Investment Advisers Act of 1940

The Investment Advisers Act regulates individuals and firms that provide investment advice for compensation. It establishes registration requirements with the SEC, imposes a fiduciary duty on advisers, prohibits fraudulent practices, and requires disclosure of conflicts of interest. The Act covers registered investment advisers (RIAs), hedge fund managers, financial planners, and other professionals who advise on securities investments.

Current Law (2026)

Legal Authority

• 15 U.S.C. § 80b-1 — Findings (Congress finds that investment advisers are of national concern and that regulation is necessary to eliminate abuses in the advisory profession)
• 15 U.S.C. § 80b-3 — Registration of investment advisers (requires registration with SEC for advisers meeting the AUM threshold; provides exemptions for certain professionals and private fund advisers)
• 15 U.S.C. § 80b-3a — State and Federal responsibilities (divides regulatory authority: SEC oversees advisers with $100M+ AUM; states oversee smaller advisers)
• 15 U.S.C. § 80b-4 — Reports by advisers (advisers must maintain books and records and make them available for SEC examination)
• 15 U.S.C. § 80b-5 — Investment advisory contracts (performance-based fees generally prohibited for retail clients; contracts must meet certain minimum requirements)
• 15 U.S.C. § 80b-6 — Prohibited transactions (the anti-fraud provision: prohibits any investment adviser from employing any device, scheme, or artifice to defraud clients, or engaging in any transaction or practice that operates as a fraud)
• 15 U.S.C. § 80b-11 — SEC rulemaking authority (authorizes the Commission to make rules necessary to carry out the Act)
• 15 U.S.C. § 80b-15 — Validity of contracts (any contract provision waiving the Act's protections is void; assigns liability for violations)

How It Works

The Investment Advisers Act establishes a regulatory framework built on one central principle: investment advisers owe a fiduciary duty to their clients. This duty, articulated by the Supreme Court in SEC v. Capital Gains Research Bureau (1963), requires advisers to act in their clients' best interests, disclose all material conflicts of interest, and not place their own interests ahead of their clients'. It is a higher standard than the "suitability" obligation that historically applied to broker-dealers.

Registration divides between the SEC and the states based on assets under management. Advisers managing $100 million or more register with the SEC; those below the threshold register with their home state's securities regulator. All registered advisers must file Form ADV, a comprehensive disclosure document that describes the adviser's business, fees, investment strategies, disciplinary history, and conflicts of interest. Part 2 of Form ADV (the "brochure") must be delivered to clients.

The Act's anti-fraud provision (§ 206) is sweeping: it prohibits any device, scheme, or artifice to defraud a client, and any transaction, practice, or course of business that operates as a fraud or deceit. Unlike securities fraud under the Exchange Act, § 206 does not require proof of scienter (intent to deceive) for certain violations — negligent conduct can suffice. This provision is the SEC's primary enforcement tool against adviser misconduct.

Performance fees — where the adviser's compensation is based on investment gains — are generally prohibited for retail clients. This prevents advisers from taking excessive risks with client money to generate higher fees. Exceptions exist for qualified clients (those with $1.1 million or more in assets under management or $2.2 million net worth) and for registered investment companies.

Books and records requirements give the SEC access to all adviser records during examinations. The SEC's examination program conducts risk-based inspections of registered advisers, checking for compliance with custody rules, best execution obligations, disclosure requirements, and the adviser's own compliance procedures.

The Dodd-Frank Act (2010) significantly expanded the Advisers Act by requiring hedge fund and private equity fund managers to register as investment advisers, closing a major gap in the securities regulation framework. Previously, many private fund managers relied on exemptions that allowed them to advise billions of dollars without SEC registration or oversight.

How It Affects You

If you work with a financial adviser or pay someone for investment recommendations: The most important thing to know is whether your adviser is a registered investment adviser (RIA) or a broker-dealer — because the legal standard they owe you is different. RIAs owe you a fiduciary duty (must act in your best interest, disclose all conflicts). Broker-dealers operating under Reg BI (Regulation Best Interest) must act in your best interest only at the moment of a recommendation and have a lighter disclosure regime. You can check any adviser at IAPD (the Investment Adviser Public Disclosure database) at adviserinfo.sec.gov — search by name or firm, and review their Form ADV Part 2 brochure. The brochure tells you their fee structure (flat fee vs. AUM percentage vs. hourly), what conflicts of interest exist (do they earn 12b-1 fees from fund companies? do they earn commissions?), their investment approach, and their disciplinary history. A red flag: advisers who can't produce or won't email you their Form ADV Part 2 on request. Compensation structure matters as much as the fiduciary label: an RIA who earns commissions from insurance or annuity products has conflicts that must be disclosed but aren't eliminated by the fiduciary label. Fee-only RIAs (who take no commissions and charge a flat or AUM-based fee) have the fewest structural conflicts. Find fee-only advisers at NAPFA.org (National Association of Personal Financial Advisors) or garrettplanningnetwork.com.

If you're a registered investment adviser (RIA) or starting an RIA: Your registration threshold determines your regulator — advisers with $100 million or more in AUM register with the SEC (Form ADV via IARD); those below $100M (down to $25M, depending on state) register with their state securities regulator. The SEC examinations program ("OCIE") conducts risk-based inspections without notice, typically requesting your books and records, compliance policies, client contracts, and marketing materials. The Marketing Rule (updated 2022 under Investment Advisers Act Rule 206(4)-1) governs all advertising and client testimonials — including social media, endorsements, and performance presentations. Performance-based fees (where you earn a share of investment gains) are prohibited for retail clients unless they qualify as "qualified clients" — $1.1M+ in assets under management with you, or $2.2M+ net worth. A separate set of rules governs the custody of client assets — if you have authority to access or transfer client money, enhanced safeguards apply. The most common source of SEC enforcement actions against small RIAs: failures in the custody rule, conflicts disclosure, and personal securities trading violations (front-running client trades, failing to report personal trading).

If you're an individual investor concerned your adviser may have mismanaged your account or had undisclosed conflicts: You have several routes. (1) Check adviserinfo.sec.gov for your adviser's disciplinary history and any customer complaints that resulted in formal action. (2) Contact the SEC's Office of Investor Education and Advocacy at investor.gov or 1-800-732-0330. (3) File an investor complaint at sec.gov/tcr (the SEC tip/complaint form). (4) The Act gives the SEC authority to disgorge ill-gotten profits and seek civil penalties — but the Act itself does not create a private right of action for investors to sue advisers (a gap courts have consistently maintained, though state securities laws often do). For actual recovery, investors typically pursue FINRA arbitration (for broker-dealer disputes), or civil litigation under state securities statutes or common law fraud claims, rather than a direct federal Investment Advisers Act claim.

State Variations

The Act explicitly divides regulatory authority between the SEC and the states:

• Advisers with $100M+ AUM: SEC-registered, generally exempt from state registration requirements
• Advisers with $25M–$100M AUM: State-registered in their principal office state
• Advisers under $25M AUM: State-registered; may be subject to varying state requirements
• State-registered advisers must comply with state-specific rules on fees, advertising, custody, and conduct, which vary
• Some states impose additional fiduciary obligations or practice restrictions beyond the federal standard

Implementing Regulations

• 17 CFR Part 275 — Rules and Regulations under the Investment Advisers Act of 1940: SEC's comprehensive implementing rules covering registration, exemptions, recordkeeping, and reporting for SEC-registered investment advisers:

  • § 275.203-1 — Form ADV registration: advisers registering with the SEC must file Form ADV in two parts — Part 1A (IARD-filed structured data on the adviser's business, ownership, disciplinary history, clients, and employees) and Part 2A ("brochure" — narrative plain-English disclosure document provided to clients describing services, fees, conflicts of interest, and disciplinary history); Form ADV must be filed electronically through IARD (Investment Adviser Registration Depository); annual amendments required; advisers must promptly update for material changes
  • § 275.203A-1 — SEC vs. state registration threshold: advisers with $100 million or more in regulatory assets under management (RAUM) must register with the SEC; advisers with less than $100 million must register with state regulators (unless an exemption applies); advisers between $100M and $110M may choose either; mid-sized adviser rules require state registration for advisers that are not "eligible" for SEC registration — created in the Dodd-Frank Act to shift oversight of smaller advisers to states
  • § 275.203(l)-1 — Venture capital fund definition: an adviser qualifies for the "venture capital fund" registration exemption only if it advises funds that (1) represent themselves to investors as pursuing venture capital strategies; (2) invest primarily in "qualifying investments" (equity securities directly acquired from issuers that are not reporting companies); (3) do not provide investors with redemption rights in the ordinary course; and (4) hold no more than 20% of committed capital in non-qualifying investments; registration-exempt VC advisers must file "exempt reporting adviser" reports on Form ADV Part 1A
  • § 275.203(m)-1 — Private fund adviser exemption: investment advisers whose only clients are "qualifying private funds" with less than $150 million in U.S. RAUM are exempt from registration (but must file as exempt reporting advisers); a "qualifying private fund" is a fund excluded from the Investment Company Act under Sections 3(c)(1) or 3(c)(7) — the standard hedge fund and private equity fund exemptions
  • § 275.202(a)(11)(G)-1 — Family office exclusion: a "family office" — an entity providing investment advice solely to family clients (family members, former employees, foundations) with no fee from non-family clients — is excluded from the definition of "investment adviser" entirely; the exclusion recognizes that family offices serving a single family's interests are not acting as professional advisers to outside clients; multi-family offices serving unrelated families cannot use this exclusion
  • § 275.202(a)(30)-1 — Foreign private adviser exemption: a non-U.S. adviser with fewer than 15 U.S. clients and U.S. RAUM below $25 million may rely on the foreign private adviser exemption from registration; the adviser also must not hold itself out to the public in the U.S. as an investment adviser; the threshold reflects the limited nexus to U.S. markets and investors
  • § 275.204-2 — Books and records: registered advisers must maintain specified records for at least 5 years (first 2 years in accessible on-site storage): advisory contracts, correspondence, financial statements, records supporting performance claims, trade blotters, account statements, powers of attorney, and compliance records; electronic storage is permissible with specified backup and access requirements; SEC examiners routinely request records from these categories during examinations
  • § 275.204(b)-1 — Form PF (private fund) reporting: advisers to private funds with $150 million or more in private fund RAUM must file Form PF with the SEC, reporting fund-level risk and performance data; "large private fund advisers" (hedge funds with $1.5B+ or private equity funds with $2B+) face more frequent and detailed reporting; Form PF data is used by the Financial Stability Oversight Council (FSOC) for systemic risk monitoring

• 17 CFR Part 270 — Investment Company Act rules (SS 270.2a-3/2a-4: exemptions for initial period of investment adviser registration)

• 17 CFR Part 247 — Trust and fiduciary activity exemptions (defined terms, bank calculation exemptions)

Pending Legislation

• S 3055 — Treat proxy advisory firms as investment advisers, require SEC inspections. Status: Introduced.
• HR 6161 — Require SEC to protect proprietary information from investment advisers. Status: Introduced.
• S 2552 (Sen. McCormick, R-PA) — Temporary ban on PRC-connected control of U.S. advisers, five-year sunset. Status: Introduced.

Recent Developments

The SEC has increased scrutiny of adviser fees and conflicts of interest, particularly around revenue sharing, soft dollars, and allocation practices. The growth of robo-advisers (automated investment management platforms) has tested the Act's application to algorithm-driven advice. SEC enforcement actions against advisers have focused on undisclosed conflicts, cherry-picking of investment opportunities, and misleading performance advertising. The marketing rule (adopted 2020) modernized adviser advertising and testimonial regulations.

• SEC adviser examination priorities (2025): The SEC's Division of Examinations (formerly OCIE) published its 2025 priorities emphasizing: AI use in investment advice and associated disclosure obligations, cybersecurity and data protection, private fund conflicts, and compliance with the Reg BI "best interest" standard for recommendations. Advisers using AI for portfolio management or client communication must disclose AI use in their Form ADV and address AI-specific risks in their compliance programs. The SEC flagged AI-generated performance projections and misleading AI capability claims as priority review areas.
• Private fund adviser rules vacated (2024-2025): The SEC's landmark private fund adviser rules (adopted August 2023) — requiring quarterly statements, annual audits, fairness opinions for adviser-led secondary transactions, and restrictions on preferential treatment — were vacated by the Fifth Circuit in June 2024. The court held the SEC exceeded its authority under the Advisers Act. The Trump SEC has not appealed or proposed new private fund rules. The vacatur leaves private fund investors (pension funds, endowments, family offices) without the protections the rules would have provided.
• Regulation BI implementation and enforcement (2025): Broker-dealers and dual registrants (broker-dealers who are also RIAs) continued implementing Regulation Best Interest, which requires recommendations to be in the client's best interest rather than merely "suitable." The Trump SEC maintained Reg BI enforcement — approximately 20-30 actions per year for failure to document best-interest analysis, undisclosed conflicts, and failure to consider reasonably available alternatives. The SEC dropped a Biden-era proposal to strengthen Reg BI's interpretation.
• AI investment advisers and fiduciary duty: Robo-advisers and AI portfolio management platforms must meet fiduciary obligations under the Advisers Act — including the duty of loyalty (no undisclosed conflicts) and duty of care (suitable investment strategies). The SEC's February 2023 proposed rules on "predictive data analytics" — requiring advisers to address conflicts when AI tools optimize for metrics that benefit the adviser at client expense — were withdrawn by the Trump SEC. The core fiduciary question remains: when an AI model recommends higher-fee products, does that constitute a breach of loyalty?