SEC Jurisdiction over Investment Advice

By Carroll, Brian | Journal of Accountancy, August 2001 | Go to article overview

SEC Jurisdiction over Investment Advice


Carroll, Brian, Journal of Accountancy


EXECUTIVE SUMMARY

* MANY CPAs HAVE RESPONDED TO INCREASED client interest in financial products by formally offering investment advisory services. This generally requires them to register as investment advisers with either a state agency or with the SEC, based primarily on the amount of assets under management.

* CPAs CAN PROVIDE LIMITED INVESTMENT ADVICE to clients without registering. The key question is whether a CPA's investment advice brings him or her under the definition of "investment adviser" in the Investment Advisers Act of 1940. Even if the answer is yes, a CPA may still be excepted under the professional's safe harbor.

* THE ACT DEFINES AN INVESTMENT ADVISER as anyone who, for compensation, engages in the business of advising others about the value of securities or the advisability of investing in, purchasing or selling securities. While this three-part definition appears simple, there are nuances CPAs should understand in deciding if they need to register.

* THE ACT'S SAFE HARBOR EXCLUDES FROM the investment adviser definition any "lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession." The exception is not available to an accountant who acts as a financial planner.

* CPAs THINKING ABOUT PROVIDING INVESTMENT advice should proceed with caution. The best approach is to consult with legal counsel to make sure the CPA is not unintentionally providing investment advice without registering.

What every CPA should know.

With the explosion of financial information and interest in financial markets, clients of all types are turning to their CPAs for advice on investing in stocks, bonds, mutual funds, limited partnerships and other financial products. Many CPAs have responded by formally offering investment advisory services, which generally requires them to register as investment advisers with either a state agency or the SEC.

Short of staking a claim as an investment adviser, CPAs can provide limited investment advice to clients without registering. The key question is whether a CPA's investment advice brings him or her under the definition of "investment adviser" in the Investment Advisers Act of 1940. Even if the answer is yes, the CPA may still be excepted from the definition under the "professionals" safe harbor. If he or she is not excepted, the CPA must determine whether to register with a state agency or the SEC (see "SEC vs. State Registration,"). Regardless, CPAs are subject to the act's anti-fraud provisions.

This article provides guidance to every CPA who has ever wondered whether or not providing investment advice triggers the act's registration requirements and its anti-fraud rules.

WHO IS, WHO ISN'T

The act defines an investment adviser as "any person who, for compensation, engages in the business of advising others ... as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. ..." [Section 202(a)(11)]. Moreover, if you fall under this definition and are not excepted, use any means of interstate commerce (mail, e-mail, telephone) as part of your investment advisory business and are required to register with the SEC and fail to do so, you may have violated the act, subjecting you to criminal and civil prosecution.

At first glance, the three-part, statutory definition of an investment adviser appears to cover only those who intend to be compensated for operating a business providing investment advice. The SEC may, however, interpret the definition in ways that are not self evident. In addition, the act has a broad reach. For example, the term "person" in the investment adviser definition includes both people and a company, which, in turn, includes not only corporations, partnerships, trusts and the like, but "any organized group of persons, whether incorporated or not . …

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