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What is the Investment Advisers Act?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 17 July 2018
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The Investment Advisers Act of 1940 is a piece of legislation which passed in the United States for the purpose of establishing a mechanism for monitoring people who act as investment advisers. It also created a regulatory framework designed to establish basic standards of conduct for the industry. Since 1940, several adjustments have been made to accommodate changing industry and economic trends so that the Investment Advisers Act will continue to be relevant.

Following the Great Depression, the United States enacted a number of pieces of key legislation which were designed to address the financial industry and to put checks in place to prevent similar market crashes in the future. One major piece of legislation was the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC), the regulatory agency which enforces the Investment Advisers Act as well as other pieces of legislation such as the Securities Act of 1933 and the Securities and Exchange Act itself.

The Investment Advisers Act requires people who receive money in exchange for investment advice, except in special circumstances, to register with the SEC. In the 1990s, the SEC mandated that people handling less than 25 million United States Dollars (USD) in assets on behalf of clients should register instead with state agencies. The SEC also does not require people to register if they are not providing investment advice on national investments, or if they handle a very small number of clients.

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Registering allows the SEC to monitor people who are providing investment advice. The Investment Advisers Act was designed to address abusive advisers and people who made reckless or fraudulent statements which led people to make financial decisions which they might not have otherwise made. People who are registered as investment advisers must also follow certain standards of conduct, including antifraud standards, or face legal penalties.

It is, of course, still possible for an investment adviser to give bad advice. However, regulation of their activities under the Investment Advisers Act has made it easier for the SEC to address investment advisers who are behaving unethically or illegally. People who believe that financial institutions and advisers are violating SEC regulations can report them to the SEC for investigation. The SEC protects not only individual investors who might otherwise be taken advantage of, but also the national economy as a whole, because well placed institutions and individuals are in a position to cause a great deal of damage.

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