Regulation of Investment Advisers 

by the

U.S. Securities and Exchange Commission

March 2013

Staff of the Investment Adviser Regulation Office

Division of Investment Management

U.S. Securities and Exchange Commission
1

Regulation of Investment Advisers by the

U.S. Securities and Exchange Commission*

I. Introduction

Money managers, investment consultants, and financial planners are regulated in the 

United States as “investment advisers” under the U.S. Investment Advisers Act of 1940 

(“Advisers Act” or “Act”) or similar state statutes. This outline describes the regulation 

of investment advisers by the U.S. Securities and Exchange Commission (“SEC”).

The Advisers Act is the last in a series of federal statutes intended to eliminate abuses in 

the securities industry that Congress believed contributed to the stock market crash of 

1929 and the depression of the 1930s. The Act is based on a congressionally-mandated 

study of investment companies, including consideration of investment counsel and 

investment advisory services, carried out by the SEC during the 1930s.1

 The SEC’s 

report traced the history and growth of investment advisers and reflected the position 

that investment advisers could not properly perform their function unless all conflicts of 

interest between them and their clients were removed. The report stressed that a 

significant problem in the industry was the existence, either consciously or, more likely, 

unconsciously, of a prejudice by advisers in favor of their own financial interests.

The SEC’s report culminated in the introduction of a bill that, with some changes, 

became the Advisers Act. The Act, as adopted, reflects congressional recognition of the 

delicate fiduciary nature of the advisory relationship, as well as Congress’ desire to 

eliminate, or at least expose, all conflicts of interest that might cause advisers, either 

consciously or unconsciously, to render advice that is not disinterested.2

The outline that follows is divided into five sections, each of which addresses a 

different question: Who is an “investment adviser?” Which investment advisers must 

register with the SEC? Who must register under the Act? How does an investment 

adviser register under the Act? What are the requirements applicable to an investment 

adviser registered under the Act?

 * The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any 

private publication or statement by any of its employees. The views expressed in this outline are those 

of the staff of the Investment Adviser Regulation Office, and do not necessarily reflect the views of the 

U.S. Securities and Exchange Commission or others on the staff of the U.S. Securities and Exchange 

Commission. The Investment Adviser Regulation Office would like to thank Robert E. Plaze, the 

original author of this outline, for his substantial contribution.

1 See Investment Trusts and Investment Companies, Report of the Securities and Exchange Commission, 

Pursuant to Section 30 of the Public Utility Holding Company Act of 1935, on Investment Counsel, 

Investment Management, Investment Supervisory and Investment Advisory Services, H.R. Doc. No. 

477, 76th Cong., 2d Sess. (1939).

2 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 189, 191-192 (1963). 
2

II. Who is an Investment Adviser?

A. Definition of Investment Adviser 

Section 202(a)(11) of the Act defines an investment adviser as any person or firm 

that:

 for compensation; 

 is engaged in the business of; 

 providing advice to others or issuing reports or analyses regarding securities.

A person must satisfy all three elements to fall within the definition of 

“investment adviser,” which the SEC staff has addressed in an extensive 

interpretive release explaining how the Act applies to financial planners, pension 

consultants and other persons who, as a part of some other financially related 

services, provide investment advice.3

 Published in 1987, Investment Advisers Act 

Release No. 1092 represents the views of the Division of Investment 

Management, which is primarily responsible for administering the Act.

1. Compensation. The term “compensation” has been broadly construed. 

Generally, the receipt of any economic benefit, whether in the form of an 

advisory fee, some other fee relating to the total services rendered, a 

commission, or some combination, satisfies this element.4

 The person 

receiving the advice or another person may pay the compensation.

2. Engaged in the Business. A person must be engaged in the business of 

providing advice. This does not have to be the sole or even the primary 

activity of the person. Factors used to evaluate whether a person is engaged 

are: (i) whether the person holds himself out as an investment adviser; (ii) 

whether the person receives compensation that represents a clearly definable 

charge for providing investment advice; and (iii) the frequency and 

specificity of the investment advice provided.

5

 Generally, a person 

providing advice about specific securities will be “engaged in the business” 

unless specific advice is rendered only on a rare or isolated occasion.6 

 3 Applicability of the Investment Advisers Act of 1940 to Financial Planners, Pension Consultants, and 

Other Persons Who Provide Others with Investment Advice as a Component of Other Financial 

Services, Investment Advisers Act Release No. 1092 (Oct. 8, 1987) (“Release 1092”).

4 Id.; see also Kenisa Oil Company, SEC Staff No-Action Letter (May 6, 1982); SEC v. Fife, 311 F. 3d 

1 (1st Cir. 2002) (a person provides advice “for compensation” if it understands that successful 

investment will yield it a commission); In the Matter of Alexander V. Stein, Investment Advisers Act 

Release. No. 1497 (June 8, 1995) (a person receives “compensation” if it fraudulently converts client 

funds to its own use). 

5 Zinn v. Parish, 644 F.2d 360 (7th Cir. 1981); Release 1092, supra note 3. 

6 For instance, the SEC staff would not view an employer providing advice to an employee in connection 

with an employer-sponsored employee benefit program to be in the business of providing advice, see 

Letter to Olena Berg, Assistant Secretary, Department of Labor, from Jack W. Murphy, Chief Counsel, 

Division of Investment Management, SEC (Feb. 22, 1996). See also Zinn, supra note 5 at 364 

(“isolated transactions with a client as an incident to the main purpose of his management contract to 

negotiate football contracts do not constitute engaging in the business of advising others on investment 

securities.”).
3

3. Advising Others about Securities 

a. Advice about Securities. A person clearly meets the third element of 

the statutory test if he provides advice to others about specific 

securities, such as stocks, bonds, mutual funds, limited partnerships, 

and commodity pools. The SEC staff has stated that advice about real 

estate, coins, precious metals, or commodities is not advice about 

securities.7

 The more difficult questions arise with less specific 

advice, or advice that is only indirectly about securities. The SEC staff 

has stated in this regard:

(i) advice about market trends is advice about securities;8

(ii) advice about the selection and retention of other advisers is 

advice about securities;9

(iii) advice about the advantages of investing in securities versus 

other types of investments (e.g., coins or real estate) is advice 

about securities;10

(iv) providing a selective list of securities is advice about securities 

even if no advice is provided as to any one security;11 and

(v) asset allocation advice is advice about securities.12

b. Advising Others. Questions about whether a person advises “others” 

usually arise when a client is not a natural person. The SEC staff 

generally looks to the substance of the arrangement rather than its 

form:

(i) A general partner of a limited partnership that provides advice 

with respect to the investments of partnership assets is advising 

others (the limited partners) even where the general partner may 

have legal title to these assets.

13

 7 Robert R. Champion, SEC Staff No-Action Letter (Sept. 22, 1986).

8 Dow Theory Forecasts, SEC Staff No-Action Letter (Feb. 2, 1978). Thus, market-timing advice is 

advice about securities. See Maratta Advisory, Inc., SEC Staff No-Action Letter (July 16, 1981).

9 Release 1092, supra note 3; FPC Securities Corp., SEC Staff No-Action Letter (Dec. 1, 1974). See

also SEC v. Bolla, 401 F.Supp. 43 (D.D.C. 2005), aff’d. in relevant part, SEC v. Washington 

Investment Network, 475 F.3d 392 (D.C. Cir. 2007) (person selecting investment advisers for clients 

meets the Advisers Act’s definition of “investment adviser”).

10 Release 1092, supra note 3.

11 RDM Infodustries, Inc., SEC Staff No-Action Letter (Mar. 25, 1996). The SEC staff takes the position 

that providing information about securities in a report does not constitute providing advice about the 

securities if: (i) the information is readily available to the public in its raw state; (ii) the categories of 

information presented are not highly selective; and (iii) the information is not organized or presented in 

a manner that suggests the purchase, holding, or sale of any security. See id.

12 Maratta Advisory, Inc., supra, note 8. See also SEC v. Bolla, supra, note 9.

13 Abrahamson v. Fleschner, 566 F.2d 862, 870 (2d Cir. 1977), cert. denied, 436 U.S. 913 (1978); SEC v. 

Haligiannis, 470 F. Supp. 2d 373, 383 (S.D.N.Y. 2007). 
4

(ii) A wholly-owned corporate subsidiary exclusively advising the 

parent or another wholly owned corporate subsidiary would not 

generally be considered advising “others.”14

c. Investment Banking. The SEC staff does not believe that the Act 

applies to persons whose activities are limited to advising issuers 

concerning the structuring of their securities offerings (although such 

advice may technically be about securities).

15

d. Non-U.S. Clients. The Act is silent regarding whether the clients must 

be U.S. persons. The SEC takes the position that a U.S. person 

providing advice exclusively to non-U.S. persons would still be subject 

to the Act.16 

B. Exclusions from Definition 

There are several exclusions from the investment adviser definition available to 

persons who presumably (or at least arguably) satisfy all three elements of the 

definition. A person eligible for one of the exclusions is not subject to any 

provisions of the Act. 

1. Banks and Bank Holding Companies. This exclusion is generally limited to 

U.S. banks and bank holding companies.17 The SEC staff has stated that the 

exclusion is unavailable to non-U.S. banks,18 credit unions, and investment 

adviser subsidiaries of banks or bank holding companies.

19

2. Lawyers, Accountants, Engineers, and Teachers. The professional exclusion 

is available only to those professionals listed, and only if the advice given is 

incidental to the practice of their profession. Factors considered by staff to 

evaluate whether advice is incidental to a profession are: (i) whether the 

professional holds himself out as an investment adviser; (ii) whether the 

advice is reasonably related to the professional services provided; and (iii) 

whether the charge for advisory services is based on the same factors that 

 14 See Zenkyoren Asset Management of America Inc., SEC Staff No-Action Letter (June 30, 2011). 

15 See, e.g., The Applicability of the Investment Advisers Act of 1940 to Financial Advisors to Municipal 

Bond Issuers, Division of Investment Management, SEC Staff Legal Bulletin No. 11 (Sept. 19, 2000), 

available at http://www.sec.gov/interps/legal.shtml. 

16 See Release 3221, infra note 46, at n.76.

17 The term “bank” is defined in section 202(a)(2) of the Act. In 2001, the Act’s definition of 

“investment adviser” was amended so that banks and bank holding companies are not eligible for this 

exclusion to the extent that they serve or act as an investment adviser to a registered investment 

company. However, if, in the case of a bank, such services or actions are performed through a 

separately identifiable department or division, the department or division, and not the bank itself, is 

deemed to be the investment adviser. The term “separately identifiable department or division” is 

defined in section 202(a)(26).

18 Letter to Rep. William J. Hughes from Stanley B. Judd, Deputy Chief Counsel, Division of Investment 

Management, SEC (June 4, 1980). 

19 First Commerce Investors, Inc., SEC Staff No-Action Letter (Jan. 31, 1991); Southwest Corporate 

Federal Credit Union, SEC Staff No-Action Letter (May 31, 1983).
5

determine the professional’s usual charge.20

3. Brokers and Dealers. A broker or dealer that is registered with the SEC 

under the Securities and Exchange Act of 1934 (“Exchange Act”) is

excluded from the Act if the advice given is: (i) solely incidental to the 

conduct of its business as broker or dealer, and (ii) it does not receive any 

“special compensation” for providing investment advice.

a. Solely Incidental. The SEC has stated that investment advice is “solely 

incidental” to brokerage services when the advisory services rendered 

are “in connection with and reasonably related to the brokerage 

services provided.”21 If advice is not “solely incidental,” a brokerdealer is subject to the Advisers Act regardless of the form of 

compensation it receives. 

b. Special Compensation. Generally, to avoid receiving “special 

compensation,” a broker or dealer relying on this exclusion must 

receive only commissions, markups, and markdowns.22

Bundled Fees. The SEC has stated a broker or dealer that receives a 

fee based on a percentage of assets that compensates the broker or

dealer for both advisory and brokerage services receives “special 

compensation.”23

Separate or Identifiable Charge. The SEC has stated that a brokerdealer charges “special compensation” when it charges its customer a 

separate fee for investment advice, or when it charges its customers 

different commission rates, one with advice and one without, because 

the difference represents a clearly definable charge for investment 

advice.24

Broker-Dealer Agents. The SEC staff has stated that a registered 

representative of a broker-dealer can rely on the exclusion if she is: (i) 

giving advice within the scope of her employment with the broker-

 20 Release 1092, supra note 3; Henry S. Miller Companies of Dallas, Texas, SEC Staff No-Action Letter 

(Feb. 21, 1975). 

21 Certain Broker-Dealers Deemed Not To Be Investment Advisers, Investment Advisers Act Release No. 

2376 (Apr. 12, 2005) (“Release 2376”), available at http://www.sec.gov/rules/final/34-51523.pdf.

22 Section 202(a)(11)(C). See S. Rep. No. 76-1775 at 22; H.R. Rep. No. 76-2639 at 28 (the term 

“investment adviser” was “so defined as specifically to exclude . . . brokers (insofar as their advice is 

merely incidental to brokerage transactions for which they receive only brokerage commissions.”)). 

23 In Release 2376, the SEC adopted a rule that, among other things, deemed brokers charging assetbased brokerage fees (rather than commissions, mark-ups, or mark-downs) not to be investment 

advisers based solely on their receipt of special compensation. The rule was vacated for other reasons 

by a federal court in March 2007. Financial Planning Association v. SEC, 482 F.3d (D.C. Cir. 2007). 

See also National Regulatory Services, SEC Staff No-Action Letter (Dec 2, 1992) at n.3.

24 Final Extension of Temporary Exemption from the Investment Advisers Act for Certain Brokers and 

Dealers, Investment Advisers Act Release No. 626 (Apr. 27, 1978) (“Release 626”). See also, Opinion 

of the General Counsel Relating to Section 203(b)(3)of the Investment Advisers Act of 1940, 

Investment Advisers Act No. 2 (Oct. 28, 1940). The Commission proposed to codify this 

interpretation in a rule. See Interpretive Rule under the Advisers Act Affecting Broker-Dealers, 

Investment Advisers Act Release No. 2652 (Sept. 24, 2007).
6

dealer; (ii) the advice is incidental to her employer’s brokerage 

activities; and (iii) she receives no special compensation for her 

advice.25

Brokerage Customers. The SEC has stated that a broker-dealer does 

not have to treat its brokerage customers to whom it provides 

investment advice as advisory clients simply because it is registered 

under the Advisers Act. It must treat as an advisory client only those 

accounts for which it provides advice (i.e., non-incidental advice) or 

receives compensation (i.e., special compensation) that subjects the 

broker-dealer to the Advisers Act.26

4. Publishers. Publishers are excluded from the Act, but only if a publication: 

(i) provides only impersonal advice (i.e., advice not tailored to the individual 

needs of a specific client);

27 (ii) is “bona fide,” (containing disinterested 

commentary and analysis rather than promotional material disseminated by 

someone touting particular securities); and (iii) is of general and regular 

circulation (rather than issued from time to time in response to episodic 

market activity).

28

5. Government Securities Advisers. This exclusion is available to persons and 

firms whose advice is limited to certain securities issued by or guaranteed by 

the U.S. government.29 

6. Credit Rating Agencies. This exclusion is available to any rating agency 

regulated under section 15E of the Exchange Act as a “nationally recognized 

statistical rating organization.”30

 25 Institute of Certified Financial Planners, SEC Staff No-Action Letter (Jan. 21, 1986). 

26 Release 626, supra note 24. The Commission has proposed to codify this interpretation in a rule. See

Interpretive Rule under the Advisers Act Affecting Broker-Dealers, supra note 24.

27 See Weiss Research, Inc., et al, Investment Advisers Act Release No. 2525 (June 22, 2006) (newsletter 

publisher deemed to be an investment adviser providing personalized investment advice whose “autotrading” program sent signals to broker-dealer, which automatically traded subscriber/customer 

securities consistent with signals). 

28 Section 202(a)(11)(D). See Lowe v. SEC, 472 U.S. 181 (1985); SEC v. Gun Soo Oh Park, A/K/A Tokyo 

Joe, and Tokyo Joe’s Societe Anonyme Corp., 99 F. Supp. 2d 889 (N.D. Ill. 2000). If a publisher is 

required to register as a result of some other advisory activity, the adviser is subject to all of the 

provisions of the Act and SEC rules with respect to the publication. See Investment Advisers Act 

Release No. 870 (July 15, 1983)(“Release 870”).

29 Section 202(a)(11)(E). The scope of the exception includes persons whose advice is limited to: 

(i) direct obligations of the Federal government (e.g., U.S. Treasury obligations); (ii) securities subject 

to guarantees from the Federal government; and (iii) securities issued by or guaranteed by corporations 

whose securities are designated by the Secretary of the Treasury as exempt from the Exchange Act. 

The SEC staff has stated that advice about repurchase agreements collateralized by U.S. government 

securities does not fall within the exception. J.Y. Barry Arbitrage Management, Inc., SEC Staff NoAction Letter (Oct. 18, 1989). See also In the Matter of Rauscher Pierce Refsnes, Inc., et al.,

Investment Advisers Act Release No. 1863 (Apr. 6, 2000) (“Because Rauscher’s advice was not 

limited to Treasury securities or other government securities as described in section 202(a)(11)(E), that 

provision did not operate to exclude Rauscher from the definition of investment adviser.”).

30 Section 202(a)(11)(F), containing this exclusion for rating agencies, was added to the Act by the Credit 

Rating Agency Reform Act of 2006. Pub. L. No. 109-291, 120 Stat. 1327 (Sept. 29, 2006). 
7

7. Family Offices. A family office that manages the wealth and other affairs of 

a single family is excluded from the investment adviser definition if it: (i) 

provides investment advice only to family clients; (ii) is wholly owned by 

family clients and exclusively controlled by family members and/or certain 

family entities; and (iii) does not hold itself out31 to the public as an 

investment adviser.32

a. Family Members. A family office’s “family members” include all 

lineal descendants (including adopted children, stepchildren, foster 

children, and, in some cases, persons who were minors when a family 

member became their legal guardian) of a common ancestor (no more 

than 10 generations removed from the youngest generation of family 

members), and such lineal descendants’ spouses or spousal 

equivalents.33

b. Family Clients. The family office’s clients generally may include 

family members; key employees; any non-profit or charitable 

organization funded exclusively by family clients; any estate of a 

family member, former family member, key employee, or subject to 

certain conditions, a former key employee; certain family client trusts; 

and any company wholly owned by and operated for the sole benefit of 

family clients.34

8. Governments and Political Subdivisions. The Act does not apply to the U.S. 

government, state governments and their political subdivisions, and their 

agencies or instrumentalities, including their officers, agents, or employees 

acting in their official capacities.35

9. Non-U.S. Advisers. There is no exemption for non-U.S. advisers. Non-U.S. 

persons advising U.S. persons are subject to the Act and must register under 

the Act36 unless eligible for one of the exemptions discussed below (e.g., the 

“foreign private adviser” registration exemption).37 The SEC does not 

accept “home state registration” of non-U.S. advisers in lieu of SEC 

 31 See infra notes 69 to 72 and accompanying text for discussion of “holding out.” 

32 Rule 202(a)(11)(G)-1(b)(defining “family office” for purpose of section 202(a)(11)(G), which was 

added to the Act by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 

111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”)). Family offices that do not meet these conditions 

must register with the SEC unless another exemption is available. Rule 202(a)(11)(G)-1(e)(2). 

33 Rule 202(a)(11)(G)-1(d)(6).

34 Rule 202(a)(11)(G)-1(d)(4). Key employees include executive officers, directors, trustees, general 

partners, or any person serving in a similar capacity for the family office or its affiliated family office, 

and certain employees who have participated in the investment activities of the family office or its 

affiliated family office for at least 12 months. Rule 202(a)(11)(G)-1(d)(8).

35 Section 202(b).

36 In the Matter of Banco Espirito Santo S.A., Investment Advisers Act Release No. 3304 (Oct. 24, 2011) 

(The SEC brought an enforcement action against a commercial bank headquartered in Portugal for 

violating section 203(a) by marketing its portfolio of financial services, including offering securities 

and providing advice regarding those securities, to U.S. residents who were primarily Portuguese 

immigrants without registering with the Commission.).

37 See Section III. B. 3 of this outline for discussion of the foreign private adviser exemption. 
8

registration.

38

The SEC has authority to designate, by rule or order, other persons who are not 

within the intent of the definition of investment adviser.39 

III. Which Investment Advisers Must Register Under the Advisers Act?

A firm that falls within the definition of “investment adviser” (and is not eligible for 

one of the exclusions) must register under the Advisers Act, unless it (i) is prohibited 

from registering under the Act because it is a smaller firm regulated by one or more of 

the states or (ii) qualifies for an exception from the Act’s registration requirement.40 All 

advisers, registered or not, are subject to the Act’s anti-fraud provisions.

A. Prohibitions from Registration 

Until 1996, most investment advisers were subject to regulation by both the SEC 

and one or more state regulatory agencies. The Act was amended in 1996 and 

again in 2010 to allocate regulatory responsibility between the SEC and the 

states.41 Today, most small advisers and “mid-sized advisers” are subject to state 

regulation of advisers and are prohibited from registering with the SEC.42 Most 

large advisers (unless an exemption is available) must register with the SEC, and 

state adviser laws are preempted for these advisers.43

 38 On June 12, 2007, the SEC held a “roundtable discussion” at which the possibility of revising its 

approach to mutual recognition was discussed. The SEC press release concerning the roundtable stated 

that “selective mutual recognition would involve the SEC permitting certain types of foreign financial 

intermediaries to provide services to U.S. investors under an abbreviated registration system, provided 

those entities are supervised in a foreign jurisdiction under a securities regulatory regime substantially 

comparable (but not necessarily identical) to that in the United States.” See 

http://www.sec.gov/spotlight/mutualrecognition.htm. 

39 Section 202(a)(11)(H). See, e.g., International Bank for Reconstruction and Development and 

International Development, Investment Advisers Act Release Nos. 1971 (Sept. 4, 2001) (notice) and 

1955 (July 27, 2001) (order) (declaring World Bank instrumentalities not to be investment advisers 

under the Act). Section 202(a)(11)(H) had been designated as section 202(a)(11)(F) until 2006, and as 

202(a)(11)(G) until 2011, when it was re-designated by the Dodd-Frank Act.

40 Section 203(a). 

41 National Securities Markets Improvements Act of 1996 (“NSMIA”), Pub. L. No. 104-290, 110 Stat. 

3416 (1996); Dodd-Frank Act, supra note 32. Most of the provisions amending the Advisers Act to 

allocate regulatory responsibilities between the SEC and state governments have been codified in 

section 203A.

42 Section 203A(a). Section 203A creates a prohibition, not an exemption. See In the Matter of Matthew 

P. Brady, Investment Advisers Act Release No. 2178 (Sept. 30, 2003); In the Matter of Warwick 

Capital Management Inc., Initial Decision Release No. 327 (Feb. 15, 2007); Credit Agricole Asset 

Management Alternative Investments, Inc., SEC Staff No-Action Letter (Aug. 7, 2006). See also In the 

Matter of Royal Oak Capital Management, LLC, Investment advisers Act Release No. 3354 (Jan. 17, 

2012) (cancelling the registration of an adviser that did not have required amount of assets under 

management to remain registered with the SEC).

43 See Sections 203(a) (registration required) and 203A(b) (preemption of state law). 
9

1. Operation of Section 203A of the Advisers Act

a. Small Advisers. Advisers with less than $25 million of assets under 

management are regulated by one or more states unless the state in 

which the adviser has its principal office and place of business has not 

enacted a statute regulating advisers.44 Thus, unless an exemption is 

available (discussed below), only a small adviser with its principal 

office and place of business in Wyoming (which has not enacted a 

statute regulating advisers) may register with the SEC.

b. Mid-Sized Advisers. Generally advisers with between $25 million and 

$100 million of assets under management45 are regulated by one or 

more states if (i) the adviser is registered with the state where it has its 

principal office and place of business (e.g., it cannot take advantage of 

an exemption from state registration), and (ii) the adviser is “subject to 

examination” by that state securities authority.46 Unless an exemption 

is available, a mid-sized adviser with its principal office and place of 

business in New York or Wyoming is not “subject to examination” and 

must register with the SEC.47

c. Non-U.S. Advisers. Advisers whose principal office and place of 

business is outside the United States are not prohibited from 

registering with the SEC and thus are not subject to the assets under 

management thresholds.48 A non-U.S. adviser giving advice to U.S. 

persons49 must register with the SEC (and thus may avoid registration 

with state regulators), unless an exemption from registration is 

 44 Section 203A(a)(1) prohibits any adviser from registering with the SEC that is regulated or is required 

to be regulated in the state in which it maintains its principal office and place of business. The SEC 

interprets this provision to mean the prohibition applies only to an adviser that maintains its principal 

office and place of business in a state that has enacted an investment adviser statute. Rules 

Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release 

No. 1633 (May 15, 1997) (“Release 1633”) at n.83 and accompanying text. 

45 The Dodd-Frank Act raised the threshold for advisers to register with the SEC to $100 million of assets 

under management. See section 410 of Dodd-Frank Act. A mid-sized adviser may register when it 

acquires $100 million of assets under management and must register once it obtains $110 million of 

assets under management, unless some other exemption is available. Rule 203A-1(a)(1). Once 

registered with the SEC, a mid-sized adviser is not required to withdraw from SEC registration and 

register with the states until the adviser has less than $90 million of assets under management. Id. 

46 Section 203A(a)(2) prohibits a mid-sized adviser from registering with the SEC if the adviser is 

required to be registered as an adviser in the state where it has its principal office and place of business 

and is subject to examination by that state. See Rule Implementing Amendments to the Investment 

Advisers Act of 1940, Investment Advisers Act Release No. 3221 (June 22, 2011) (“Release 3221”). 

47 See Instructions for Item 2 of Part 1A of Form ADV; Division of Investment Management: Frequently 

Asked Questions Regarding Mid-Sized Advisers, available at 

www.sec.gov/divisions/investment/midsizedadviserinfo.htm. New York and Wyoming did not advise 

the SEC staff that advisers registered with them are subject to examination. See Release 3221 at n.152, 

supra note 46.

48 See Release 1633, supra note 44 at Section II. E. An adviser with a principal office and place of 

business in another country does not have a principal office and place of business in a U.S. state that 

regulates investment advisers.

49 See infra note 64 for discussions of the definition of a “U.S. person.”
10

available (in which case it may be subject to state registration 

requirements).50

2. Exceptions to Prohibition. Section 203A and SEC rules carve out several 

exceptions from the assets under management tests.

a. Advisers to Investment Companies. Advisers to investment companies 

registered under the Investment Company Act of 1940 (the 

“Investment Company Act”) must register with the SEC.51 The 

exception is not available to an adviser that simply gives advice about 

investing in investment companies.52

b. Advisers to Business Development Companies. Advisers with at least 

$25 million of assets under management that advise a company which 

has elected to be a business development company pursuant to section 

54 of the Investment Company Act must register with the SEC.53

c. Pension Consultants. Advisers providing advisory services to 

employee benefit plans having at least $200M of assets may register 

with the SEC (even though the consultant does not itself have those 

assets under management).54

d. Related Advisers. Advisers that control, are controlled by, or are under 

common control of an SEC-registered adviser may register with the 

SEC, but only if they have the same principal office and place of 

business.55

e. Newly-Formed Advisers. Advisers that are not registered, and have a 

reasonable expectation that they will be eligible for SEC registration 

within 120 days of registering, may register with the SEC.56

 50 See Section III. A. 3 of this outline for discussion of exemption from registration for foreign private 

advisers. 

51 Sections 203A(a)(1)(B); 203A(a)(2)(A).

52 See Instructions for Item 2 of Part 1A of Form ADV. 

53 Section 203A(a)(2)(A). See also Item 2.A.(6) of Part 1A of Form ADV. 

54 Rule 203(A)-2(a). In June 2011, the SEC increased the plan assets threshold required for pension 

consultants from $50 million to $200 million. See Release 3221, supra note 46. In May 2005, the SEC 

staff published a report detailing concerns with conflicts of pension fund consultants who help pension 

managers evaluate money managers. See Staff Report Concerning Staff Examinations of Certain Select 

Pension Fund Consultants, available at www.sec.gov/news/studies/pensionexamstudy.pdf. The SEC 

settled an administrative proceeding with a pension consultant that breached its fiduciary obligations by 

failing to disclose conflicts of interest. In the Matter of Yanni Partners, Inc., Investment Advisers Act 

Release No. 2643 (Sept. 4, 2007) (pension consultant held itself out to be “independent” of money 

managers sold subscriptions to data base to money managers it was evaluating). 

55 Rule 203A-2(b). 

56 Rule 203A-2(c). An adviser relying on this exception must file an amendment to its Form ADV at the 

end of the 120 days indicating whether it has become eligible for SEC registration, or must withdraw 

its SEC registration. An adviser that expects to be eligible for SEC registration because of the amount 

of its assets under management must have $100M or more of assets under management no later than 

120 days after its registration is declared effective. See Instructions for Item 2 of Part 1A of Form 

ADV.
11

f. Multi-State Advisers. Advisers that would otherwise be obligated to 

register with 15 or more states may register with the SEC.57

g. Internet Advisers. Certain advisers who provide advice though an 

interactive web site may register with the SEC.

58

3. State Law Still Applicable to SEC-Registered Advisers. Although state 

investment adviser statutes do not apply to SEC-registered advisers, other 

state laws, including other state securities laws, do apply. In addition, state 

laws may (and most state laws continue to) require an SEC-registered 

adviser to:

a. comply with state anti-fraud prohibitions;

b. provide the state regulator with a copy of its SEC registration;

c. pay state licensing and renewal fees; and

d. license persons giving advice on behalf of the adviser, but only if the 

person has a place of business in the state.59

4. Federal Anti-Fraud Law Still Applicable to State-Registered Advisers. The 

SEC continues to institute enforcement actions against state-registered 

advisers charging violations of section 206 of the Act.60

B. Exemptions from Registration 

The Advisers Act provides several exemptions from registration. The exemptions 

are voluntary; advisers eligible for them can nonetheless register with the SEC.61

1. Intrastate Advisers. Available to an adviser (i) all of whose clients are 

residents of the state in which the adviser maintains its principal office and 

place of business and (ii) that does not give advice about securities on any 

 57 Section 203A(a)(2)(A); Rule 203A-2(d). 

58 Rule 203A-2(e). Exemption for Certain Investment Advisers Operating Through the Internet, 

Investment Advisers Act Release No. 2091 (Dec. 12, 2002), available at

http://www.sec.gov/rules/final/finalarchive/finalarchive2002.shtml. 

59 SEC-registered advisers can comply with state requirements that they provide states with a copy of 

their registration (so-called “notice filings”), pay state registration fees, and license advisory personnel 

(in most states) through the electronic filing system (IARD) discussed below.

60 See, e.g., In the Matter of James William Fuller, Investment Advisers Act Release No. 1842 (Oct. 4, 

1999); In the Matter of Robert Radano, Investment Advisers Act Release No. 2750 (June 30, 2008); 

SEC v. Aaron Donald Vallett and A.D. Vallett & Co., LLC, Litigation Release No. 21557 (June 16, 

2010). Most of the anti-fraud rules adopted by the SEC pursuant to its authority under section 206(4) 

of the Act (and discussed below) are not applicable to state-registered advisers. States have, however, 

adopted similar rules in many cases.

61 Persons who voluntarily register under the Advisers Act, in circumstances where their registration may 

not be required, are subject to all of the provisions and rules under the Advisers Act applicable to 

persons required to register. See Release 870, supra note 28. State regulatory law is not preempted for 

an adviser taking advantage of one of the exceptions from registration and thus the adviser may be 

required to register with one or more state securities regulators. See discussion of state preemption in 

Section III. A. of this outline.
12

national exchange.62

Updated 2. Advisers to Insurance Companies. Available to an adviser whose only 

clients are insurance companies.63

3. Foreign Private Advisers. Available to an adviser that (i) has no place of 

business in the United States; (ii) has, in total, fewer than 15 clients in the 

United States and investors in the United States in private funds advised by 

the adviser; (iii) has aggregate assets under management attributable to these 

clients and investors of less than $25 million; and (iv) does not hold itself 

out generally to the public in the United States as an investment adviser.64

The exemption for foreign private advisers was added by the Dodd-Frank 

Act and replaces the private adviser exemption (i.e., an exemption for any 

adviser with fewer than 15 clients) previously provided by the same section 

of the Act, which was repealed. The SEC incorporated many of the rules 

from “old” section 203(b)(3). 

a. Counting Clients

(i) Multiple Persons as a Single Client. Rule 202(a)(30)-1 provides 

that the following can be considered a single client:65

(A) a natural person and (i) any minor child of the natural person; 

(ii) any relative, spouse, spousal equivalent, or relative of the 

spouse or of the spousal equivalent of the natural person with

the same principal residence; and (iii) all accounts or trusts of 

which the persons described above are the only primary 

beneficiaries; or 

(B) a corporation, general or limited partnership, limited liability 

company, trusts or other legal organization that receives 

investment advice based on its investment objectives (rather 

than the individual investment objectives of its owners),66

 62 Section 203(b)(1). The SEC staff takes the position that advice regarding investment companies 

involves advice about “listed securities” if the investment company invests in listed securities. Roy 

Heybrock, SEC Staff No-Action Letter (Apr. 5, 1992).

63 Section 203(b)(2). See also TACT Asset Mgmt., Inc., SEC Staff No-Action Letter (Oct. 24, 2012) 

(stating that the staff would not recommend enforcement proceedings if a U.S. investment adviser 

whose only client is a foreign insurance company does not register with the SEC). 

64 Section 203(b)(3) (exempting “any investment adviser that is a foreign private adviser”); Section 

202(a)(30) (defining a “foreign private adviser”). Rule 202(a)(30)-1 defines the term “in the United 

States” by reference to the definitions of a “U.S. person” and the “United States” in Regulation S under 

the Securities Act, except that the rule treats as “in the United States” any discretionary account owned 

by a U.S. person and managed by a non-U.S. affiliate of the adviser. An adviser must assess whether a 

person is “in the United States” at the time the person becomes a client or, in the case of an investor in 

a private fund, each time the investor acquires securities issued by the fund. See rule 202(a)(30)-1, at 

note to paragraph (c)(3)(i). 

65 Rule 202(a)(30)-1. The rule provides a non-exclusive safe harbor for counting clients for purposes of 

section 203(b)(3). See rule 202(a)(30)-1, at note to paragraphs (a) and (b). 

66 An adviser must count an owner (e.g., a limited partner) as a client if it provides advice to that owner 

“separate and apart” from the advice provided to the entity. Rule 202(a)(30)-1(b)(1). Cf. Latham & 
13

and two or more of these entities that have identical owners.

(ii) “Look through” private funds. An adviser must count both its 

direct clients and each investor in any “private fund” it advises.

No Double Counting. An adviser may treat as a single investor 

any person who is an investor in two or more of the adviser’s 

private funds.67

Nominal Holders. An adviser may be required to also “look 

through” persons who are nominal holders of a security issued by 

a private fund to count the investors in the nominal holder when 

determining if the adviser qualifies for the exemption. For 

example, holders of the securities of any feeder fund in a masterfeeder arrangement may be deemed to be the investors of the 

master fund.68

b. Holding Out. The SEC staff views a person as holding himself out as 

an adviser if he advertises as an investment adviser or financial 

planner, uses letterhead indicating activity as an investment adviser, or 

maintains a telephone listing or otherwise lets it be known that he will 

accept new advisory clients,69 or hires a person to solicit clients on his 

behalf.70

(i) Participation in Non-Public Offerings. Foreign private advisers 

will not be deemed to be holding themselves out generally to the 

public in the United States as an investment adviser solely 

because they participate in a non-public offering in the United 

States of securities issued by a private fund pursuant to an 

exemption from registration under the Securities Act of 1933.71

(ii) Use of the Internet. An adviser using the Internet to provide 

information about itself ordinarily would be “holding itself out” 

as an adviser. However, the SEC has stated that it will not 

consider a non-U.S. adviser, including foreign private advisers, to 

be holding itself out as an adviser if:

(A) Prominent Disclaimer. The adviser’s web site includes a 

 Watkins, SEC Staff No-Action Letter (Aug. 24, 1998); Burr, Egan, Deleage & Co., Inc., SEC Staff 

No-Action Letter (Apr. 27, 1987). 

67 Rule 202(a)(30)-1, at note to paragraph (c)(2).

68 Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 

Million in Assets Under Management, and Foreign Private Advisers, Investment Advisers Act Release 

No.3222 (June 22, 2011)(“Release 3222”) at Section II.C.2.

69 See, e.g., William Bloor, SEC Staff No-Action Letter (Feb. 15, 1980); Richard J. Shaker, SEC Staff 

No-Action Letter (Aug. 1, 1977); Al O’Brien Associates, SEC Staff No-Action Letter (Oct. 6, 1973).

70 Investment Advisers Act Release No. 688 (July 15, 1979) at n.9. See also Lamp Technologies, Inc., 

SEC Staff No-Action Letter (May 29, 1997) (investment adviser not “holding itself out generally to the 

public as an investment adviser” solely by virtue of posting information about certain private funds 

(e.g., hedge funds) on a password-protected web site that is accessible only by accredited investors).

71 Rule 202(a)(30)-1(d).
14

prominent disclaimer making it clear that its web site 

materials are not directed to U.S. persons; and

(B) Procedures. The adviser implements procedures reasonably 

designed to guard against directing information about its 

advisory services to U.S. persons (e.g., obtaining residency 

information before sending further information).72

4. Charitable Organizations and Plans. Available to an adviser that is a 

charitable organization or a charitable organization’s employee benefit plan, 

including a trustee, officer, employee, or volunteer of the organization or 

plan to the extent that the person is acting within the scope of his 

employment or duties.73

5. Commodity Trading Advisors 

a. Generally. Available to any adviser that is registered with the U.S. 

Commodity Futures Trading Commission (“CFTC”) as a commodity 

trading advisor and whose business does not consist primarily of acting 

as an investment adviser and that does not advise a registered 

investment company or a business development company.74

b. Commodity Trading Advisors to Private Funds. Available to any 

adviser registered with the CFTC as a commodity trading advisor that 

advises a private fund, provided that the adviser must register with the 

SEC if its business becomes predominantly the provision of securitiesrelated advice.75

6. Private Fund Advisers. Available to an adviser solely to private funds that 

has less than $150 million in assets under management in the United

States.76 An adviser that has any other type of client is not eligible for the 

exemption.77

 72 Statement of the Commission Regarding Use of Internet Web Sites to Offer Securities, Solicit Securities 

Transactions or Advertise Investment Services Offshore, Investment Advisers Act Release No. 1710 

(Mar. 23, 1998) section VI, available at

http://www.sec.gov/rules/interp/interparchive/interparch1998.shtml.

73 Sections 203(b)(4) and (5) were added by the Philanthropy Protection Act of 1995, Pub. L. No. 104-62, 

109 Stat. 682 (1995). See also Sisters of Mercy, SEC Staff No-Action Letter (Oct. 1, 2009).

74 Section 203(b)(6) (re-designated as 203(b)(6)(A) by Dodd-Frank Act) was added by the Commodity 

Futures Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 (2000), which also amended 

the Act’s definition of “security” in section 202(a)(18) of the Act to include certain “securities futures.” 

The Act repealed the ban on single stock or narrow-based stock index futures and established a 

framework for shared jurisdiction over the trading of these instruments and market participants. See

Exchange Act Release No. 44288 (May 9, 2001), available at http://www.sec.gov/rules/proposed/34-

44288.htm.

75 Section 203(b)(6)(B) of the Advisers Act (added by the Dodd-Frank Act).

76 Section 203(m) of the Advisers Act (added by the Dodd-Frank Act). The SEC adopted rule 203(m)-1 

on June 22, 2011 to implement the section. See Release 3222, supra note 68.

77 Two nominally separate but related advisers may be considered to be one adviser (and their assets 

aggregated) if they do not operate sufficiently independent of one another.
15

a. Private Funds. A “private fund” is an issuer of securities that would be 

an investment company “but for” the exceptions provided for in 

section 3(c)(1) or 3(c)(7) of the Investment Company Act.78

(i) Section 3(c)(1) is available to a fund that does not publicly offer its 

securities and has 100 or fewer beneficial owners of its 

outstanding securities.

(ii) Section 3(c)(7) is available to a fund that does not publicly offer its 

securities and limits its owners to qualified purchasers.79

b. Calculating Private Fund Assets

(i) Method of Calculation. Generally, advisers must include the 

value of all private funds managed, including the value of any 

uncalled capital commitments.80 Value is based on market value 

of those assets, or the fair value of those assets where market 

value is unavailable, and must calculate the assets on a gross 

basis, i.e., without deducting liabilities, such as accrued fees and 

expenses or the amount of any borrowing.81

(ii) Annual Assessment. An adviser must assess annually whether it 

has $150 million or more of private fund assets under 

management. An adviser that meets or exceeds the $150 

threshold must register with the Commission.82

c. Non-U.S. Advisers. An adviser with a principal office and place of 

business outside the United States may exclude consideration of nonU.S. clients, i.e., it may rely on the exemption if (a) all of its clients 

that are United States persons83 are qualifying private funds; and (b) 

any management at a U.S. place of business by the adviser is solely 

 78 Section 202(a)(29) of the Advisers Act.

79 The term “qualified purchasers” is defined in section 2(a)(51) of the Investment Company Act.

80 Form ADV: Instructions for Part 1A, instr. 5.b.(4). Proprietary assets, i.e, those of the adviser or its 

principals may not be excluded. Form ADV: Instructions for Part1A, instr. 5.b.(1).

81 Id. The SEC has recognized that, although many advisers will calculate the fair value of their private 

fund assets in accordance with Generally Accepted Accounting Principles (“GAAP”) or another 

international accounting standard, other advisers acting consistently and in good faith may utilize 

another fair valuation standard. Release 3222, supra note 68 at nn.364-365 and accompanying text. 

Consistent with this good faith requirement, the SEC expects that an adviser that calculates fair value in 

accordance with GAAP or another basis of accounting for financial reporting purposes will also use 

that same basis for purposes of determining the fair value of its regulatory assets under management. 

Id. at n.365. 

82 Rule 203(m)-1(c). A private fund adviser that had complied with all SEC reporting requirements 

applicable to an exempt reporting adviser, but reported in its annual updating amendment that fund 

assets exceeded $150 million, has up to 90 days after filing the annual updating amendment to apply 

for SEC registration, and may continue doing business as a private fund adviser during this time. 

General Instruction 15 to Form ADV.

83 Similar to the foreign private adviser exemption, a “United States person” generally is a “U.S. person,” 

as defined in Regulation S under the Securities Act, except that a discretionary or other fiduciary 

account also is a “United States person” if the account is held for the benefit of a United States person 

by a non-U.S. fiduciary who is a related person of the adviser. Rule 203(m)-1(d)(8).
16

attributed to $150 million of private fund assets.84

d. Annual Report. An adviser relying on the private fund adviser 

exemption must annually file a report on Form ADV to the SEC 85 and 

is subject to examination. Other provisions of the Act and SEC rules 

applicable only to registered advisers do not apply. The SEC refers to 

these advisers as “exempt reporting advisers.”

7. Venture Capital Advisers. Available to an adviser that solely advises one or 

more “venture capital funds” as defined by SEC rule (regardless of the 

amount of assets managed).86

a. Definition. To qualify as a “venture capital fund,” a fund must be a 

“private fund”87 that: 

(i) represents to investors that the fund pursues a venture capital 

strategy;88

(ii) does not provide investors with redemption rights;89

(iii) holds no more than 20% of the fund’s assets in non-“qualifying 

investments” (excluding cash and certain short-term holdings) 

Qualifying investment means generally directly acquired 

investments in equity securities of private companies (generally, 

companies that at the time of investment have not made a public 

offering) and that do not incur leverage or borrow in connection 

with the venture capital fund investment and distribute proceeds 

of such borrowing to the fund (i.e., have not been acquired in a 

leveraged buy-out transaction); and 

(iv) does not borrow (or otherwise incur leverage) more than 15% of 

the fund’s assets, and then only on a short-term basis (i.e., for no 

more than 120-days).90

 84 Rule 203(m)-1(b)(1) and (2). The term “place of business” has the same meaning as in the exemption 

for foreign private advisers, discussed above. See Section III. B. 3. of this outline. Rule 203(m)-

1(d)(2). 

85 Rule 204-2. The report must be filed within 60 days of relying on the private fund adviser exemption. 

Only portions of Form ADV must be completed. General Instruction 13 to Form ADV. An exempt 

reporting adviser is not required to deliver a brochure to its clients. General Instruction 3 to Form 

ADV. 

86 Section 203(l) of the Advisers Act (added by the Dodd-Frank Act). The SEC adopted rule 203(l)-1 on 

June 22, 2011 to implement the section. See Release 3222, supra note 68.

87 Rule 203(l)-1(a)(5). In addition, the fund cannot be registered under the Investment Company Act or 

have elected to be treated as a business development company as defined by that Act. Rule 203(l)-

1(a)(5).

88 Rule 203(l)-1(a)(1).

89 Rule 203(l)-1(a)(4) (the rule permits exceptions in extraordinary circumstances).

90 Rule 203(l)-1 contains a grandfathering provision for certain private funds that have sold their initial 

interests in the fund by December 31, 2010, provided that they have represented to their investors that 
17

b. Non-U.S. Advisers. The exemption is available to a non-U.S. adviser, 

but (unlike the private fund adviser exception) such an adviser may not 

disregard its non-U.S. advisory activities.91 Thus, all of an adviser’s 

clients, including non-U.S. clients, must be venture capital funds.92

c. Annual Reporting. An adviser relying on the venture capital adviser 

exemption must annually file a report on Form ADV to the SEC, 93 and 

is subject to examination. Other provisions of the Act and SEC rules 

applicable only to registered advisers do not apply. The SEC also 

refers to these advisers as “exempt reporting advisers.”

8. Advisers to Small Business Investment Companies (“SBICs”). SBICs, 

licensed by the Small Business Administration, are privately owned and 

managed investment firms that provide venture capital to small businesses 

from the SBIC’s own capital and from funds the SBIC is able to borrow at 

favorable rates through the federal government.94

IV. Who Must Register Under the Advisers Act?

A. The Advisory Firm

Although many individuals who are employed by advisers fall within the 

definition of “investment adviser,” the SEC generally does not require those 

individuals to register as advisers with the SEC. Instead, the advisory firm must 

register with the SEC. The adviser’s registration covers its employees and other 

persons under its control, provided that their advisory activities are undertaken on 

the adviser’s behalf.95

B. Affiliates

1. Integration. The SEC staff takes the view that advisers and their affiliates 

cannot circumvent the disclosure and other requirements of the Act by 

separately registering under the Act if they are operationally integrated, e.g., 

have the same personnel, capital structures, and investment decision-making 

functions.96 

 they pursue a venture capital strategy and that they do not issue any interests to any person after July 

21, 2011.

91 Release 3222, supra note 68.

92 Rule 203(l)-1 contains a note the effect of which is to permit a non-U.S. adviser to treat a foreign fund 

it advises as a “private fund” even if the fund does not meet the Act’s definition of a private fund 

because it is not relying on a statutory exemption from the Investment Company Act, but is rather 

relying on the lack of jurisdiction of the U.S. Release 3222, supra note 68.

93 Rule 204-2. See supra note 85 for a summary of reporting requirements.

94 Section 203(b)(7) (added by the Dodd-Frank Act).

95 Investment Advisers Act Release No. 688 (July 12, 1979) (persons associated with registered 

adviser need not separately register as investment advisers solely as a result of their activities 

as associated persons). See also Kevin J. Hughes, SEC Staff No-Action Letter (Dec. 7, 1983). 

96 The determination of whether an advisory business of two separately formed affiliates may be required 

to be integrated is based on the facts and circumstances. Release 3222, supra note 68. See Richard
18

For example, an adviser managing $200 million of private fund assets could 

not simply reorganize as two separate advisers each of which purported to 

rely on the private fund adviser exemption from registration.97

2. Participating Non-U.S. Affiliates. The SEC staff takes the view that, under 

certain conditions, a non-U.S. adviser (a “participating affiliate”) does not 

have to register under the Act if it provides advice to U.S. persons through a 

registered affiliate.98 The conditions that must be satisfied include the 

following:

a. an unregistered adviser and its registered affiliate must be separately 

organized;

b. the registered affiliate must be staffed with personnel (located in the 

U.S. or abroad) who are capable of providing investment advice;

c. all personnel of the participating affiliate involved in U.S. advisory 

activities must be deemed “associated persons”99 of the registered 

affiliate; and

d. the SEC must have adequate access to trading and other records of the 

unregistered adviser and to its personnel to the extent necessary to 

enable the SEC to monitor and police conduct that may harm U.S. 

clients or markets.100

The Commission affirmed these staff positions in the context of the private 

adviser exemptions.101

3. Joint Registration of Affiliates. 

a. Special Purpose Vehicles. The SEC staff takes the position that a 

special purpose vehicle (“SPV”) set up by a registered investment 

adviser to serve as the general partner of a pooled investment vehicle 

(e.g., a hedge fund) does not have to separately register as an 

investment adviser if all of the activities of the SPV are subject to the 

registered adviser’s supervision and control,

102 its employees are 

 Ellis, SEC Staff No-Action Letter (Sept. 17, 1981); Kenneth Levanthal, SEC Staff No-Action Letter 

(Feb. 7, 1983). See also Price Waterhouse, SEC Staff No-Action Letter (Nov. 22, 1988).

97 Release 3222, supra note 68, at Section II.D.

98 See Uniao de Bancos de Brasilerios, S.A., SEC Staff No-Action Letter (July 28, 1992); Mercury Asset 

Management, SEC Staff No-Action Letter (Apr. 16, 1993); Kleinwort Benson Investment Management 

Ltd., SEC Staff No-Action Letter (Dec. 15, 1993); Murray Johnston Holdings Ltd., SEC Staff NoAction Letter (Oct. 7, 1994). See also Section II. C. of Release 3222 and Section III. B. 3 of this 

outline regarding the exemption for foreign private advisers.

99 See Section V. A. 1 of this outline for the definition of “person associated with an investment adviser.” 

100 See id.

101 Release 3222, supra note 68, at Section II.D.

102 For guidance regarding application of the staff’s position with respect to directors of an SPV that are 

independent of the investment adviser, see American Bar Association Subcommittee on Hedge Funds, 

SEC Staff Letter (Jan. 18, 2012) (“ABA Letter 2012”), Question 3, available at

http://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm.
19

treated as “supervised persons” of the registered adviser and reported 

as such on its Form ADV, and the SPV is subject to examination by 

the SEC.103 The SEC staff takes the view that this analysis is not 

limited to a registered adviser with a single SPV.104

b. Multiple Entities in Control Relationships. The SEC staff has taken 

the position that an investment adviser may file (or amend) a single 

Form ADV on behalf of itself and each other adviser that is under 

common control with the filing adviser where the filing adviser and 

each relying adviser collectively conduct a “single advisory 

business.”105

V. How Does an Investment Adviser Register Under the Advisers Act?

A. Procedure 

Applicants for registration under the Act must file Form ADV with the SEC. 

Within 45 days the SEC must grant registration or institute an administrative 

proceeding to determine whether registration should be denied.

1. Denial of Registration. The SEC may deny registration if the adviser is 

subject to a “Statutory Disqualification,” that is, if the adviser or any “person 

associated with the adviser” makes false or misleading statements in its 

registration application, has within the past 10 years been convicted of a 

felony, or if it has been convicted by a court or found by the SEC to have 

violated a securities-related statute or rule, or have been the subject of a 

securities-related injunction, or similar legal action.106

Person Associated with An Investment Adviser. These include employees 

(other than clerical employees) of the advisers as well as any persons who 

directly or indirectly control the investment adviser or are controlled by the 

adviser.107 The SEC can deny registration if, for example, the parent 

company of an adviser has been convicted of securities fraud even if the 

adviser and its employees have not.

Non-U.S. Based Offenses. Statutory Disqualifications include convictions in 

 103 American Bar Association Subcommittee on Private Entities, SEC Staff Letter (Dec. 8, 2005) (“ABA 

Letter 2005”), Question G1, available at

http://www.sec.gov/divisions/investment/noaction/aba120805.htm.

104 ABA Letter 2012, Question 2. Similarly, under certain circumstances, the staff has indicated that an 

exempt reporting adviser to which a private fund’s day-to-day management responsibility has been 

delegated may satisfy the Form ADV reporting obligations of one or more special purpose entities. See 

“FAQs” regarding Reporting to the SEC as an Exempt Reporting Adviser (“ERA FAQs”) available at 

http://www.sec.gov/divisions/investment/iard/iardfaq.shtml#exemptreportingadviser.

105 See id. Question 4 (outlining the circumstances under which a filing adviser and one or more relying 

advisers would, in the staff’s view, collectively conduct a single advisory business absent other factors 

suggesting that they conduct different businesses). Likewise, under certain circumstances, the staff has 

indicated that an exempt reporting adviser may satisfy the Form ADV reporting obligations of one or 

more special purpose entities under its control. See ERA FAQs.

106 Sections 203(c)(2) and (e). 

107 Section 202(a)(17).
20

non-U.S. courts, and by findings of violations by “foreign financial 

regulatory authorities” enforcing non-U.S. laws.108

2. Qualifications. There are no “fit and proper” or educational requirements 

for registration as an investment adviser, although certain employees of the 

adviser may have to pass securities examinations in the states in which they 

have a principal place of business. Instead, advisers must disclose to clients 

the background and qualifications of certain of their personnel.109

B. Form ADV 

Form ADV sets forth the information that the SEC requires advisers to provide in 

an application for registration. Once registered, an adviser must update the form 

at least once a year, and more frequently if required by instructions to the form.110 

Form ADV consists of two parts.111

1. Part 1. Part 1 is primarily for SEC use. It requires information about the 

adviser’s business, ownership, clients, employees, business practices 

(especially those involving potential conflicts with clients), and any 

disciplinary events of the adviser or its employees. The SEC uses 

information from this part of the form to make its registration determination 

and to manage its regulatory and examination programs. Part 1 is organized 

in a check-the-box, fill-in-the-blank format.

On June 22, 2011, the SEC amended Part 1A to expand the information 

collected, primarily from advisers to hedge funds and other private funds in 

order to improve the SEC’s ability to oversee registered advisers. Amended 

Part 1A requires advisers to provide additional information about three areas 

of their operations: (i) additional information about private funds they 

advise; (ii) expanded data provided by advisers about their advisory business 

(including the types of clients they have, their employees, and their advisory 

activities), as well as about their business practices that may present 

significant conflicts of interest; (iii) additional information about advisers’

non-advisory activities and their financial industry affiliations.112 

2. Part 2. Amended in 2010, Part 2 is divided into Part 2A and Part 2B and 

sets forth information required in client brochures and brochure 

supplements.

113

 108 Sections 203(c)(2) and (e). Non-U.S. based offenses were added to section 203(e) in 1990 by the 

International Securities Enforcement Cooperation Act of 1990, Pub. L. No. 101-550, 104 Stat. 2713 

(Nov. 15, 1990). 

109 Form ADV, Part 2B. 

110 Rule 204-1(a). 

111 Both Part 1 and Part 2A of the Form ADV are filed by registered advisers through the IARD system 

and are available to the public on the Investment Adviser Public Disclosure Website at 

http://www.adviserinfo.sec.gov/(S(hdqosw4svnoutoxsmgo4mizx))/IAPD/Content/IapdMain/iapd_Site

Map.aspx.

112 Release 3221, supra note 46. 

113 On July 28, 2010, the SEC adopted amendments to Part 2 of Form ADV. Investment Advisers Act 

Release No. 3060 (July, 2010), available at http://www.sec.gov/rules/final/2010/ia-3060.pdf (“Part 2 
21

Brochure Part 2A requires an adviser to prepare a narrative “brochure” that 

includes plain English disclosures of, among other things, the adviser’s

business practices, investment strategies, fees, conflicts of interest, and 

disciplinary information.

114 Part 2B requires an adviser to prepare a 

“brochure supplement” that contains information about each advisory 

employee that provides investment advice to its clients, including her 

educational background, business experience, other business activities, and 

disciplinary history. To satisfy the “brochure rule” (discussed below),115 

the adviser must deliver the brochure (and updates to that brochure) to its

clients annually and the brochure supplement about a supervisory employee 

to a client at the time the employee begins to provide advisory services to 

that client.116 In addition, the adviser must file its brochure, but not its 

brochure supplement, with the SEC to satisfy its registration 

requirements.117

C. Electronic Filing 

All applications for registration as an adviser with the SEC must be submitted 

electronically through an Internet-based filing system called the Investment 

Adviser Registration Depository (“IARD”).118 The IARD is operated by the 

Financial Industry Regulatory Authority (“FINRA”), the broker-dealer selfregulator (formerly, NASD).119

D. Public Availability

All current information from advisers’ Form ADVs filed with the SEC is publicly 

available through an SEC web-site: www.adviserinfo.sec.gov. 

E. Withdrawal of Registration

Advisers withdraw from registration by filing Form ADV-W.120 An adviser may 

withdraw from registration because it: (i) ceases to be an investment adviser; (ii) 

is entitled to an exception from the registration requirements; or (iii) no longer is 

eligible for SEC registration (e.g., it no longer has the requisite amount of assets 

 Adopting Release”). For staff responses to frequently asked questions about the amended Part 2, visit 

the SEC’s website at http://www.sec.gov/divisions/investment/form-adv-part-2-faq.htm (“Part 2 

FAQs”).

114 Prior to the 2010 amendments, Part II of Form ADV was in a check-the-box, fill-in-the-blank format.

115 Rule 204-3. 

116 Rule 204-3(b)(3). For specific delivery requirements under the brochure rule, see Section VI. B. 12

below.

117 Rule 203-1(a); Rule 204-1(b)(1).

118 Rule 203-1(b). FINRA charges advisers filing fees to defray the cost of maintaining and operating the 

IARD. To pay the fees, advisers must establish and fund an account with FINRA before making a 

filing. A fee schedule is available at www.sec.gov/divisions/investment/iard/iardfee.shtml. 

119 Rule 204-1(b). For information about electronic filing by advisers, see www.sec.gov/iard. FINRA 

does not act as a self-regulatory organization with respect to investment advisers.

120 Rule 203-2. Form ADV-W filings are made electronically through the IARD, and are effective 

immediately. There are no filing fees for Form ADV-W. 
22

under management).121 The SEC also has the authority under section 203(f) of the 

Advisers Act to revoke the registration of an adviser under certain enumerated 

circumstances.

F. Successor Registrations

An unregistered person that assumes and continues the business of a registered 

investment adviser (which then ceases to do business) may rely on the registration 

of the investment adviser by filing an application for registration within 30 days of 

the succession.122 

VI. What Are the Requirements Applicable to a Registered Investment Adviser?

The Advisers Act does not provide a comprehensive regulatory regime for advisers, but 

rather imposes on them a broad fiduciary duty to act in the best interest of their clients. 

As the Commission explained:

Unlike the laws of many other countries, the U.S. federal securities laws do not 

prescribe minimum experience or qualification requirements for persons providing 

investment advice. They do not establish maximum fees that advisers may 

charge. Nor do they preclude advisers from having substantial conflicts of interest 

that might adversely affect the objectivity of the advice they provide. Rather, 

investors have the responsibility, based on disclosure they receive, for selecting 

their own advisers, negotiating their own fee arrangements, and evaluating their 

advisers’ conflicts.123

There are five types of requirements on an adviser: (i) fiduciary duties to clients; (ii)

substantive prohibitions and requirements; (iii) contractual requirements; 

(iv) recordkeeping requirements; and (v) administrative oversight by the SEC, primarily 

by inspection. 

A. Fiduciary Duties to Clients

Fundamental to the Act is the notion that an adviser is a fiduciary. As a fiduciary, 

an adviser must avoid conflicts of interest with clients and is prohibited from 

overreaching or taking unfair advantage of a client’s trust. A fiduciary owes its 

clients more than mere honesty and good faith alone. A fiduciary must be 

sensitive to the conscious and unconscious possibility of providing less than 

disinterested advice, and it may be faulted even when it does not intend to injure a 

client and even if the client does not suffer a monetary loss.124 The landmark 

 121 Before withdrawing from registration, an adviser must arrange for the preservation of records it is 

required to keep under the Act. Rule 204-2(f).

122 Section 203(g). See Instruction 4 to Part 1A of Form ADV; Registration of Successors to BrokerDealers and Investment Advisers, Investment Advisers Act Release No. 1357 (Dec. 28, 1992) (the 

provision in rule 203-1 referred to in Release 1357 that addressed successions was moved by the SEC 

to Instruction 4 to Form ADV in 2000). A succession resulting from a change in the place or form of 

organization, or composition of a partnership, i.e., a succession that does not involve a change of 

control, may be completed by amending the predecessor’s Form ADV promptly after the succession. 

Id. 

123 See Amendments to Form ADV, Investment Advisers Act Release No. 2711 (Mar. 3, 2008). 

124 SEC v. Capital Gains Research Bureau, supra note 2, at 191-192.
23

court decision defining the duties of a fiduciary is Justice Cardozo’s opinion in 

Meinhard v. Salmon, in which he explains that:

Many forms of conduct permissible in the workaday world for those acting 

at arm’s length are forbidden by those bound by fiduciary ties. A fiduciary 

is held to something stricter than the morals of the marketplace. Not honesty 

alone, but the punctilio of an honor the most sensitive, is then the standard of 

behavior.125 

These concepts are embodied in the anti-fraud provisions of the Advisers Act. As 

the Supreme Court stated in SEC v. Capital Gains Research Bureau, Inc., its 

seminal decision on the fiduciary duties of an adviser under the Act:

[t]he Investment Advisers Act of 1940 reflects a congressional recognition 

of the delicate fiduciary nature of an investment advisory relationship as 

well as a congressional intent to eliminate, or at least to expose, all conflicts 

of interest which might incline an investment adviser—consciously or 

unconsciously—to render advice which was not disinterested.126 

The duty is not specifically set forth in the Act, established by SEC rules, or a 

result of a contract between the adviser and the client (and thus it cannot be 

negotiated away). Rather, fiduciary duties are imposed on an adviser by operation 

of law because of the nature of the relationship between the two parties.127 It is 

made enforceable by section 206 of the Act,128 which contains the Act’s anti-fraud 

provisions, and incorporated indirectly into the Act in various provisions and 

disclosure requirements discussed below.129

Several obligations flow from an adviser’s fiduciary duties.

1. Full Disclosure of Material Facts. Under the Act, an adviser has an 

affirmative obligation of utmost good faith and full and fair disclosure of all 

facts material to the client’s engagement of the adviser to its clients, as well 

as a duty to avoid misleading them.130 Accordingly, the duty of an 

investment adviser to refrain from fraudulent conduct includes an obligation 

to disclose material facts to its clients whenever failure to do so would 

defraud or operate as a fraud or deceit upon any client. 

Conflicts of Interest. This disclosure of material facts is particularly 

pertinent whenever the adviser is faced with a conflict—or a potential 

 125 164 N.E. 545, 546 (N.Y. 1928).

126 SEC v. Capital Gains Research Bureau, supra note 2, at 190-192. 

127 See In the Matter of Arleen W. Hughes, Exchange Act Release No. 4048 (Feb 18, 1948).

128 Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11 (1979) (“[T]he Act’s legislative history leaves 

no doubt that Congress intended to impose enforceable fiduciary obligations.”).

129 See Morris v. Wachovia Securities, Inc., 277 F. Supp. 2d 622 (E.D. Va. 2003) (“§206(2) is more than 

an anti-fraud provision because it establishes fiduciary duties for investment advisers.”). The scope of 

the fiduciary duties is determined by reference to federal court and administrative decisions rather than 

state common law analogies. Laird v. Integrated Resources, Inc., 897 F.2d 826 (5th Cir. 1990) 

(“[B]ecause state law is not considered, uniformity is promoted.”).

130 See In the Matter of Arleen W. Hughes, supra note 127. 
24

conflict— of interest with a client. As a general matter, the SEC has stated

that the adviser must disclose all material facts regarding the conflict so that 

the client can make an informed decision whether to enter into or continue 

an advisory relationship with the adviser, or take some action to protect 

himself or herself against the conflict.131

Disciplinary Events and Precarious Financial Condition. The SEC requires 

a registered adviser to disclose to clients and prospective clients material 

facts about: 

a. a financial condition of the adviser that is reasonably likely to impair 

the adviser’s ability to meet contractual commitments to clients;132 and 

b. certain disciplinary events of the adviser (and certain of its officers) 

occurring within the past 10 years, which are presumptively 

material.133

2. Suitable Advice. Advisers owe their clients a duty to provide only suitable 

investment advice. This duty generally requires an adviser to make a 

reasonable inquiry into the client’s financial situation, investment experience 

and investment objectives, and to make a reasonable determination that the 

advice is suitable in light of the client’s situation, experience and 

objectives.134 

3. Reasonable Basis for Recommendations. An adviser must have a 

 131 Part 2 Adopting Release, supra note 113. See also SEC v. Capital Gains Research Bureau, supra note 

2, at 191-192 (“The Investment Advisers Act of 1940 thus reflects a congressional recognition of the 

delicate fiduciary nature of an investment advisory relationship, as well as a congressional intent to 

eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser—

consciously or unconsciously—to render advice which was not disinterested.”).

132 Item 18 of Part 1A, Form ADV. This requirement is applicable to advisers that have discretionary 

authority with client accounts, or have custody of client assets, or require or solicit prepayment of more 

than $1,200 in fees per client, six months or more in advance.

133 Form ADV: Item 11 of Part 1A; Item 9 of Part 2A, and Item 3 of Part 2B. 

134 See Suitability of Investment Advice Provided by Investment Advisers, Investment Advisers Act Release 

No. 1406 (Mar. 16, 1994). In that release, the SEC proposed a rule under the Act’s anti-fraud 

provisions requiring advisers give clients only suitable advice. Although the rule was never adopted, 

SEC staff believes that the rule would have codified existing suitability obligations of advisers and, as a 

result, the proposed rule reflects the current obligation of advisers under the Act. Suitability 

obligations do not apply to impersonal investment advice, and compliance with the obligation is 

evaluated in the context of a client’s overall portfolio. Id. “Thus, inclusion of some risky securities in 

the portfolio of a risk-averse client may not necessarily be unsuitable.” Id. The SEC has instituted 

enforcement actions against advisers that provided unsuitable investment advice. See In the Matter of 

George E. Brooks & Associates, Inc., Investment Advisers Act Release No. 1746 (Aug. 17, 1998) 

(adviser failed to appropriately diversify, and effected unsuitable trades of speculative high risk stocks 

in, the discretionary accounts of customers with conservative investment objectives, many of whom 

were elderly and had little investment experience); In the Matter of Philip A. Lehman, Investment 

Advisers Act Release No. 1831 (Sept. 22, 1999) (alleging adviser recommended risky investment for 

customer’s individual retirement account, despite customer’s conservative investment objective and 

age). 
25

reasonable, independent basis for its recommendations.135

4. Best Execution. Where an adviser has responsibility to direct client 

brokerage, it has an obligation to seek best execution of clients’ securities 

transactions.136 In meeting this obligation, an adviser must seek to obtain 

the execution of transactions for clients in such a manner that the client’s 

total cost or proceeds in each transaction is the most favorable under the 

circumstances.137 In assessing whether this standard is met, an adviser 

should consider the full range and quality of a broker’s services when 

placing brokerage, including, among other things, execution capability, 

commission rate, financial responsibility, responsiveness to the adviser, and 

the value of any research provided.138

Interpositioning. An adviser will generally not obtain best execution if it 

interposes a broker that does not make a market in the security when it could 

have avoided the unnecessary commission payments by dealing directly 

with market makers.139

Directed Trades. An adviser is relieved of this obligation when a client 

directs the adviser to use a particular broker. An adviser may, however, be 

required to make additional disclosure to clients when it receives some 

benefit from the direction of the trade.140

 135 In the Matter of Alfred C. Rizzo, Investment Advisers Act Release No. 897 (Jan 11, 1984) (investment 

adviser lacked a reasonable basis for advice and could not rely on “incredible claims” of issuer); In the 

Matter of Baskin Planning Consultants, Ltd., Investment Advisers Act Release 1297 (Dec. 19, 1991) 

(adviser failed adequately to investigate recommendations to clients). 

136 In the Matter of Kidder Peabody & Co., Inc., Investment Advisers Act Release No. 232 (Oct. 16, 

1968). See also rule 206(3)-2(c) (acknowledging adviser’s duty of best execution of client 

transactions).

137 This obligation is different from a broker-dealer’s best execution obligation, which typically focuses on 

the price at which an order is executed and does not consider the broker’s compensation, whereas an 

adviser’s duty requires it to consider the total transaction cost to its client. The SEC has brought 

enforcement actions against advisers alleging failure to seek best execution. See, e.g., In the Matter of 

Renberg Capital Management, Inc., Investment Advisers Act Release No. 2064 (Oct 1, 2002); In the 

Matter of Portfolio Advisory Services, LLC, Investment Advisers Act Release. No. 2038 (June 30, 

2002).

138 See Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 

and Related Matters, Exchange Act Release No. 23170 (Apr. 23, 1986) (“1986 Soft Dollar Release”). 

To fulfill this duty, an investment adviser should “periodically and systematically” evaluate the 

execution it is receiving for clients. Id. The scope of the duty evolves as changes occur in the market 

that give rise to improved execution, including opportunities to trade at more reasonable prices. See, 

e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270-271 (3d Cir. 1998). 

See also, In the Matter of Jamison, Eaton & Wood, Inc., Investment Advisers Act Release No. 2129 

(May 15, 2003); In the Matter of Portfolio Advisory Services, LLC, supra note 137.

139 In the Matter of Delaware Management Company, Inc., Securities Exchange Act Release No. 8128 

(July 19, 1967). 

140 See In the Matter of Mark Bailey & Co., Investment Advisers Act Release No. 1105 (Feb. 24, 1988) 

(adviser failed to disclose that it did not negotiate commissions on directed trades, and failed to 

disclose that the adviser would be in a better position to negotiate commissions in bunched transactions 

for non-directed trades, and violated anti-fraud provisions of Advisers Act); Jamison, Eaton & Wood, 

Inc., supra note 138.
26

Use of Brokerage Affiliate. The Act does not prohibit advisers from using 

an affiliated broker to execute client trades. However, use of an affiliate 

involves a conflict of interest that must be disclosed to client.141 For 

example, use of an affiliated broker may give the adviser incentive to 

“churn” the account.

Soft Dollars. Section 28(e) of the Exchange Act provides a safe harbor from 

liability for breach of fiduciary duties when advisers purchase brokerage and 

research products and services with client commission dollars under 

specified circumstances. In July 2006, the SEC issued a revised 

interpretation as to the scope of the safe harbor.142

Under section 28(e), an adviser that exercises investment discretion may 

lawfully pay commissions to a broker at rates higher than those offered by 

other brokers, as long as the services provided to the adviser by the brokerdealer: (i) are limited to “research” or “brokerage;” (ii) constitute lawful and 

appropriate assistance to the adviser in the performance of its investment 

decision-making responsibilities, and (iii) the adviser determines in good 

faith that the commission payments are reasonable in light of the value of 

the brokerage and research services received. 

a. Research Services. “Research” services generally include the 

furnishing of advice, analyses, or reports concerning securities, 

portfolio strategy and the performance of accounts, which means the 

research must reflect the expression of reasoning or knowledge 

relating to the statutory subject matter bearing on the investment 

decision-making of the adviser. The SEC does not believe that 

products or services with “inherently tangible or physical attributes” 

meet this test. 

(i) Products or services generally falling within the safe harbor 

include traditional research reports, market data, discussions with 

research analysts, meetings with corporate executives, software 

that provides analysis of securities, and publications (other than 

mass-marketed publications).

 141 Folger Nolan Fleming Douglas Capital Management, Inc., Investment Advisers Act Release No. 2639 

(Aug. 23, 2007) (adviser entered into agreements with clients to direct trades to affiliated broker 

without disclosing commission rates were twice as high as non-directed trades). See also Investment 

Advisers Act Release 1092, supra note 3 (if an investment adviser recommends that a client effect 

transactions through its broker-dealer employer, the anti-fraud provisions of the Advisers Act require 

that the adviser make full disclosure of the nature and extent of all adverse interests, including the 

amount of any compensation the advisers will receive from its broker-dealer employer in connection 

such transactions); Don P. Matheson, SEC Staff No-Action Letter (Aug. 2, 1976) (investment advisers 

that are also broker-dealers or registered representatives have a duty to inform their investment 

advisory clients of their ability to seek executions of transactions recommended through other brokerdealers firms); David P. Atkinson, SEC Staff No-Action Letter (Aug. 1, 1977).

142 Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities 

Exchange Act of 1934, Exchange Act Release No. 34-54165 (July 18, 2006) (“2006 Soft Dollar 

Release”), available at http://www.sec.gov/rules/interp/2006/34-54165.pdf. The release superseded 

parts (but not all) of the 1986 Soft Dollar Release. In particular, the 2006 Soft Dollar Release does not 

replace Section IV of the 1986 Release, which discusses an investment adviser’s disclosure obligations. 
27

(ii) Products or services not within the safe harbor include computer 

hardware, telephone lines, peripherals; salaries, rent, travel, 

entertainment, and meals; software used for accounting, 

recordkeeping, client reporting, or other administrative functions; 

and marketing seminars and other marketing costs.

(iii) Where a product or service has uses both inside and outside the 

safe harbor, the SEC believes that an adviser should make a 

reasonable allocation of the cost of the product or service 

according to its use and keep adequate books and records 

concerning allocations so as to be able to make the required good 

faith showing.143

b. Brokerage Services. “Brokerage” generally includes activities related 

to effecting securities transactions and incidental functions. According 

to the SEC, brokerage begins when the order is transmitted to the 

broker-dealer and ends when funds or securities are delivered to the 

client account.144 

c. Commissions. The SEC interprets the safe harbor of section 28(e) as 

being available for research obtained in relation to commissions on 

agency transactions, and certain riskless principal transactions.145

d. Disclosure Obligations. Advisers are required to disclose to clients 

any soft dollar arrangements, regardless of whether the arrangements 

fall within the section 28(e) safe harbor.146 Failure to disclose the 

receipt of products or services purchased with client commission 

dollars may constitute a breach of fiduciary duties and/or violation of 

specific provisions of the Advisers Act and other federal laws.147

 143 See id., at Section F, n. 148. 

144 Id. 

145 Exchange Act Release No. 45194 (Dec. 27, 2001) (“Release No. 45194”), available at

http://www.sec.gov/rules/interp/interparchive/interparch2001.shtml. In Release No. 45194, the SEC 

concluded with respect to riskless principal transactions that “[t]he term ‘commission’ in Section 28(e) 

. . . include[s] a markup, markdown, commission equivalent or other fee paid by a managed account to 

a dealer for executing a transaction where the fee and transaction price are fully and separately

disclosed on the confirmation and the transaction is reported under conditions that provide independent 

and objective verification of the transaction prices subject to self-regulatory oversight.” The SEC staff 

had previously interpreted the safe harbor as being available only to agency transactions. Letter to 

Charles Lerner, Esq., Director of Enforcement, Pension and Welfare Benefit Administration, U.S. 

Department of Labor, from Richard Ketchum, Director, Division of Market Regulation, SEC (July 25, 

1990). 

146 Form ADV, the registration form for advisers, requires that advisers disclose soft dollar arrangements. 

See Form ADV, Part 1A, Item 8; Part 2A, Item 12A.1. See also SEC Inspection Report on the Soft 

Dollar Practices of Broker-Dealers, Investment Advisers and Mutual Funds (Sept. 22, 1998), available 

at http://www.sec.gov/news/studies/softdolr.htm.

147 See, e.g., In the Matter of S Squared Technology Corporation, Investment Advisers Act Release No. 

1575 (Aug. 7, 1996) (adviser’s failure to disclose its receipt of benefits in exchange for benefits 

received in exchange for direction of client brokerage violated section 206 of the Act); In the Matter of 

Schultze Asset Management, Investment Advisers Act Release No. 2633 (Aug. 15, 2007) (adviser 
28

5. Proxy Voting. The SEC has stated that an adviser delegated authority to 

vote client proxies has a fiduciary duty to clients to vote the proxies in the 

best interest of its clients and cannot subrogate the client’s interests to its 

own.148

B. Substantive Requirements 

The Act contains other, more specific prohibitions designed to prevent fraud. In 

addition, the SEC has adopted several anti-fraud rules, which apply to advisers 

registered with the SEC.

1. Client Transactions 

a. Principal Transactions. Section 206(3) of the Act prohibits an adviser, 

acting as principal for its own account, from knowingly selling any 

security to or purchasing any security from a client for its own 

account, without disclosing to the client in writing the capacity in 

which it (or an affiliate149) is acting and obtaining the client’s consent 

before the completion of the transaction.150 The SEC staff has stated 

that notification and consent must be obtained separately for each 

transaction, i.e., a blanket consent for transactions is not sufficient.151

 misrepresented to clients that it would restrict its use of soft dollars to cover only those expenses 

covered by section 28(e) when it used them to pay for operating expenses). 

148 Proxy Voting by Investment Advisers, Investment Advisers Act Release No. 2106 (Jan. 31, 2003), 

available at http://www.sec.gov/rules/final/ia-2106.htm. In this release, the SEC adopted rule 206(4)-

6, which requires, among other things, each registered investment adviser that has voting authority over 

client securities to adopt and implement policies and procedures reasonably designed to ensure that 

client securities are voted in the best interest of clients. The SEC has instituted enforcement action 

against an adviser that failed to disclose to clients its conflicts before voting their shares in a hotly 

contested proxy fight. In the Matter of Deutsche Asset Management, Inc., Investment Advisers Act 

Release No. 2160 (Aug. 19, 2003). See also Section VI. B. 6 of this outline.

149 The SEC has applied section 206(3) not only to principal transactions engaged in or effected by any 

adviser, but also when an adviser causes a client to enter into a principal transaction that is effected by 

a broker-dealer that controls, is controlled by, or is under common control with, the adviser. 

Interpretation of Section 206(3) of the Investment Advisers Act of 1940, Investment Advisers Act 

Release No. 1732 (July 17, 1998)(“Release 1732”), at n.3, available at

http://www.sec.gov/rules/interp/interparchive/interparch1998.shtml. The SEC has instituted 

enforcement actions when advisers have effected principal transactions through affiliates without 

complying with section 206(3), see, e.g., In the Matter of Calamos Asset Management, Investment 

Advisers Act Release No. 1589 (Sept. 30, 1996), including “riskless principal” transactions; In the 

Matter of Rothschild Investment Corporation, Investment Advisers Act Release No. 1714 (Apr. 13, 

1998); In the Matter of Concord Investment Co., Investment Advisers Act Release No. 1585 (Sept. 27, 

1996). 

150 Section 206(3). The SEC interprets “completion of the transaction” to mean by settlement of the 

transaction. Release 1732, supra note 149, available at http://www.sec.gov/rules/interp/ia-1732.htm. 

But the SEC believes that, in order for post-execution, pre-settlement consent to comply with section 

206(3), the adviser must provide both sufficient disclosure for a client to make an informed decision, 

and the opportunity for the client to withhold consent. Id. While the notice must be in writing, the 

SEC staff has stated that oral consent is sufficient under the Act. Dillon, Reed & Co., SEC Staff NoAction Letter (Aug. 6, 1975). The notice and consent provisions of section 206(3) do not apply if the 

adviser is giving only impersonal advisory services. Rule 206(3)-1. 

151 Opinion of Director of Trading and Exchange Division, Investment Advisers Act Release No. 40 (Jan. 

5, 1945). The SEC has instituted enforcement actions against investment advisers for violating section 
29

Pooled Investment Vehicles. The SEC staff has stated that section

206(3) may apply to client transactions with a pooled investment 

vehicle in which the adviser or its personnel may have interests 

depending on the facts and circumstances, including the extent of the 

interests held by the adviser and its affiliates.152 The SEC staff, 

however, believes that section 206(3) does not apply to a transaction 

between a client account and a pooled investment vehicle of which the 

investment adviser and/or its controlling persons, in the aggregate, own 

25% or less.153

Statutory Exception. The restrictions on principal transactions do not 

apply to transactions by a client where the adviser (or an affiliate) is 

also a broker-dealer, but “is not acting as an investment adviser with 

respect to the trade,” e.g., it has not given the advice to buy or sell the 

security.154

Updated  Rule 206(3)-3T. The SEC has adopted a temporary rule, set to expire 

on December 31, 2014, that permits advisers that are also registered 

with the SEC as broker-dealers to comply with section 206(3) by 

providing oral (instead of written) notice of principal transactions so 

long as certain conditions are met.155 Specifically, rule 206(3)-3T 

permits an adviser, with respect to a non-discretionary advisory 

account, to comply with section 206(3) of the Act by, among other 

things: 

(i) providing written prospective disclosure regarding the conflicts 

arising from principal trades; 

(ii) obtaining written, revocable consent from the client prospectively 

authorizing the adviser to enter into principal transactions;

(iii) making certain disclosures either orally or in writing and 

 206(3) when they entered into principal transactions with their clients using only prior blanket 

disclosures and consents. See In the Matter of Stephens, Inc., Investment Advisers Act Release No. 

1666 (Sept. 16, 1997); In the Matter of Clariden Asset Management (New York) Inc., Investment 

Advisers Act Release No. 1504 (July 10, 1995). 

152 ABA Letter 2005, supra note 103 at II.A.1. The SEC has instituted enforcement actions based on 

claims of violations of section 206(3) against advisers and their principals when the advisers effected 

transactions between their advisory clients and accounts in which the principals of the advisers held 

significant ownership interests. See In the Matter of SEC v. Beacon Hill Asset Management, LLC, et 

al., Litigation Release No. 18950 (Oct. 28, 2004); In the Matter of Gintel Asset Management, et al., 

Investment Advisers Act Release No. 2079 (Nov. 8, 2002).

153 Gardner Russo & Gardner, SEC Staff No-Action Letter (June 7, 2006).

154 Section 206(3) provides that the section’s “prohibitions...shall not apply to any transaction with a 

customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation 

to such transaction.” 

155 Rule 206(3)-3T. Temporary Rule Regarding Principal Trades with Certain Advisory Clients, 

Investment Advisers Act Release No. 2653 (Sep. 24, 2007) (adopting rule 206(3)-3T), available at 

http://www.sec.gov/rules/final/2007/ia-2653.pdf; Temporary Rule Regarding Principal Trades with 

Certain Advisory Clients, Investment Advisers Act Release 3522 (Dec. 20, 2012) (extending expiration 

date to Dec. 31, 2014), available at http://www.sec.gov/rules/final/2012/ia-3522.pdf.
30

obtaining the client’s consent before each principal transaction; 

(iv) sending to the client confirmation statements disclosing the 

capacity in which the adviser has acted and disclosing that the 

adviser informed the client that it may act in a principal capacity 

and that the client authorized the transaction; and 

(v) delivering to the client an annual report itemizing the principal 

transactions. 

With certain limited exceptions (for non-convertible investment-grade 

debt securities underwritten by the adviser or a person who controls, is 

controlled by, or is under common control with the adviser (a “control 

person”)), the rule generally is not available for principal trades of 

securities issued or underwritten by the investment adviser or a control 

person of the adviser.156

Fiduciary Obligations. Compliance with the disclosure and consent 

provisions of section 206(3) or rule 206(3)-3T alone does not satisfy an 

adviser’s fiduciary obligations with respect to a principal trade. The 

SEC has expressed the view that section 206(3) must be read together 

with sections 206(1) and (2) of the Act to require that the adviser 

disclose additional facts necessary to alert the client to the adviser’s 

potential conflict of interest in the principal trade.157

b. Agency Cross Transactions. Section 206(3) also prohibits an adviser 

from knowingly acting as broker for both its advisory client and the 

party on the other side of the transaction without obtaining its client’s 

consent before each transaction.158 

Rule 206(3)-2. The SEC has adopted a rule permitting these “agency 

cross-transactions” without transaction-by-transaction disclosure if, 

among other things:

(i) the client has executed a written blanket consent after receiving 

full disclosure of the conflicts involved, which must be renewed 

each year;

(ii) the adviser provides a written confirmation to the client before 

the completion of each transaction providing, among other 

 156 The rule also requires that each account for which the adviser relies on the rule be a brokerage account 

subject to the Exchange Act, and the rules thereunder, and the rules of the self-regulatory 

organization(s) of which it is a member. 

157 Release 1732, supra note 149. See also Rocky Mountain Financial Planning, Inc., SEC Staff NoAction Letter (Feb. 24, 1983) (“While section 206(3) of the Investment Advisers Act of 1940 requires 

disclosure of such interest and the client’s consent to enter into the transaction with knowledge of such 

interest, the adviser’s fiduciary duties are not discharged merely by such disclosure and consent. The 

adviser must have a reasonable belief that the entry of the client into the transaction is in the client’s 

interest.”).

158 Section 206(3). The SEC staff has expressed the view that the provisions of section 206(3) do not 

apply when the adviser/broker effects the trade without charging a commission or other fee. Release 

No. 1732, supra note 149.
31

things, the source and amount of any remuneration it received; 

and

(iii) the disclosure document and each confirmation conspicuously 

disclose that consent may be revoked at any time.159 

c. Cross-Trades. Effecting cross-trades between clients (where a thirdparty broker is used) is not specifically addressed by the Act, but is 

subject to the anti-fraud provisions of the Act.160 Cross-trades involve 

potential conflicts of interest (because the adviser could favor one 

client over another), and thus many advisers follow the methodology 

required by a rule under the Investment Company Act when one of the 

clients is an investment company.161

d. Aggregation of Client Orders. The SEC staff has stated that in 

directing orders for the purchase or sale of securities, an adviser may 

aggregate or “bunch” those orders on behalf of two or more of its 

accounts, so long as the bunching is done for the purpose of achieving 

best execution, and no client is systematically advantaged or 

disadvantaged by the bunching.162 

Advisers that aggregate orders of securities face conflicts when they 

disaggregate the orders to client accounts since, for example, not all 

securities may have been acquired at the same price. Advisers should 

have procedures in place that are designed to ensure that the trades are 

allocated in such a manner that all clients are treated fairly and 

equitably.163 For example, advisers can allocate orders based on a pro 

rata, rotational, or random basis. 

 159 Rule 206(3)-2. The rule does not apply to a transaction when the adviser has discretionary authority to 

act for the purchaser and seller. Paragraph (c) of the rule admonishes advisers that the rule does not 

relieve them of the duty to act in the best interests of their clients, including the duty to obtain best 

price and execution for any transaction. See Agency Cross Transactions for Advisory Clients, 

Investment Advisers Act Release No. 589 (May 31, 1977) (adopting rule 206(3)-2).

160 See In the Matter of Renberg Capital Management, Inc. and Daniel H. Renberg, Investment Advisers 

Act Release No. 2064 (Oct. 1, 2002). 

161 Rule 17a-7. Merely following the procedures set forth in rule 17a-7 may not satisfy an adviser’s 

fiduciary obligations to clients. The staff has explained that it must be in the interest of both clients to 

enter into a cross trade and thus, for example, an adviser should not cause a client to enter into a crosstrade if it could obtain a better price in the markets. Federated Municipal Funds, SEC No-Action 

Letter (Nov. 20, 2006). 

162 Pretzel & Stouffer, SEC Staff No-Action Letter (Dec. 1, 1995).

163 The SEC has instituted numerous enforcement actions against advisers that unfairly allocated client 

trades without making adequate disclosure. See In the Matter of John McStay Investment Counsel, L.P, 

Investment Advisers Act Release No. 2153 (July 31, 2003) (adviser failed to disclose change in its 

method of allocating initial public offerings among accounts to a method that favored mutual fund 

account); In the Matter of McKenzie Walker Investment Management, Inc., et al., Investment Advisers 

Act Release No. 1571 (1996) (adviser allocated profitable trades to accounts charged a performancebased fee); In the Matter of Nicholas-Applegate Capital Management, Investment Advisers Act 

Release No. 1741 (Aug. 12, 1998) (adviser failed to supervise trader who allocated profitable trades to 

own personal account); In the Matter of Ark Asset Management Co., Inc., Investment Advisers Act 

Release No. 2962 (Dec. 14, 2009) (adviser allocated profitable trades to the proprietary hedge fund 

accounts at the expense of the client accounts without disclosing this practice).
32

2. Advertising. The anti-fraud provisions of the Act apply with respect to both 

clients and prospective clients. The SEC has adopted rule 206(4)-1, which 

prohibits any adviser registered with the SEC from using any advertisement 

that contains any untrue statement of material fact or is otherwise 

misleading.164 

Specific Restrictions. An advertisement may not:

a. use or refer to testimonials, which staff views as including any 

statement of a client’s experience with, or endorsement of, an 

adviser;165

b. refer to past specific recommendations made by the adviser, unless the 

advertisement sets out a list of all recommendations made by the 

adviser during the preceding year;

c. represents that any graph, chart, or formula can, in and of itself, be 

used to determine which securities to buy or sell; and

d. refer to any report, analysis, or service as free, unless it really is.

Performance Advertising. Advertisements containing information about the 

performance of client accounts must not be misleading. The SEC staff 

considers an advertisement containing performance information misleading 

if it implies, or if a reader would infer from it, something about an adviser’s 

competence or possible future investment results that would be unwarranted 

if the reader knew all of the facts.166 Advisers registered with the SEC must 

maintain records substantiating any performance claimed in an 

advertisement.167 

Definition of Advertisement. While no communications to clients may be 

misleading, the specific restrictions discussed above apply only to

“advertisements” by advisers, which the SEC defines generally as 

communications (in writing or electronic form) to more than one person that 

offer advisory services.168 The SEC staff does not believe that a written 

 164 Rule 206(4)-1. See also SEC v. C.R. Richmond & Co., 565 F.2d 1101, 1104 (9th Cir. 1977) (an 

adviser’s advertising “must be measured from the viewpoint of a person unskilled and unsophisticated 

in investment matters”); In the Matter of Jesse Rosenblum, Investment Advisers Act Release No. 913 

(May 17, 1984) (an investment adviser’s advertisement that contained materially misleading statements 

was “not cured by the disclaimers buried in the [smaller print] text [of the advertisement]”).

165 For further discussion, see DALBAR, Inc., SEC Staff No-Action Letter (Mar. 24, 1997).

166 Edward F. O’Keefe, SEC Staff No-Action Letter (Apr. 13, 1978); Anametrics Investment Management, 

SEC Staff No-Action Letter (May 5, 1977). See also Clover Capital Management, Inc., SEC Staff NoAction Letter (Oct. 28, 1986).

167 Rule 204-2(a)(16). See In the Matter of Warwick Capital Management, Inc., Initial Decision Release 

No. 327 (Feb. 15, 2007). (“Respondent blamed a series of dubious calamities for their inability to 

produce records that would support the inflated numbers and created after-the-fact documents 

concerning the inflated numbers.”).

168 Rule 206(4)-1(b) defines advertisement for purposes of the rule as “[a]ny notice circular, letter or other 

written communication addressed to more than one person, or any notice or other announcement in any 

publication or by radio or television, which offers (1) any analysis, report or publication concerning 

securities, or (2) any graph, chart, formula or other device to be used in making any determination as to 
33

communication by an adviser that does no more than respond to an 

unsolicited request by a client is an advertisement even if it received 

multiple requests for the same information, e.g., in multiple RFPs.169

Use of Social Media. Use of social media to communicate with clients and 

prospective clients may implicate rule 206(4)-1.

170

3. Custody of Client Assets. A registered adviser with custody of client funds 

or securities (“client assets”) is required by rule 206(4)-2 to take a number of 

steps designed to safeguard those client assets.171 These requirements were 

amended in December 2009.

172

a. Definition of Custody. Custody means “holding, directly or indirectly, 

client funds or securities, or having any authority to obtain possession 

of them.” An adviser has custody if an affiliate has custody of its 

client funds or securities in connection with advisory services it 

provides to clients.

Custody includes:

(i) Possession of client funds or securities;

(ii) Any arrangement under which an adviser is permitted or 

authorized to withdraw client funds or securities (such as checkwriting authority or the ability to deduct fees from client assets), 

and 

(iii) Any capacity that gives an adviser or its supervised person legal 

ownership of or access to client funds or securities (such as 

acting as general partner or trustee of a pooled investment 

vehicle).173

b. Qualified Custodians. An adviser with custody must maintain client 

funds and securities with “qualified custodians” either under the 

client’s name or under the adviser’s name as agent or trustee for its 

clients. Qualified custodians are:

 when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory 

service with regard to securities.” A communication covered by the rule may be made to new clients or 

to existing clients where the purpose is to induce them to renew their advisory contract or subscription. 

Spear & Staff, 42 S.E.C. 549 (1965).

169 Investment Counsel Association of America, SEC Staff Letter (Mar. 1, 2004). 

170 The SEC staff has made observations regarding advisers’ use of social media. Investment Adviser Use 

of Social Media, National Examination Risk Alert, Vol. II, Issue 1 (Jan. 4, 2012), available at 

http://www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf.

171 Rule 206(4)-2. The staff of the SEC’s Division of Investment Management has published responses to 

“FAQs” (frequently asked questions) on the custody rule (“Custody Rule FAQs”), available at 

http://www.sec.gov/divisions/investment/custody_faq_030510.htm.

172 See Custody of Funds or Securities of Clients by Investment Advisers, Investment Advisers Act Release 

No. 2968 (Dec. 30, 2009) (“Release 2968”), available at http://www.sec.gov/rules/final/2009/ia2968.pdf.

173 Rule 206(4)-2(d)(2).
34

(i) broker-dealers, banks, savings associations, futures commission 

merchants, and

(ii) non-U.S. financial institutions that customarily hold financial 

assets for their customers, if the institutions keep the advisory 

assets separate from their own.

c. Quarterly Account Statements. The adviser must have a reasonable 

basis, after due inquiry, for believing that the qualified custodian sends 

quarterly account statements directly to the client.174

d. Notification. The adviser must notify the client as to where and how 

the funds or securities will be maintained, promptly after opening an 

account for the client and following any changes to this information.175 

If the adviser also sends its own account statements to clients, this 

notice and subsequent account statements from the adviser must 

contain a statement urging the client to compare account statements 

from the custodian with those from the adviser.176

e. Surprise Examinations. An adviser that has custody of client assets 

generally must undergo an annual surprise examination by an 

independent public accountant to verify the client’s funds and 

securities.177 One exception from this requirement is if it has custody 

solely because it has authority to deduct advisory fees directly from 

client accounts.178

Updated  f. Pooled Investment Vehicles. If the adviser is the general partner of a 

limited partnership (or holds a similar position with another form of 

pooled investment vehicle such as a hedge fund)179:

(i) the adviser is deemed to have complied with the annual surprise 

examination requirement and need not form a reasonable belief 

regarding delivery of account statements if the pool’s financial 

statements are audited by an independent public accountant that 

is registered with, and subject to regular inspection by, the Public 

 174 A common method of forming a reasonable belief acceptable to the SEC is receipt of a copy of an 

account statement sent to the client. Release No. 2968, supra note 172. 

175 Notice need not be given if the client opens the account himself.

176 Rule 206(4)-2(a)(2).

177 The timing of exams must be irregular from year to year. Rule 206(4)-2(a)(4). See also, In the Matter 

of Kaufman, Bernstein, et al., Investment Advisers Act Release No. 2194 (Nov. 20, 2003) (independent 

auditor began examination the same date each year). The accountant conducting the examination must 

file a certificate on Form ADV-E within 120 days of the time chosen by the accountant for the 

examination. Rule 206(4)-2(a)(4)(i). The SEC has issued guidance for accountants performing an 

examination pursuant to this rule. See Commission Guidance Regarding Independent Public 

Accountant Engagements Performed Pursuant to Rule 206(4)-2 Under the Investment Advisers Act of 

1940, Investment Advisers Act Release No. 2969 (Dec. 30, 2009).

178 Rule 206(4)-2(b)(3).

179 The SEC staff takes the position that a state-created 529 plan may be treated as a pooled investment 

vehicle for these purposes. See Investment Company Institute, SEC Staff No-Action Letter (Sept. 5, 

2012).
35

Company Accounting Oversight Board (“PCAOB”),180 and the 

audited statements are distributed to the pool’s investors;181 or

(ii) the qualified custodian must send quarterly account statements to 

each investor in the pool and the adviser must obtain a surprise 

examination of the pool’s assets.182

g. Adviser or “Related Person” as Custodian.183 If the adviser or its 

related person maintains client assets as the qualified custodian in 

connection with the adviser’s advisory services, the adviser must:

(i) have an independent public accountant that is registered with, 

and subject to regular inspection by, the PCAOB perform the 

required annual surprise examination, unless the related person is 

“operationally independent” of the adviser;184 and

(ii) obtain, or receive from the affiliate, an annual report of the 

internal controls relating to the custody of client assets prepared 

by an independent public accountant that is registered with, and 

subject to regular inspection by, the PCAOB.185

4. Use of Solicitors. An adviser generally is prohibited by rule 206(4)-3 from 

paying a cash fee, directly or indirectly, to a third party (a “solicitor”) unless 

it meets the requirements of the rule: 

a. Registered. The adviser must be registered under the Act.

b. Not Disqualified. An adviser may not pay solicitation fees to a 

solicitor that would itself be subject to Statutory Disqualification as an 

investment adviser.186

 180 The audited financial statements must be prepared according to, or reconciled to, U.S. GAAP. 

181 The audited financial statements must be distributed to investors within 120 days after the close of the 

pool’s fiscal year. In 2006, the Division of Investment Management issued a letter indicating that it 

would not recommend enforcement action to the Commission under section 206(4) of the Act or rule 

206(4)-2 against an adviser of a “fund of funds” relying on the annual audit provision of rule 206(4)-2 

if the audited financial statements of the fund of funds are distributed to investors in the fund of funds 

within 180 days of the end of its fiscal year. See ABA Committee on Private Investment Entities, SEC 

Staff Letter (Aug. 10, 2006); Release 2968, supra note 172, at n. 45. See also Custody Rule FAQs, 

supra note 171.

182 Rule 206(4)-2(a)(5) and (a)(4).

183 A “related person” includes any person, directly or indirectly, controlling or controlled by the adviser, 

and any person that is under common control.

184 The surprise examination is not required of the adviser if it can demonstrate that the related person 

acting as qualified custodian is operationally independent. This determination is made by examining 

the relationship between the adviser and the related person, including whether there are common 

employees, shared premises, and common supervision. See rule 206(4)-2(d)(5).

185 Rule 206(4)-2(a)(6).

186 See supra notes 106-108 and accompanying text. Through a series of no-action letters, however, the 

SEC staff expressed the view that statutorily disqualified persons may act as solicitors if the 

disqualifying conduct is disclosed in a separate written document to be given to each solicited person 

(i) at least 48 hours before such solicited person enters into an advisory contract, or (ii) at the time the 
36

c. Written Agreement. The solicitation fee must be paid pursuant to a 

written agreement that: 

(i) describes the solicitation activities and the compensation to be 

paid;

(ii) contains an undertaking by the solicitor to perform his duties 

according to the agreement and in compliance with the Act; and

(iii) requires the solicitor to provide a prospective client a copy of:

(A) the adviser’s disclosure statement (brochure), and 

(B) a separate disclosure statement describing the terms of the 

solicitation arrangement, including that the solicitor is being 

compensated by the adviser.187

Solicitors. The rule defines a solicitor as anyone who, directly or indirectly, 

solicits any client for, or refers any client to, an investment adviser. The 

Commission believes that a solicitor would be a “person associated with an 

adviser” under the Act. The adviser has an obligation to supervise the 

activities of solicitors.188

Client Referrals. Rule 206(4)-3 does not apply to the direction of brokerage 

in return for client referrals. But the adviser directing brokerage to brokers 

referring clients to it has a significant conflict of interest. Accordingly, an 

adviser may be obligated to disclose to clients material information 

regarding conflicts arising from the arrangement, including any affect on the 

adviser’s ability to obtain best execution.189 

Pooled Investment Vehicles. The SEC staff has stated that the rule does not 

apply to payments by an adviser to solicit investments in a pooled 

investment vehicle sponsored by the adviser.190

 solicited person enters into the advisory contract, if the solicited person has the right to terminate the 

advisory contract within five days. Accordingly, the staff no longer issues no-action letters of this type, 

except if the facts raise novel or unusual circumstances. See Dougherty & Company LLC, SEC Staff 

No-Action Letter (July 3, 2003). 

187 If the solicitor is an employee of the adviser, however, the solicitor is not required to provide 

prospective clients a copy of the adviser’s brochure or the separate disclosure statement. 

188 For discussion of an adviser’s obligation to supervise cash solicitors acting on its behalf, see

Requirements Governing Payments of Cash Referral Fees by Investment Advisers, Investment Advisers 

Act Release No. 615 (Feb. 2, 1978) (proposing release); Requirements Governing Payments of Cash 

Referral Fees by Investment Advisers, Investment Advisers Act Release No. 688 (July 12, 1979) 

(adopting release).

189 In the Matter of Jamison, Eaton and Wood, Inc., supra note 138; In the Matter of Portfolio Advisory 

Services LLC, supra note 137; In the Matter of Founders Asset Management, Investment Advisers Act 

Release No. 1953 (July 20, 2001); In the Matter of Fleet Investment Advisers, Inc. (successor to 

Shawmut Investment Advisers, Inc.), Investment Advisers Act Release No. 1821 (Sept. 9, 1999).

190 Mayer Brown, LLP, SEC Staff No-Action Letter (July 15, 2008). In its response, however, the staff 

noted that the solicitor may itself be an adviser subject to the antifraud provisions of the Act. The 

staff’s response was amended on July 28, 2008 but indicates that the response letter should be deemed 
37

5. Pay to Play Rule. On July 1, 2010, the Commission adopted rule 206(4)-5 

to address so-called "pay to play" practices in which investment advisers 

make campaign contributions to elected officials of state or municipal 

governments in order to influence the award of contracts to manage public 

pension plan assets and other government investment accounts.191 The rule 

applies to SEC-registered investment advisers, certain exempt reporting 

advisers, and foreign private advisers, who provide investment advisory 

services, or are seeking to provide investment advisory services, to state and 

municipal government entities.192 

a. Prohibitions. The rule contains three main prohibitions: 

(i) Two-Year Time Out. An investment adviser is prohibited from 

receiving compensation for providing advice to a government 

entity, either directly or through a “covered investment pool”, 

within two years after a contribution by the adviser, or by any of 

its “covered associates” (which include the adviser’s general 

partner or managing member, executive officers or other 

individuals with a similar status or function, solicitors, and 

political action committees they control) to an official of that 

government entity who can influence the award of advisory 

business.193 

(ii) Third Party Solicitor Ban. Neither an investment adviser nor 

any of its covered associates may provide or agree to provide, 

directly or indirectly, payment to any third party to solicit 

government clients for the adviser unless such person is a 

“regulated person.”194

 to have been issued on July 15. See also rule 206(4)-5 and Section VI. B. 5 of this outline regarding 

solicitation of government clients.

191 Political Contributions by Certain Investment Advisers, Investment Advisers Act Release No. 3043 

(July 1, 2010)(“Pay to Play Release”), available at http://www.sec.gov/rules/final/2010/ia-3043.pdf. 

For staff responses to frequently asked questions about the rule, visit the SEC’s website at 

http://www.sec.gov/divisions/investment/pay-to-play-faq.htm.

192 Rule 206(4)-5(a).

193 Rule 206(4)-5(a)(1). An adviser subject to the rule is not prohibited from providing advisory services 

to a government client, even after triggering the two-year time out. Instead, an adviser is prohibited 

from receiving compensation for providing advisory services to such client during the time out. This 

enables an adviser to act consistently with its fiduciary obligations and provide uncompensated 

advisory services for a reasonable period of time to allow the government client to replace the adviser. 

See also Section VI. B. 4 regarding the cash solicitation rule that applies to all SEC-registered advisers.

194 Rule 206(4)-5(a)(2)(i). “Regulated persons” include (i) SEC-registered investment advisers that have 

not, and whose covered associates have not, within two years of soliciting a government entity, made a 

contribution to an official of that government entity; or bundled any contribution to an official or 

payment to a political party of a state or locality where the adviser is providing or seeking to provide 

investment advisory services to a government entity; (ii) registered broker-dealers that are subject to a 

pay to play rule adopted by the Financial Industry Regulatory Authority that the Commission, by order, 

finds substantially equivalent or more stringent than rule 206(4)-5; and (iii) a “municipal adviser” 

registered with the Commission and subject to rules adopted by the Municipal Securities Rulemaking 

Board that the Commission, by order, finds substantially equivalent or more stringent than rule 206(4)-
38

(iii) Bundling Ban. Rule 206(4)-5 prohibits an adviser and its 

covered associates from “bundling” others’ contributions -- i.e. 

coordinating or soliciting any person or political action 

committee to make (A) any contribution to an official of a 

government entity to which the adviser is providing or seeking to 

provide investment advisory services; or (B) any payment to a 

political party of a state or locality where the investment adviser 

is providing or seeking to provide investment advisory services 

to a government entity.195 

b. Catch-All Provision. Rule 206(4)-5(d) prohibits acts done indirectly, 

which, if done directly, would violate the rule.

c. Covered Investment Pools. Rule 206(4)-5 includes a provision that 

applies each of the prohibitions of the rule to an adviser that manages 

assets of a government entity through a “covered investment pool” 

defined as (i) any investment company registered under the Investment 

Company Act that is an investment option of a plan or program of a 

government entity;196 or (ii) any company that would be an investment 

company under section 3(a) of the Investment Company Act but for 

the exclusions from that definition provided by section 3(c)(1), section 

3(c)(7) or section 3(c)(11) of that Act.197

d. Recordkeeping. Rule 204-2 was amended to require registered 

advisers that provide investment advisory services to a government 

entity, or to a covered investment pool in which a government entity is 

an investor, to make and keep certain records related to the pay to play 

rule.

6. Proxy Voting. A registered adviser that exercises voting authority over 

client securities is required to vote them in the best interest of the client and 

not in its own interest. Rule 206(4)-6 requires advisers with voting authority 

over client securities to:

a. adopt and implement written policies and procedures that are 

reasonably designed to ensure that the adviser votes in the clients’ best 

interests, and which must specifically address conflicts of interest that 

may arise between the adviser and its clients;

b. describe their voting policies and procedures to clients, deliver a copy 

of the policies and procedures to clients upon request, and inform 

clients how they can obtain information on how the adviser voted their 

securities; and

 5. This prohibition is limited to third-party solicitors. Thus, the prohibition does not apply to any of the 

adviser’s employees, general partners, managing members, or executive.

195 Rule 206(4)-5(a)(2)(ii). 

196 A plan or a program of a government entity includes participant-directed plans, such as college savings 

plans like 529 plans and retirement plans like 403(b) and 457 plans.

197 Rule 206(4)-5(f)(3).
39

c. keep certain records relating to voting of client securities.198

7. Supervision. An adviser has a continuing responsibility to supervise all 

persons acting on its behalf.

199 The SEC may sanction an adviser that “has 

failed reasonably to supervise, with a view to preventing violations of the 

provisions of such statutes, rules, and regulations, another person who 

commits such a violation, if such other person is subject to his 

supervision.”200

a. Supervisor. Whether a person has responsibility as a “supervisor” 

depends on whether, under the facts and circumstances of a particular 

case, the person has a requisite degree of responsibility, ability or 

authority to affect the conduct of the employee whose behavior is at 

issue.201

b. Safe Harbor. Under the Act, a person (e.g., an adviser or an officer of 

the adviser) will not be deemed to have failed to supervise a person if 

(i) the adviser had established procedures and a system for applying 

such procedures that are reasonably expected to prevent and detect the 

conduct, and (ii) the person reasonably discharged his supervisory 

duties and had no reasonable cause to believe that the procedures were 

not being complied with.

202 

8. Compliance Program. Under rule 206(4)-7 each registered adviser must 

establish an internal compliance program that addresses the adviser’s 

performance of its fiduciary and substantive obligations under the Act.

a. Chief Compliance Officer. Each adviser must designate a chief 

 198 See also Section VI. A. 5 of this outline. 

199 The SEC has stated that the “delicate fiduciary relationship” between an investment adviser and a client 

imposes an obligation on an adviser to review and to monitor its activities and the activities of its 

employees. Shearson Lehman Brothers, Inc. and Stein Roe & Farnham, Exchange Act Release No. 

23640 (Sept. 24, 1986). The Commission has repeatedly emphasized that the duty to supervise is a 

critical component of the federal regulatory scheme. See In re Rhumbline Advisers, Investment 

Advisers Act Release. No. 1765 (Sept. 29, 1998); In re Scudder Kemper Investments, Inc., Investment 

Advisers Act Release. No. 1848 (Dec. 22, 1999) (adviser failed reasonably to supervise employee and 

did not have policies and procedures designed to detect and prevent employees’ unauthorized trading in 

client accounts); In re Nicholas-Applegate Capital Management, Investment Advisers Act Release. No. 

1741 (Aug. 12, 1998) (adviser failed reasonably to supervise employee and did not have policies and 

procedures designed to detect and prevent employees from engaging in improper personal trading); In 

re Van Kampen American Capital Asset Management, Inc., Investment Advisers Act Release. No. 

1525 (Sep. 29, 1995) (adviser failed reasonably to supervise employee and did not have policies and 

procedures designed to detect and prevent employees from mispricing fund securities). Both registered 

and unregistered advisers have an obligation to supervise persons acting on their behalf. In the Matter 

of Wilfred Mickel and Robert A. Littell, Investment Advisers Act Release No. 2203 (Dec. 15, 2003). 

See also In the Matter of Western Asset Management Co. and Legg Mason Fund Adviser, Inc., 

Investment Advisers Act Release No. 1980 (Sept. 28, 2001) (adviser has a duty to supervise a subadviser); TBA Financial Corporation, SEC Staff No-Action Letter (Nov. 7, 1983) (duty to supervise 

employees who are also “registered representatives”). 

200 Section 203(e)(6).

201 See In re John H. Gutfreund, 51 S.E.C. 93, 113 (1992).

202 Section 203(e)(6).
40

compliance officer (“CCO”).

203 The CCO must be knowledgeable 

about the Act and have the authority to develop and enforce 

appropriate compliance policies and procedures for the adviser. The 

CCO need not be an employee who does not have other duties.204 

b. Policies and Procedures. Each adviser must also adopt and implement 

written policies and procedures reasonably designed to prevent the 

adviser or its personnel from violating the Act.205 The SEC explained 

that each adviser, in designing its policies and procedures, should 

identify conflicts and other compliance factors creating risk exposure 

for the firm and its clients in light of the firm's particular operations, 

and then design policies and procedures that address those risks.206

The SEC has stated that these policies and procedures should cover, at 

a minimum, the following areas to the extent applicable to the adviser:

(i) Portfolio management processes, including allocation of 

investment opportunities among clients and consistency of 

portfolios with clients' investment objectives, disclosures by the 

adviser, and applicable regulatory restrictions; 

(ii) Trading practices, including procedures by which the adviser 

satisfies its best execution obligation, uses client brokerage to 

obtain research and other services (“soft dollar arrangements”), 

and allocates aggregated trades among clients;

(iii) Proprietary trading of the adviser and personal trading activities 

of supervised persons;

 203 Rule 206(4)-7(c). The Commission has stated that having the title of chief compliance officer does 

not, in and of itself, carry supervisory responsibilities so that an adviser’s chief compliance officer 

would not necessarily be subject to a sanction for failure to supervise other advisory personnel. 

Investment Advisers Act Release No. 2204 (Dec. 17, 2003) (“Release 2204”) at n. 73 available at

http://www.sec.gov/rules/final/finalarchive/finalarchive2003.shtml. 

204 Release 2204, supra note 203 at Section II. C. However, the SEC recently settled an enforcement 

action alleging that a dually-registered broker-dealer and investment adviser violated section 206(4) of 

the Advisers Act and rule 206(4)-7 thereunder by failing to adopt and implement compliance policies 

and procedures specific to its advisory business when its CCO spent about 95% of his time on 

compliance-related issues for the firm’s brokerage business and only about 5% of his time on 

compliance-related issues for the advisory business. In the Matter of Feltl & Company, Inc., 

Investment Advisers Act Release No. 3325 (Nov. 28, 2011).

205 Rule 206(4)-7(a). The SEC has brought enforcement actions against advisers for failing to adopt and 

implement adequate policies and procedures as required by rule 206(4)-7. See, e.g., In the Matter of 

OMNI Investment Advisors Inc. and Gary R. Beynon, Investment Advisers Act Release No. 3323 (Nov. 

28, 2011); In the Matter of The Buckingham Research Group, Inc., Buckingham Capital Management, 

Inc., and Lloyd R. Karp, Investment Advisers Act Release No. 3109 (Nov. 17, 2010); In the Matter of 

Consulting Services Group, LLC, and Joe D. Meals, Investment Advisers Act Release No. 2669 (Oct. 

4, 2007). 

206 The SEC has settled an enforcement action against an adviser that adopted a “pre-packaged” policies 

and procedures manual that failed to reflect the risk factors or conflicts of interest of the adviser; the 

SEC found that the adviser violated rule 206(4)-7 by failing to adopt and implement written policies 

and procedures reasonably designed to prevent violations of the Advisers Act by that adviser’s 

supervised persons. In the Matter of Consulting Services Group, LLC, and Joe D. Meals, supra note 

205. 
41

(iv) The accuracy of disclosures made to investors, clients, and 

regulators, including account statements and advertisements;

(v) Safeguarding of client assets from conversion or inappropriate 

use by advisory personnel;

(vi) The accurate creation of required records and their maintenance 

in a manner that secures them from unauthorized alteration or use 

and protects them from untimely destruction;

(vii) Marketing advisory services, including the use of solicitors; 

(viii) Processes to value client holdings and assess fees based on those 

valuations;

(ix) Safeguards for the privacy protection of client records and 

information; and

(x) Business continuity plans.207

c. Annual Review. The adviser must review the adequacy and 

effectiveness of its policies at least annually.208

9. Code of Ethics. All advisers registered with the SEC must adopt and enforce 

a written code of ethics reflecting the adviser’s fiduciary duties to its 

clients.209 At a minimum, the adviser’s code of ethics must:

a. Standards of Conduct. Set forth a minimum standard of conduct for 

all supervised persons;

b. Compliance with Federal Securities Laws. Require supervised persons 

to comply with federal securities laws;

c. Personal Securities Transactions. Require each of an adviser’s access 

persons210 to report his securities holdings at the time that the person 

becomes an access person and at least once annually thereafter and to 

make a report at least once quarterly of all personal securities 

transactions in reportable securities to the adviser’s CCO or other 

designated person;211

 207 Release 2204, supra note 203.

208 Rule 206(4)-7(b).

209 Rule 204A-1. See also, In the Matter of Consulting Services Group, LLC, and Joe D. Meals, supra 

note 205 (adviser failed to timely adopt and accurately document ethics code).

210 Rule 204A-1(e)(1) defines “access person.” Generally, an access person is a supervised person who 

has access to non-public information regarding clients’ securities purchase or sale of securities.

211 Rule 204A-1(b) (1) (holdings reports), and (2) (transaction reports). Access persons do not have to 

report holdings of or transactions in: (i) direct obligations in of the U.S. government; (ii) certain bank 

instruments, commercial paper, and agreements; (iii) shares of money market funds; (iv) shares in 

open-end investment companies (mutual funds) that are not advised by either the adviser or an entity in 

a control relationship with the adviser); and (v) shares of a (US) unit investment trust that invests 

exclusively in an unaffiliated mutual fund. See rule 204A-1(j). See also, M&G Investment 
42

d. Pre-approval of Certain Securities Transactions. Require the CCO or 

other designated persons to pre-approve investments by the access 

persons in IPOs or limited offerings;

e. Reporting Violations. Require all supervised persons to promptly 

report any violations of the code to the adviser’s CCO or other 

designated person;

f. Distribution and Acknowledgment. Require the adviser to provide 

each supervised person with a copy of the code, and any amendments, 

and to obtain a written acknowledgment from each supervised person 

of his receipt of a copy of the code; and

g. Recordkeeping. Require the adviser to keep copies of the code, 

records of violations of the code and of any actions taken against 

violators of the code, and copies of each supervised person’s 

acknowledgement of receipt of a copy of the code.

10. Fraud Against Investors in Pooled Investment Vehicles. Rule 206(4)-8 

prohibits advisers from defrauding investors and prospective investors in 

pooled investment vehicles they advise.212 The anti-fraud provisions of the 

Act (section 206(1) and (2)) prohibit advisers from defrauding “clients.” A 

2006 court decision created doubt about whether an investor in a pooled 

investment vehicle (e.g., a hedge fund) advised by an adviser is a “client,” 

and thus whether the SEC could enforce these provisions against an adviser 

that defrauds the investors, but not the fund.213

a. Prohibition on False or Misleading Statements. Rule 206(4)-8 

prohibits advisers to pooled investment vehicles from making any 

materially false or misleading statements to investors or prospective 

investors in those pools. 

b. Prohibition of Other Frauds. In addition, the rule prohibits advisers to 

pooled investment vehicles from otherwise defrauding the investors or 

prospective investors in those pools. This provision is designed to 

apply more broadly to fraudulent conduct that may not involve 

statements.

 Management Ltd., SEC Staff No-Action Letter (Mar. 1, 2007) (permitting access persons of U.K.-

based registered adviser to exclude from reports certain analogous instruments).

212 Rule 206(4)-8. See Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles,

Investment Advisers Act Release No. 2628 (Aug. 3, 2007), available at

http://www.sec.gov/rules/final/2007/ia-2628.pdf. See also, SEC v. Rabinovich & Associates, LP, Alex 

Rabinovich and Joseph Lovaglio, 07 Civ. 10547(GEL) (S.D.N.Y.) (Nov. 17, 2008); SEC v. Moises 

Pacheco, et al., Civil Action No. 09-CV-1355-W-RBB (Nov. 19, 2009) (discussed in In the Matter of 

Moises Pacheco, Investment Advisers Act Release No. 2960 (Dec. 11, 2009)); SEC v. Thomas J. 

Petters, et al, Civil Action No. 09 SC 1750 ADM/JSM (D. Minn.) (Oct. 5, 2010) (discussed in SEC v. 

Thomas J. Petters, et al, Litigation Release No. 21687 (Oct. 18, 2010)); SEC v. Donald Anthony 

Walker Young, et al, Civil Action No. 09-1634 (E.D. Penn.)(Apr. 12, 2011); SEC. v. Imperium 

Investment Advisors, LLC, et al, 8:10-CV-02859-JDW-MAP (M.D.F.L) (June30, 2011) (discussed in 

In the Matter of Imperium Investment Advisors, LLC, Administrative Proceeding File No. 3-14471 

(July 20, 2011)).

213 Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006). 
43

c. No Fiduciary Duty. Rule 206(4)-8 does not create a fiduciary duty to 

investors or potential investors in a pooled investment vehicle not 

otherwise imposed by law, nor does it alter any duty or obligation an 

adviser has under the Advisers Act, or any state law or requirement to 

investors in a pooled vehicle.214 In adopting the rule, the SEC 

explained that rule 206(4)-8 would, however, permit the SEC to 

enforce an adviser’s fiduciary duty created by other law if the adviser 

fails to fulfill that duty by negligently or deliberately failing to make 

the required disclosure. 

d. Pooled Investment Vehicles. Pooled investment vehicles include 

hedge funds, private equity funds, venture capital funds, and other 

types of privately offered pools that invest in securities as well as 

investment companies that are registered with the SEC under the 

Investment Company Act.215

11. Insider Trading. Section 204A of the Act requires advisers to establish, 

maintain, and enforce written policies and procedures reasonably designed 

to prevent the misuse of material, non-public information by the adviser or 

any of its associated persons,216 including the misuse of material, non-public 

information about the adviser’s securities recommendations and client 

securities holdings and transactions.217 

12. Brochure Rule. 

a. Firm Brochure. Rule 204-3, as amended in 2010, requires a registered 

adviser to prepare and deliver to clients a plain English, narrative 

brochure that contains all information required by Part 2A of Form 

ADV, including, among other things, the adviser’s business practices, 

investment strategies, fees, conflicts of interest, and disciplinary 

information.218 The adviser must deliver the brochure to a client before 

or at the time of entering into an advisory contract with the client, and 

must annually deliver to the client an updated brochure which contains 

or is accompanied by a summary of material changes, or a summary of 

 214 An adviser to a hedge fund may have a separate relationship with an investor in a hedge fund that it 

advises that gives rise to fiduciary obligations. U.S. v. Lay, 566 F. Supp. 2d 652 (N.D. Ohio May 13, 

2008).

215 Rule 206(4)-8(b) provides that a “pooled investment vehicle” means any investment company as 

defined in section 3(a) of the Investment Company Act or any company that would be an investment 

company under section 3(a) of that Act but for the exclusion provided from that definition by either 

Section 3(c)(1) or section 3(c)(7) of that Act. 

216 The SEC has brought enforcement proceedings against advisers for violating section 204A. See, e.g.,

In the Matter of Gabelli & Co. Inc., Investment Advisers Act Release No. 1457 (Dec. 8, 1994). 

217 See also, Investment Adviser Code of Ethics, Investment Advisers Act Release No. 2256 (July 2, 2004), 

available at http://www.sec.gov/rules/final/finalarchive/finalarchive2004.shtml (“We ... remind 

advisers that they must maintain and enforce policies and procedures to prevent the misuse of material, 

non-public information, which we believe includes misuse of material, non-public information about 

the adviser’s securities recommendations, and client securities holdings and transaction.”).

218 As stated in Section V.B.2, the adviser must also file with the SEC the brochure that it delivered to its 

client to satisfy its registration requirements under rules 203-1 and 204-1. 
44

material changes with an offer to deliver the updated brochure upon 

request. 219

(i) Non-Required Information. Delivery of a brochure meeting the 

requirements of Part 2A does not necessarily satisfy an adviser’s 

full disclosure obligation under the anti-fraud rules.220 

Accordingly, many advisers include additional information in 

their brochures.

(ii) Exceptions to Delivery. Advisers are not required to deliver a

brochure to investment company clients or to clients for whom 

they provide only impersonal services for less than $500.221 

(iii) Electronic Delivery. Advisers may deliver brochures 

electronically with client consent.222

b. Brochure Supplement. Rule 204-3 also requires the adviser to deliver 

a brochure supplement that contains information about an advisory 

employee, including the employee’s educational background, business 

experience, other business activities, and disciplinary history, to a 

client before or at the time the employee begins to provide advisory 

services to that client.223 

(i) Covered employees. An employee must deliver a brochure 

supplement to clients, if the employee formulates investment

advice for the client and has direct client contact; or makes 

discretionary investment decisions for the client even if the 

employee has no direct client contact.224

(ii) Exceptions to delivery. Advisers are not required to deliver a 

brochure supplement to a client: (i) to whom the adviser is not 

required to deliver a brochure; (ii) who receives only impersonal 

service; or (iii) who is an officer, employee or other persons 

related to the adviser that would be “qualified client” under rule 

205-3(d)(1).225

(iii) Electronic Delivery. Advisers may deliver brochure supplements 

 219 Rule 204-3(b)(1) and (2).

220 See Part 2 Adopting Release, supra note 113, at n. 7. 

221 Rule 204-3(c).

222 Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of 

Information, Investment Advisers Act Release No. 1562 (May 9, 1996) (publishing Commission 

interpretive guidance with respect to use of electronic media to fulfill investment advisers’ disclosure 

delivery obligations).

223 Rule 204-3(b)(3).

224 Id. Note that if the investment advice is provided by a team comprised of more than 5 employees, only 

the 5 employees that have the most significant responsibility for the day-to-day advice to a client need 

to provide brochure supplements to that client. For more information, see Part 2 FAQs, supra note 

113.

225 Rule 204-3(c)(2).
45

electronically with client consent.

13. Systemic Risk Reporting on Form PF. In October 2011, the SEC adopted 

rule 204(b)-1 requiring registered advisers with at least $150 million in 

private fund assets under management to submit regular reports on new 

Form PF. Advisers must file Form PF electronically on a confidential basis. 

Form PF is designed, among other things, to assist the Financial Stability 

Oversight Council in its assessment of systemic risk in the U.S. financial 

system.226

a. Smaller private fund advisers. Advisers that manage at least $150 

million of private fund assets, but less than the amounts that make 

them “large private fund advisers,” complete only section 1 of Form 

PF. They file annually within 120 days of the end of their fiscal year.

Section 1 requires, for each private fund, limited information about the 

size, leverage, investor types, investor concentration, liquidity and fund 

performance. This section also requires information regarding 

strategy, counterparty exposures, and use of trading and clearing 

mechanisms for each private fund that is a hedge fund.

b. Larger Private Funds Advisers. Three types of “Large Private Fund 

Advisers” that meet certain thresholds for assets under management 

based on investment strategy type are required to complete additional 

sections of Form PF.227

(i) Large Hedge Fund Advisers. Advisers managing at least $1.5 

billion in hedge fund assets must file quarterly within 60 days of 

their quarter end and, in addition to Section 1, must complete 

Section 2 of Form PF. 

Section 2a requires information about aggregate hedge fund 

assets the adviser manages, such as the value of investments in 

different types of assets, the duration of fixed income holdings, 

the value of turnover for certain asset classes and the 

geographical breakdown of investments. Section 2b requires, for 

each hedge fund that has net assets of at least $500 million, more 

granular information about the fund’s exposures, leverage, risk 

profile and liquidity.

(ii) Large Private Equity Fund Advisers. Advisers managing at least 

$2 billion in private equity fund assets must file annually within 

120 days of the end of their fiscal year (same as smaller advisers) 

and, in addition to Section 1, must complete section 4 of Form 

PF.

 226 Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and 

Commodity Trading Advisors on Form PF. Investment Advisers Act Release No. 3308 (Oct. 2011), 

available at http://www.sec.gov/rules/final/2011/ia-3308.pdf (“Form PF Adopting Release”). The staff 

of the Division of Investment Management has published responses to frequently asked questions on 

Form PF, available at http://www.sec.gov/divisions/investment/pfrd.pfrdfaq.shtml.

227 Form PF Adopting Release, supra note 226, at 21.
46

Section 4 requires information about the extent of leverage 

incurred by funds’ portfolio companies, use of bridge financing, 

funds’ investments in financial institutions, and geographical and 

industry breakdowns of funds’ investments in portfolio 

companies.

(iii) Large Liquidity Fund Advisers. Advisers managing at least $1 

billion in combined unregistered and registered money market 

fund assets must file quarterly within 15 days of their quarter end 

and, in addition to Section 1, must complete section 3 of Form PF

Item 3 requires information about each liquidity fund’s portfolio, 

certain information relevant to the risk profile of the fund and the 

extent to which the fund has a policy of complying with all or 

aspects of rule 2a-7 under the Investment Company Act.

c. Non-US. Advisers. A registered adviser with a principal office and 

place of business outside the U.S. may omit reporting of any private 

fund that, during the preceding fiscal year: (i) was not organized in the 

U.S.; (ii) was not beneficially owned by one or more U.S. persons; and 

(iii) was not offered in the U.S.228

14. Privacy Rules. Title V of the Gramm-Leach-Bliley Act protects the privacy 

interests of consumers of financial services, including clients of SECregistered investment advisers.229 SEC rules implementing the statute 

protect only individuals’ personal privacy interests, and not those of 

businesses or individuals who seek to obtain the services of an adviser for 

business purposes.230 

a. Notices. An adviser must provide clients an initial and an annual

notice of the adviser’s privacy policies. The initial notice must be 

provided no later than when the client enters into an advisory 

contract.231

Content of Notice. Notices must be clear and conspicuous, i.e.,

reasonably understandable and designed to call attention to the nature 

and significance of the notice. They must include, among other things: 

(i) categories of non-public personal information the adviser collects; 

(ii) categories of information the adviser shares; (iii) categories of 

 228 General Instruction 1 (last paragraph) to Form PF.

229 Title V is not codified as part of the Advisers Act. It is codified at 15 U.S.C. 6801-6827.

230 See rule 248.3(g)(1). The SEC’s implementing rules can be found at 17 CFR Part 248 (“Regulation 

S-P”). The rules apply to SEC-registered advisers. Rule 248.1(b). Advisers that are unregistered or 

are registered only with the states are subject to privacy regulations overseen by the Consumer 

Financial Products Board. Regulation S-P was adopted under the Securities Exchange Act, the 

Investment Company Act, and the Advisers Act; therefore the SEC has the remedies available under 

those statutes as applicable in enforcing the privacy rules. The SEC staff has posted responses to 

frequently asked questions about Regulation S-P at 

www.sec.gov/divisions/investment/guidance/regs2qa.htm.

231 Rules 248.4(a), 248.5(a).
47

affiliates and non-affiliates with which the adviser shares the 

information; and (iv) the adviser’s policies and practices for protecting 

the confidentiality and security of information.

Model Form. The SEC has adopted a model form that advisers may 

choose to use to satisfy the initial and annual notice disclosure 

requirements. Use of the form provides advisers with a “safe harbor” 

for the content of the required notice under the privacy rules.232

b. Opt-Out. An adviser must provide clients with an opportunity to “opt 

out” or block the adviser from sharing “non-public” personal financial 

information with nonaffiliated third parties.233

Exceptions. An adviser does not have to provide an opt-out right in 

three circumstances:

(i) the information is provided to an affiliate;234

(ii) the adviser shares the information in the course of providing 

advisory services to the client (e.g., with a broker, transfer agent, 

or lawyer) with the client’s consent, or as required by law;235 or

(iii) the adviser shares the information with a nonaffiliate that 

performs services, including marketing, for the adviser, but the 

adviser must have entered into a contract with the nonaffiliate 

that prohibits the nonaffiliate from using the information except 

for the purpose for which it received it.236

c. Safeguarding and Properly Disposing of Client Information.

237 An 

 232 17 CFR 248.2, adopted in, Final Model Privacy Form under the Gramm-Leach-Bliley Act, Investment 

Advisers Act Release No. 2950 (Nov. 16, 2009), available at http://www.sec.gov/rules/final/2009/34-

61003.pdf. 

233 Rule 248.10.

234 Subpart B of Regulation S-P governs the use of certain information received by affiliates. This 

subpart, Regulation S-AM, allows a consumer, in certain limited situations, to block affiliates of 

advisers from soliciting the consumer, if the solicitation is derived from certain private information that 

the adviser has shared with an affiliate. Subpart B (Regulation S-AM) differs from Subpart A of 

Regulation S-P in that it does not restrict the sharing of certain information, only the actual use of the 

information to solicit. See Regulation S-AM: Limitations on Affiliate Marketing, Investment Advisers 

Act Release No. 2911 (August, 4, 2009) available at http://www.sec.gov/rules/final/2009/34-

60423.pdf.

235 Rules 248.14, 248.15.

236 Rule 248.13.

237 The SEC has proposed additional amendments to its privacy rules. In 2012, the SEC proposed rules, 

including those that could require certain advisers who have custody or client assets or that otherwise 

qualify as financial institutions to (i) develop a program to identify “red flags” associated with identity 

theft, and (ii) have policies and procedure designed to prevent and mitigate identity theft in connection 

with its consumer accounts. Identity Theft Red Flags Rules, Investment Company Act Release No. 

29969 (Feb. 28, 2012) available at http://www.sec.gov/rules/proposed/2012/ic-29969.pdf. In 2008, 

the SEC proposed amendments to its rules, including (i) a requirement that individuals be notified 

under certain circumstances in the event of a breach of security, (ii) additional guidance as to 

information that must be included in the safeguard and disposal polices, and (iii) a limited exception to 

the notice and opt-out requirements to allow a departing registered representative to take certain client 
48

adviser must adopt written procedures reasonably designed to protect

client records and information and to dispose of consumer report 

information properly.238

d. “Non-public personal information” includes “personally identifiable 

financial information” (a defined term) and any list, description, or 

other grouping of clients derived using “personally identifiable 

financial information” (e.g., a client list):239

(i) “Personally identifiable financial information” includes 

information a client provides an adviser, information that results 

from services the adviser provides to the client, and information 

an adviser otherwise obtains about the client in connection with 

providing advisory services.240

(ii) “Non-public personal information” does not include “publicly 

available information”— i.e., information the adviser reasonably 

believes is lawfully made available to the general public from 

government records, widely distributed media, or disclosures to 

the general public required by law.241

15. Form 13F Disclosure. An SEC-registered investment adviser that exercises 

investment discretion over at least $100 million in “section 13(f) securities” 

must periodically file Form 13F with the SEC.242 This requirement was 

designed “to create a central depository of historical and current data about 

the investment activities of institutional investment managers” to assist 

investors and regulators.243

“Section 13(f) securities” generally include equity securities that trade on an 

exchange (including the NASDAQ National Market System).

244 Form 13F 

must be filed electronically, via the SEC’s Electronic Data Gathering, 

 information when leaving a firm. Regulation S-P: Privacy of Consumer Financial Information and 

Safeguarding Personal Information, Investment Advisers Act Release No. 2712 (Mar. 4, 2008). 

238 Rule 248.30(a); 248.30(b). The SEC has settled an enforcement action against an investment adviser 

that failed to adopt procedures reasonably designed to protect client records and information. See In 

the Matter of LPL Financial Corporation, Investment Advisers Act Release No. 2775 (Sept. 11, 2008).

239 Rule 248.3(t)(1). 

240 Rule 248.3(u)(1).

241 Rule 248.3(t)(2).

242 Section 13(f) of the Exchange Act; rule 13f-1(a) under the Exchange Act. See In the Matter of Quattro 

Global Capital, LLC., Investment Advisers Act Release No. 2634 (Aug. 15, 2007) (adviser failed to 

File Form 13F); In the Matter of Cabot Money Management Inc., Investment Advisers Act Release No. 

1577 (Aug. 15, 1996). 

243 S. Rep. No. 94-75, 94th Cong., 2d Sess. 82-85 (1975). Each quarter, the SEC publishes a list of section 

13(f) securities to assist institutional investment managers in the preparation of their Form 13F filings, 

available at http://www.sec.gov/divisions/investment/13flists.htm.

244 “Section 13(f) securities” also include certain equity options and warrants, shares of closed-end 

investment companies, and some convertible securities. Shares of open-end investment companies are 

not “section 13(f) securities.” Rule 13f-1(c). The SEC publishes an official list of section 13(f) 

securities, available at http://www.sec.gov/divisions/investment/13flists.htm.
49

Analysis and Retrieval (“EDGAR”) system, within 45 days after the end of 

the March, June, September, and December calendar quarters. Form 13F 

reports must identify, among other things: (i) the name of the issuer; (ii) the 

number of shares owned; and (iii) the fair market value, as of the end of the 

quarterly filing period, of the reported securities.245 

Non-U.S. Advisers. Non-US investment advisers must file Form 13F if they 

(i) use any means or instrumentality of United States interstate commerce in 

the course of their business; and (ii) exercise investment discretion over 

$100 million or more in section 13(f) securities.246

16. Large Trader Reporting. An investment adviser that qualifies as a “large 

trader” must obtain a large trader identification number from the SEC, file 

and periodically update Form 13H, and disclose to each SEC-registered 

broker-dealer through which it trades its large trader identification number 

and all accounts to which that number applies.247 These requirements were 

designed to assist the SEC in both identifying, and obtaining trading 

information on, market participants that conduct a substantial amount of 

trading activity.248

An adviser is a “large trader” if it exercises investment discretion over one 

or more accounts through which transactions in “national market system 

securities” are effected through one or more registered broker-dealers in 

amounts that, in the aggregate, amount to either: (i) 2 million shares or 

shares with a fair market value of $20 million during a calendar day; or (ii) 

20 million shares or shares with a fair market value of $200 million during a 

calendar month.249

National market system securities. These securities include listed options 

and equity securities listed on an exchange (including the NASDAQ 

National Market System).

250 The scope of securities that fall under this 

definition is narrower than the scope of securities that trigger Form 13F 

filing.251

 245 The Division of Investment Management has published a “FAQ” regarding Form 13F (“13F FAQs”), 

available at http://www.sec.gov/divisions/investment/13ffaq.htm. 

246 See also 13F FAQs at FAQ #4.

247 See Large Trader Reporting, Exchange Act Release No. 34-64976 (July 27, 2011) (“LTR 

Release”). The Commission adopted rule 13h-1 and related Form 13H, as directed by section 13(h) of 

the Exchange Act, on July 27, 2011. The rule also requires registered broker-dealers to monitor 

accounts for the purpose of identifying “unidentified large traders,” capture certain information relating 

to all transactions on behalf of large traders and unidentified large traders that are effected directly or 

indirectly by or through them, and make such information available to the Commission through the 

already-established trade-reporting infrastructure, commonly referred to as the “electronic blue sheets.” 

See id. 

248 Id. 

249 See id.

250 See Regulation NMS, rule 600(b)(46), (47) and (82).

251 See supra note 244 and accompanying text. 
50

To comply, a large trader must file a Form 13H initial filing (via EDGAR) 

generally within 10 days after effecting aggregate transactions equal to or 

greater than the identifying activity level.252 A large trader must then submit 

an annual filing within 45 days after the end of each calendar year, and must 

file an amendment no later than the end of the calendar quarter in which 

information became stale.253

Non-U.S. Advisers. Non-U.S. investment advisers that are “large traders 

under the rule” (i.e., trade through SEC-registered broker-dealers) must 

comply with the rule’s filing and disclosure requirements.254

C. Contractual Requirements

The Act does not require advisory contracts to be written255 and the existence of a 

contract and the interpretation of its terms is generally a matter for state law. 

Section 205 of the Act, however, requires all advisory contracts to include certain 

provisions and prohibits the contracts from including other provisions entered into 

by advisers registered with, or required to be registered with, the SEC.

1. Advisory Fees. Advisers and clients are free to mutually agree to the amount 

of the adviser’s compensation for its services, and the method by which it 

will be paid.256 

Performance Fees. With significant exceptions discussed below, section 

205(a)(1) of the Act prohibits advisers from entering into a contract with a 

client that varies with the adviser’s success in managing the client’s money, 

i.e., a fee based on a share of the capital gains or appreciation of a client’s 

 252 The form requires disclosure of, among other things, the large trader’s contact information, its and its 

affiliates companies businesses, the forms it and its securities affiliates file with the Commission, its 

organizational structure and legal form, and a list of broker-dealers with which it maintains accounts. 

See id.

253 See LTR Release. A large trader may avoid updating filings if it obtains “inactive status” through a 

Form 13H filing by not having effected aggregated transactions in excess of the thresholds at any time 

during the previous full calendar year. See id.

254 Where the laws of a foreign jurisdiction prevent a non-U.S. large trader (whether itself a broker-dealer 

or adviser) from disclosing certain personal identifying information of an underlying principal, foreign 

large traders or representatives of foreign large traders may request an exemption from the SEC 

pursuant to section 36 of the Exchange Act and subsection (g) of rule 13h-1. See id.

255 However, section 15(a) of the Investment Company Act requires advisory contracts with investment 

companies to be in writing. 

256 The SEC staff has taken the position that an investment adviser that charges fees which substantially 

exceed those charged by other investment advisers may violate section 206 of the Act, unless it 

discloses to existing and prospective clients that such a fee is higher than that charged by other advisers 

that provide the same or similar services. The staff had indicated that it will consider an advisory fee 

greater than 2% of the total assets under management as excessive and would violate section 206 

unless the adviser disclosure is made that the fee is higher than that normally charged in the industry. 

See Equitable Communications Co., SEC Staff No-Action Letter (Feb. 26, 1975); Consultant 

Publications, Inc., SEC Staff No-Action Letter (Jan. 29, 1975); Financial Counseling Corporation, 

SEC Staff No-Action Letter (Dec. 7, 1974); John G. Kinnard & Co., Inc., SEC Staff No-Action Letter 

(Nov. 30, 1973).
51

funds.257 Congress included this provision in the Act because of its concern 

that a performance fee would encourage undue speculation with clients’ 

investments. 

a. Assets Under Management. The commonly charged fee based on an 

amount of assets under management is specifically excepted.258 

b. Fulcrum Fee. The Act excepts from the performance fee prohibition a 

type of fee known as a “fulcrum fee.” This is a fee for “big players” 

where the investment advisory contract involves registered investment 

companies or clients with over $1 million of assets.259 The fee must be 

based on the asset value of the funds under management over a 

“specified period” and must increase or decrease proportionately with 

the “investment performance” of funds under management in relation 

to an “appropriate index of securities prices.”260

c. Non-U.S. Clients. The Act also excepts contracts with persons who are 

not residents of the United States.261 Congress added this exception in 

1996 in recognition that the common use of performance fee 

arrangements in other countries placed U.S. advisers at a competitive 

disadvantage.

d. Qualified Clients. Rule 205-3 permits an adviser to enter into a 

performance fee contract with certain “qualified clients.” A qualified 

client is a:

(i) natural person or company that has at least $1,000,000 under 

management with the adviser immediately after entering into the 

 257 Section 205(a)(1). The SEC staff has taken the position that section 205(a)(1)’s prohibition of 

investment advisory contracts that contain performance fees extends to investment advisory contracts 

that provide for “contingent fees.” Contingent Advisory Compensation Arrangements, Investment 

Advisers Act Release No. 721 (May 16, 1980). A contingent fee is “an advisory fee [that] will be 

waived or refunded, in whole or in part, if a client’s account does not meet a specified level of 

performance” or that is contingent on the investment performance of the funds of advisory clients.

258 Section 205(b)(1). 

259 Section 205(b)(2). The SEC has published a release discussing factors that investment companies 

considering entering into a fulcrum fee should consider. Investment Advisers Act Release No. 113 

(Apr. 18, 1972).

260 Rules 205-1 and 205-2 define the terms in the text. But see Royce Value Trust, SEC Staff No-Action 

Letter (Dec. 22, 1986) (the SEC staff stated it would not object if an advisory agreement contained a 

performance fee that decreased at a greater rate than it increased and provided for no compensation if 

the net asset value per share declined). The SEC has instituted several enforcement cases against 

advisers who entered into advisory contracts with investment companies that charge performance fees 

that did not comply with section 205(b). In each case, the adviser charged the fund more that it could 

charge under section 205(b). In the Matter of Gartmore Mutual Fund Capital Trust, Investment 

Advisers Act Release No. 2548 (Sept. 7, 2006); In the Matter of Putnam Investment Management, 

LLC, Investment Advisers Act Release No. 2547 (Sept. 7, 2006); In the Matter of Numeric Investors 

LLC, Investment Advisers Act Release No. 2546. (Sept. 7, 2006); In the Matter of Kensington 

Investment Group, Inc., Investment Advisers Act Release No. 2545 (Sept. 7, 2006). 

261 Section 205(b)(5). 
52

contract;262

(ii) natural person or company that the adviser reasonably believes 

has a net worth of more than $2 million at the time the contract is 

entered into,263 or is a “qualified purchaser”;264 or

(iii) natural person who is an officer, director, trustee, or general 

partner (or a person serving in a similar capacity) of the adviser, 

or an employee who participates in investment decisions of the 

adviser and has done so for at least 12 months.265

e. Qualified Purchaser Funds. The Act also excepts contracts with 

certain funds not registered under the Investment Company Act 

because they are offered only to certain wealthy or sophisticated 

investors.266 The funds, which include many hedge funds, rely on the 

exception from the definition of “investment company” provided by 

section 3(c)(7) of the Investment Company Act.

f. Other Funds. Rule 205-3 excepts contracts with other types of funds, 

but only if each equity owner of the company is a qualified client with 

whom the adviser could otherwise enter into a performance fee 

contract under the rule.267 This exception is available to (i) public 

investment companies registered under the Investment Company Act 

of 1940, (ii) business development companies, and (iii) private 

investment companies that rely on the exception provided by section

 262 Section 418 of Dodd-Frank Act directed the SEC to periodically adjust for inflation the dollar amount 

threshold for a “qualified client” every five years. In 2011, SEC issued an order to increase the 

minimum amount of assets under management threshold from $750,000 to $1,000,000. See Order 

Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment 

Advisers Act of 1940, Investment Advisers Act Release No. 3236 (July 12, 2011) (the “Performance 

Fee Order”). The SEC then amended rule 205-3 to codify the order in the rule. See Investment Adviser 

Performance Compensation, Investment Advisers Act Release No. 3372 (Feb. 15, 2012) (“Release 

3372”).

263 The Performance Fee Order increased the dollar amount for the threshold from $1.5 million to $2 

million. The SEC then amended rule 205-3 to codify the order in the rule and to exclude the value of a 

person’s primary residence and certain property-related debts from the test of whether a person has 

sufficient net worth to be considered a “qualified client.” See Release 3372, supra note 262. 

264 A “qualified purchaser” is defined in the rule by reference to section 2(a)(51) of the Investment 

Company Act, which generally defines a "qualified purchaser" to include: (i) a natural person who 

owns not less than $5,000,000 in investments; (ii) a trust that meets certain requirements; and (iii) any 

person (including an investment adviser) who in the aggregate owns and invests on a discretionary 

basis not less than $25,000,000 in investments. 

265 Rule 205-3(d)(1)(iii).

266 Section 205(b)(4). 

267 For a discussion of some of the contours of this exception, see Seligman New Technologies Fund II, 

Inc., SEC Staff No-Action Letter (Feb. 7, 2002). The adviser itself and any equity owner not charged a 

performance fee need not be qualified clients. Rule 205-3(b). In an arrangement involving multiple 

tiers of funds, the analysis of whether a performance fee may be charged must be repeated at each tier. 

Exception to Allow Registered Investment Advisers to Charge Fees Based Upon a Share of Capital 

Gains Upon or Capital Appreciation of a Client’s Account, Investment Advisers Act Release No. 1731 

(July 15, 1998). 
53

3(c)(1) of the Investment Company Act.268

Non-U.S. Funds. The SEC staff has stated that if the fund is organized 

under the laws of a non-U.S. country, only the equity owners that are 

U.S. residents must be qualified clients.269

2. Assignments of Advisory Contracts. Advisory contracts must contain a 

provision prohibiting their assignment without consent of the client.270 An 

assignment generally includes any direct or indirect transfer of an advisory 

contract by an adviser or any transfer of a controlling block of an adviser’s 

outstanding voting securities.271 A transaction that does not result in a 

change of actual control or management of the adviser (e.g., a corporate 

reorganization) would not be deemed to be an assignment for these 

purposes.272

3. Notification of Partnership Changes. If the adviser is organized as a 

partnership, each of its advisory contracts must provide that the adviser will 

notify the client of a change in its membership.273

4. Hedge Clauses. The Act voids any provision of a contract that purports to 

waive compliance with any provision of the Act.274 The SEC staff takes the 

position that an adviser that includes any such provision in a contract 

misleads its clients in violation of the Act’s anti-fraud provisions by creating 

in the mind of the client the belief that a legal right or remedy under the Act 

is not available.275 

Indemnification Clauses. Historically, the SEC staff has taken the position 

that prohibition would, for example, preclude an adviser from purporting to 

limit its culpability to acts involving gross negligence or willful 

malfeasances,276 even if the hedge clause explicitly provides that rights 

 268 Rule 205-3(b) and (d)(3).

269 See Lazard Frères Asset Management, SEC Staff No-Action Letter (Feb. 12, 1996).

270 Section 205(a)(2). 

271 Section 202(a)(1). 

272 Rule 202(a)(1)-1. While rule 202(a)(1)-1 was adopted primarily to deal with intra-corporate 

reorganizations and reorganizations resulting from changes in domicile, the Division of Investment 

Management explained in a staff no-action letter that the rule is not so limited. Zurich Insurance 

Company, Scudder Kemper Investments, SEC Staff No-Action Letter (Aug. 31, 1998). Zurich involved 

a complex corporate transaction, the substance of which the Division did not address. Instead, the 

Division stated that the adviser must itself evaluate whether a particular transaction involves a change 

of actual control or management. 

273 Section 205(a)(3). 

274 Section 215(a). 

275 Opinion of the General Counsel, Investment Advisers Act Release No. 58 (Apr. 10, 1951). The SEC 

has instituted enforcement actions against advisers that have utilized hedge clauses in their advisory 

contracts. In the Matter of William Lee Parks, Investment Advisers Act Release No. 736 (Oct. 27, 

1980); In the Matter of Olympian Financial Services, Inc. Investment Advisers Act Release No. 659 

(Jan 16. 1979).

276 Auchincloss & Lawrence Inc., SEC Staff No-Action Letter (Feb. 8, 1974).
54

under federal or state law cannot be relinquished.277 More recently, the SEC 

staff has stated that whether such an indemnification clause would violate 

the Act’s anti-fraud provisions, turns on “the form and content of the 

particular hedge clause (e.g., its accuracy), any oral or written 

communications between the investment adviser and the client about the

hedge clause, and the particular circumstances of the client.”278

5. Termination Penalties. The SEC staff takes the position that certain fees 

that may have the effect of penalizing a client for ending the advisory 

relationship, or that may make the client reluctant to terminate an adviser, 

may be inconsistent with the adviser’s fiduciary duties and may violate 

section 206.279 Thus, the SEC staff interprets the anti-fraud provisions of 

the Act to require an adviser receiving its fee in advance to give a client 

terminating a contract a pro rata refund of pre-paid fees (less reasonable 

expenses),280 unless the adviser is to receive a pre-determined amount upon 

termination for services already performed, and the client is provided 

adequate disclosure.281

D. Recordkeeping Requirements

The SEC generally requires a registered adviser to maintain two types of books 

and records: (i) typical accounting and other records that any business would 

normally keep; and (ii) certain additional records the SEC believes necessary in 

light of the adviser’s fiduciary duties.282

The requirement to keep records does not turn on the medium in which a 

document is created or maintained. Thus, electronic documents, including emails, must be maintained if they meet the required record described below.

1. Typical Records

a. All checkbooks, bank statements, and reconciliations.

b. All written agreements entered into by the adviser with any client or 

otherwise relating to the business of the adviser, e.g., rental and service 

agreements, mortgages, employment contracts, advisory contracts.

c. All invoices or statements relating to the adviser’s business.

 277 Omni Management Corp. SEC Staff No-Action Letter (Dec. 13, 1975); First National Bank of Akron, 

SEC Staff No-Action Letter (Feb. 27. 1976).

278 Heitman Capital Management, LLC, et al., SEC Staff No-Action Letter (Feb. 12. 2007).

279 See, e.g., National Deferred Compensation, SEC Staff No-Action Letter (Aug. 31, 1987) (“an adviser 

may not fulfill its fiduciary obligations if it imposes a fee structure penalizing a client for deciding to 

terminate the adviser’s service or if it imposes an additional fee on a client for choosing to change his 

investment”). 

280 National Regulatory Services, SEC Staff No-Action Letter (Dec. 2, 1992). The staff does not see this 

view altered by the decision Transamerica v. Lewis, 444 U.S. 11 (1979), that clients do not have a 

private right of action under section 206 of the Act, because they continue to have rights to sue for 

equitable damages under section 215 of the Act.

281 BISYS Fund Services, Inc., SEC Staff No-Action Letter (Sept. 2, 1999). 

282 Rule 204-2.
55

d. All cash receipts and disbursement journals, other journals, appropriate 

ledger accounts, all trial balances, financial statements, and internal 

audit working papers relating to the business of the adviser.

2. Additional Records

a. A record of the personal securities transactions of the adviser and its 

employees.

b. Copies of each report of personal securities holdings made by an 

access person under the adviser’s code of ethics.

c. Documents supporting an adviser’s decision to approve an access 

person’s personal securities transactions.

d. A list of all persons who currently are “access persons” and who have 

been access persons within the last five years.

e. A memorandum of each order given by the adviser for the purchase or 

sale of any security and any instruction from the client concerning 

such purchase and sale.

f. A cross reference of securities held by client and by issuer.

g. All written communications received and copies of all written 

communications sent by the adviser relating to:

(i) any recommendation made or proposed to be made, and any 

advice given or proposed to be given;

(ii) any receipt, disbursement or delivery of funds or securities; or

(iii) the placing or executing of any order to purchase or sell any 

security.

h. Copies of all circulars, advertisements, newspaper articles, etc., sent to 

10 or more persons.

i. A list of all accounts over which the adviser has discretionary 

authority.

j. Copies of any power of attorney.

k. A copy of each written statement given to any client in compliance 

with the brochure rule and any document prepared in compliance with 

the requirements of Form ADV.

l. Clients’ acknowledgement of receipt of a solicitation agreement.

m. Documents substantiating any performance advertised.283

 283 Rule 204-2(a)(16). See Investment Advisers Act Release No. 1135 (Aug. 17, 1988) (adopting 

paragraph (a)(16)); see also Salomon Brothers Asset Management Inc. and Salomon Brothers Asset 

Management Asia Pacific Limited, SEC Staff No-Action Letter (July 23, 1999) (explaining that records 

needed to be retained to substantiate performance). In addition, rule 204-2(e)(3)(ii) provides that 

advisers that had relied on the exemption from registration under section 203(b)(3) of the Act before 
56

n. Certain additional records if the adviser has custody or possession of 

clients’ cash or securities.284

o. Copies of the code of ethics and amendments thereto.

p. Records of violations of the code by supervised persons and of any 

actions taken against violators of the code of ethics.

q. Copies of each supervised person’s written acknowledgment of receipt 

of a copy of the code of ethics.

r. Certain additional records regarding political contributions and 

advisory services to any government entity.

285

3. Other Requirements Regarding Recordkeeping

a. All books and records required to be kept by the rule must be 

maintained and preserved in any easily accessible place for a period of 

no less than five years.286

b. Records required to be kept may be kept in micrographic media (e.g., 

microfilm or microfiche) or in electronic storage media (e.g., optical 

storage discs, CD ROMs).287

c. There are special recordkeeping rules for non-resident investment 

advisers.288

E. Applicability to Non-U.S. Advisers. 

The SEC has stated that most of the requirements (discussed above) do not apply 

with respect to the non-U.S. clients of an SEC registered adviser whose principal 

place of business is not in the U.S.289 For example, a non-U.S. adviser is not 

 July 21, 2011 (the private adviser exemption) will not be subject to the requirement of maintaining 

records to support their calculation of the performance, or rate of return, of the accounts they managed 

or securities they recommended for any period prior to their registration with the SEC, provided that 

they continue to preserve any records in their possession that pertain to such performance or rate of 

return.

284 Rule 204-2(a)(17)(iii) and (b).

285 Rule 204-2(a)(18) and (h).

286 Rule 204-2(e). The first two years, the records must be kept in the offices of the adviser.

287 Rule 204-2(g). An adviser storing records in electronic storage media must establish and maintain 

procedures: (i) to preserve the records and safeguard them from loss, alteration or destruction; (ii) limit 

access to authorized personnel; and (iii) reasonably assure that any reproduction of paper records onto 

electronic media is accurate. See In the Matter of Anthony Fields, CPA, et al., Investment Advisers Act 

Release No. 3348 (Jan. 4, 2012) (The SEC has instituted administrative proceedings alleging that 

adviser violated section 204 of the Advisers Act and rules 204-2(a)(11) and 204-2(e)(3)(i) thereunder 

by utilizing several email and online communication providers, each of which routinely deletes emails 

and online communications after six months, and doing nothing to retain these communications).

288 Rule 204-2(j). 

289 Registration Under the Advisers Act of Certain Hedge Fund Advisers, Investment Advisers Act 

Release No. 2266 (July 20, 2004) at §II.C.(3)(c)(this rule was vacated by a federal court in 2006, see 

supra note 213). See also section 203(b)(3) of the Advisers Act amended by the Dodd-Frank Act, 
57

required to maintain non-U.S. person client assets in accordance with the custody 

rule. 

The SEC staff has stated that a non-U.S. adviser registered with the SEC is subject 

to examination by SEC staff and must maintain certain records with respect to all 

of its clients, including non-U.S. clients.290 

F. Administrative Oversight

All records of a registered adviser (and not only those required to be created or 

maintained pursuant to SEC rule) are subject to examination by SEC staff.291 

Personnel in the SEC’s Office of Compliance Inspections and Examinations 

located at SEC headquarters and various regional offices usually conduct 

inspections. All examinations are confidential.292 

1. Types of Inspections. There are generally three types of inspections.

a. Examinations of High-Risk Investment Advisers. The SEC staff 

utilizes a risk-based process, identifying higher-risk investment 

advisers for examination consideration and focusing examination 

resources on certain higher-risk activities at selected investment 

advisers, including conflicts of interest, portfolio management, 

valuation, performance, advertising and asset verification. Typically, 

higher-risk investment advisers are identified based on (i) information 

contained in regulatory filings; (ii) assessments made during past 

examinations; and/or (iii) other criteria and available information.293

 Release 3222, supra note 68 and Section III. B. 3 of this outline for discussion regarding foreign 

private adviser exemption. 

290 The SEC staff has provided guidance in a series of no-action letters regarding the recordkeeping 

obligations of registered advisers that are located offshore. Under that analysis, the registered adviser 

must, in order to rely on the no-action relief, comply with the Act’s recordkeeping rules, other than (i) 

rules 204-2(a)(3) and (7) with respect to transactions involving offshore clients that do not relate to 

advisory services performed by the registered adviser on behalf of United States clients or related 

securities transactions; and (ii) rules 204-2(a)(8), (9), (10), (11), (14), (15) and (16) and 204-2(b) with 

respect to transactions involving, or representations or disclosures made to, offshore clients. See, e.g., 

Royal Bank of Canada, SEC Staff No-Action Letter, (June 3, 1998). The Dodd-Frank Act added 

section 214(b) to the Advisers Act, which provides extraterritorial jurisdiction to U.S. federal courts 

regarding actions or proceedings brought by the Commission or the United States for violation of 

section 206 of the Act involving (i) conduct within the United States even if the violation is committed 

by a foreign adviser and involves only foreign investors; or (ii) conduct occurring outside the United 

States that has a foreseeable substantial effect within the United States.

291 See section 204 (“All records (as so defined) of such investment advisers are subject at any time, or 

from time to time, to such reasonable periodic, special, or other examinations.” (emphasis added)).

292 Section 210(b) of the Act generally prohibits the SEC or the SEC staff from disclosing publicly either 

the existence of an examination or investigation conducted under the Act, or the results of or any facts 

ascertained during an examination or investigation.

293 See Study on Enhancing Investment Adviser Examinations (Jan. 19, 2011), available at

http://sec.gov/news/studies/2011/914studyfinal.pdf (staff study required by section 914 of the DoddFrank Act, which directed the Commission to review and analyze the need for enhanced examination 

and enforcement resources for investment advisers); Commissioner Elisse B. Walter, Statement on 

Study Enhancing Investment Adviser Examinations (Required by Section 914 of Title IV of the Dodd-
58

b. Special Purpose Reviews. The SEC staff conducts risk-targeted 

examination sweeps regarding specific areas of concern within the 

financial services industry covering a broad sample of regulated 

entities regarding those areas. These sweeps are typically limited in 

scope. In addition, the SEC staff conducts limited scope examinations 

of an investment adviser’s general business activities and a targeted set 

of the adviser’s books and records to help OCIE better assess the risk 

profile of an investment adviser.294

c. Cause Examinations. These may be based on receipt of a complaint 

from a client or a competitor, press reports of problems, rumors, or 

anonymous tips. 

In addition, OCIE launched a presence exams initiative in 2012 to conduct 

focused, risk-based examinations of investment advisers to private funds that 

registered with the Commission following the repeal of the private adviser 

exemption.295 The presence exams include three phases: (i) an initial phase 

of industry outreach and education; (ii) followed by a coordinated series of 

examinations of a significant percentage of newly registered advisers 

focusing on the highest risk areas of their businesses; and (iii) culminating in 

the publication of a series of “after action” reports, reporting to the industry 

on the broad issues, risks and themes identified during the course of the 

examinations.296

2. Focus of Inspections. Examiners will generally focus on the various 

activities at an investment adviser deemed by the staff to be high risk. 

Among other things, the staff is seeking to detect violations of the federal 

securities laws, including the requirement that the adviser have effective 

compliance policies and procedures. When the SEC adopts new rules that 

are applicable to investment advisers, examiners may inquire about the areas 

affected by such rules and review relevant documentation to assess how the 

adviser is complying with the new requirements. Other examination focus 

areas are determined by the purpose for conducting the exam, business 

activities of the investment adviser, and the compliance controls surrounding 

those activities.

297

3. Results of Inspection. Generally, there are three possible results from an 

examination.

a. The SEC staff finds no problems and sends the adviser a letter stating 

that the inspection is finished (a rare event!).

 Frank Wall Street Reform and Consumer Protection Act) (Jan. 19, 2011), available at

http://sec.gov/news/speech/2011/spch011911ebw.pdf. 

294 Id.

295 See Letter to Newly Registered Investment Advisers from Drew Bowden, Deputy Director, Office of 

Compliance Inspections and Examinations, SEC (Oct. 9, 2012), available at

http://www.sec.gov/about/offices/ocie/letter-presence-exams.pdf. 

296 See Norm Champ, “What SEC Registration Means for Hedge Fund Advisers” (May 11, 2012), 

available at http://sec.gov/news/speech/2012/spch051112nc.htm.

297 See Study on Enhancing Investment Adviser Examinations, supra note 293.
59

b. The SEC staff sends an “exam summary letter,” which informs the 

adviser of any violations or possible violations found and requests the 

adviser promptly to take any necessary corrective steps and submit a 

written response to the SEC staff of the corrective actions taken.

c. The SEC staff refers the inspection to the SEC’s Division of 

Enforcement for further consideration and possible commencement of 

an enforcement proceeding—not common as a first step.