What is a Registered Investment Advisor Under the Investment Advisers Act of 1940?

When your business’s investment portfolio stands on the brink of a new era, facing uncharted territories, every path seems laden with potential. Yet, unbeknownst to you, these routes may harbor hidden pitfalls and uncertainties. The right investment advisor, regulated by the Investment Advisers Act of 1940, can guide you through these murky waters. Bearing the weight of fiduciary duty, they pledge allegiance to your interests, steering your business towards lucrative investments while navigating economic hardships. Discover more in this detailed blog.

The Investment Advisers Act of 1940 Explained

The stock market crash of 1929, preceding the Great Depression, served as the catalyst for the Investment Advisers Act of 1940, alongside other landmark legislation like the Securities Act of 1933 and the Securities Exchange Act of 1934. Together, they ushered in a new era of regulatory oversight for the securities industry, enhancing transparency in financial statements to protect investors' interests.

Under the Investment Advisers Act of 1940, an investment adviser is defined as a person or firm that, for a fee, offers advice or recommendations on securities, either directly through managing assets or via written publications.

This act enforces stringent conduct and reporting obligations for investment advisers, holding them to fiduciary standards overseen by the Securities and Exchange Commission (SEC) or state regulators, based on the breadth and scale of their operations.

For example, investment advisers are required to prioritize their clients' interests, which includes avoiding the purchase of securities for their own accounts ahead of their clients—a practice known as front-running. They are also barred from engaging in trades that primarily benefit themselves or their firm, specifically through a practice known as churning, which involves excessive trading in a client’s account primarily to generate commissions

Who is a Registered Investment Advisor?

An investment adviser becomes a Registered Investment Advisor (RIA) by successfully registering with the Securities and Exchange Commission (SEC), which is required for those managing assets above a certain threshold.

Prior to the 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers managing portfolios over $25 million were required to register with the Securities and Exchange Commission (SEC), while those with smaller portfolios had the option to register at the state level.

The Dodd-Frank Act raised the SEC registration threshold for assets under management to $100 million, aiming to enhance regulatory oversight and financial stability. Consequently, advisers managing assets between $25 million and $100 million, previously under SEC jurisdiction, are now primarily regulated by state securities authorities, unless they qualify for specific exemptions.

Local securities authorities from the US, Canada, and Mexico are affiliated with the North American Securities Administrators Association (NASAA), a self-regulatory organization dedicated to investor protection and maintaining the integrity of the securities industry at the state, provincial, and territorial levels.

It's crucial to understand that qualifying RIAs are not required to register with NASAA directly. They must register with their local regulators, all of whom are members of NASAA. Yet, NASAA does not operate in isolation; it collaborates with entities like the Financial Industry Regulatory Authority, Inc. (FINRA).

FINRA, an autonomous self-regulatory organization, oversees firms that publicly trade securities and manages the licensing process for RIAs. In particular, professionals working as or for RIAs need to succeed in specific exams overseen by FINRA, including the Series 65 exam, to qualify for their roles.

Benefits of Hiring a Registered Investment Advisor

For business owners and managers, entrusting the management of your company’s assets to the right financial advisor is a decision of paramount importance. It’s about finding a partner who is not only adept in the complexities of the market, but also deeply committed to your business’s success.

A Registered Investment Advisor (RIA), bound by fiduciary duty, pledges to prioritize your interests, ensuring that every financial decision aligns with your business goals. Here are some of the top benefits of working with an RIA:

• Transparency - The law requires RIAs to be clear about their fees, investment strategies, and any potential conflicts of interest. This transparency allows clients to feel confident, knowing precisely how their assets are managed.
• Customized advice - RIAs offer personalized advice tailored to the client's needs, whether for retirement planning, wealth management, or tax planning.
• Regulatory Oversight - RIAs are regulated by either the SEC or state regulators, depending on their business's scale and scope. This oversight ensures they adhere to the industry's highest standards, providing an additional layer of protection for clients.

Conclusion

Consulting an RIA is an excellent way to shine a light on the path your investments will follow. However, ensuring an RIA is registered with the appropriate regulatory authority, be it the SEC or state regulators, is crucial. Before engaging their services, request their Investment Adviser Registration Depository (IARD) Number. This identifier allows you to verify their registration status on the SEC's Investment Adviser Public Disclosure (IAPD) website, revealing which regulator oversees their activities and any disciplinary history they may have.

Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.

At Wilkinson Law, we give business owners the documents and advice they desperately need to fund, grow, protect and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®