Identification

• The Investment Advisers Act of 1940 identifies investment advisers who must register with the SEC as those who make use of the mails or any other means of interstate commerce in order to conduct their business. Congress later amended the Investment Advisers Act, making its provisions applicable only to investment advisers with a minimum of $25 million of assets under management. Investment advisers with less than $25 million under management are typically regulated by the individual states.
  
  

History

• The Public Utility Holding Company Act of 1935 authorized a study of investment trusts by the Securities and Exchange Commission. According to References for Business, the study revealed numerous instances of abuse by some investment advisers including questionable fees and unfounded recommendations. The Investment Advisers Act of 1940 was passed to help monitor those involved in providing investment advice across state lines. The act was amended by Congress in 1996 with the passage of the Investment Advisers Supervision Coordination Act.
  
  

Function

• The Investment Advisers Act of 1940 was designed as a means of helping the SEC keep track of individuals and companies involved the practice of interstate investment advice. The act was also intended as a means of understanding the methods of operation used by investment adviser for the solicitation of business. The act does not specify nor dictate the qualifications for investment advisers.
  
  

Exemptions

• Three classes of investment advisers are exempt from registration with the SEC. Investment advisers who only work with clients who are residents of the state where the adviser's business office is located are not required to register, provided they do not give advice regarding securities listed on national exchanges. Investment advisers who only advise insurance companies are not required to register with the SEC. Investment advisers with fewer than 15 clients during the previous 12 months are exempt from registration.
  
  

Warning

• The Investment Advisers Act of 1940 provides severe penalties for anyone who willfully violates any provision of the act. If convicted, a person may be subject to a fine of up to $10,000, imprisonment for up to five years or a combination of both.