Investment Advisers Act of 1940

Investment Advisers Act of 1940 is a foundational United States federal law that established a comprehensive framework for regulating investment advisers. Enacted in the wake of the Great Depression and following the seminal Securities Act of 1933 and Securities Exchange Act of 1934, it aimed to protect investors by mandating registration and imposing a fiduciary duty on those providing investment advice for compensation. The Act is administered by the U.S. Securities and Exchange Commission (SEC) and has been significantly amended over the decades, most notably by the Dodd–Frank Wall Street Reform and Consumer Protection Act.

Background and legislative history

The Act emerged from the extensive investigations of the Pecora Commission, which exposed widespread abuses in the financial industry during the 1920s. Legislative efforts were galvanized by the SEC's "Report on the Study of Investment Trusts and Investment Companies" in 1939, which detailed conflicts of interest and fraudulent practices. Championed by SEC Chairman William O. Douglas and signed into law by President Franklin D. Roosevelt, it was designed to complement the Investment Company Act of 1940, which regulated mutual funds. This legislative pairing sought to restore public confidence in capital markets following the Wall Street Crash of 1929.

Key provisions and requirements

The Act's core mandates include the anti-fraud provisions of Section 206, which prohibit transactions that defraud clients or engage in manipulative practices. It requires advisers to maintain accurate books and records, subject to inspection by the SEC. Advisers must also provide clients with a written disclosure document, or Form ADV, detailing their business practices, fees, and potential conflicts of interest. These requirements are intended to ensure transparency and prevent the types of misconduct investigated by the Pecora Commission.

Registration and exemptions

Generally, advisers with over $100 million in assets under management must register with the SEC, while smaller advisers typically register with state securities authorities, often called Blue Sky laws. Notable exemptions from SEC registration include advisers solely to private funds with less than $150 million in assets, advisers solely to insurance companies, and most advisers to venture capital funds. The Dodd–Frank Act significantly altered these thresholds and exemptions, shifting many mid-sized advisers to state oversight and creating the new exempt reporting adviser category.

Fiduciary duty and standards of conduct

The Act establishes a federal fiduciary duty, requiring advisers to act in the best interest of their clients and to fully disclose material conflicts. This duty encompasses the duties of care and loyalty, requiring advisers to provide suitable advice and prioritize client interests over their own. In 2019, the SEC formalized this standard through Regulation Best Interest and a formal interpretation under the Securities Exchange Act of 1934. This standard is distinct from, though related to, the ERISA fiduciary rules enforced by the U.S. Department of Labor.

Enforcement and amendments

Primary enforcement authority rests with the SEC, which can bring civil actions for injunctions, monetary penalties, and industry bars. The U.S. Department of Justice handles criminal prosecutions for egregious violations. Major amendments include the Investment Advisers Supervision Coordination Act of 1996, which revised federal-state registration responsibilities, and the landmark Dodd–Frank Act, which introduced new rules for private fund advisers and hedge funds. Key enforcement actions have involved prominent firms like Goldman Sachs and Bernard L. Madoff Investment Securities, testing the limits of the Act's anti-fraud provisions. Category:1940 in American law Category:United States federal securities legislation Category:1940 in economics