What type of client disclosure is mandated by the Investment Advisers Act of 1940?
- [ ] Monthly portfolio summaries
- [x] Disclosure of any conflicts of interest
- [ ] Daily trading reports
- [ ] Annual physical meeting results
## Which of the following is NOT a part of the definition of an "investment adviser" according to the Investment Advisers Act of 1940?
- [ ] Provides advice or analysis on securities
- [x] Engages in fixed-income investment only
- [ ] Receives compensation for advice
- [ ] Is in the business of providing investment advice
