The Advice You Give
By Lacey Shrum
Generally, any time you are giving advice you need to register. Attorneys, accountants, psychologists, etc. There is no difference when you are giving advice on securities.
Both the federal SEC and state of Texas has the same definition of an investment adviser: any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.
In both jurisdictions, if you are an investment adviser, you must 1) find an exemption or 2) register with the appropriate jurisdiction.
First we will define the straightforward meaning of an investment adviser and through various blog posts we will document practices that are exempt from the definition as well as what filings may be required if you are exempt or do not fall under an exemption.
“For Compensation” means any economic benefit, including an advisory fee or something else in exchange for the information.
“Engaged in a Business” does not have to be the sole or primary activity of the person. Factors include:
- Does the person hold herself out as an investment adviser;
- Is compensation clearly tied to the advice given;
- The frequency and specificity of the investment advice. (One-off or isolated occasions are not necessarily investment advice.)
“Providing Advice” includes market trends, asset allocation, the selection and retention of other advisers, the advantages of securities over other investments,or providing a selective list of securities.
“To Others” can include other individuals, entities, a fund, or limited partners.
“Regarding Securities” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Investment contract, highlighted above, is where individuals and firms can get themselves hung up with the regulators by inadvertently, yet effectively, giving investment advice regarding a security. The Howey Test is most often used to determine whether something is or isn’t an investment contract and therefore a security.
It is important to know that one can fall under the definition of an Adviser with only one client or advice recipient. This client or recipient can be an individual, a group of individuals, a fund, or an entity.
Lastly, it is imperative that you speak with an attorney regarding your specific situation anytime you are giving financial advice, analysis, opinions, or commentary to a third party. As you will see throughout this series, there are many pieces of law that weave together to make this a sticky legal genre.