Summary. Two federal regimes govern people who give investment advice and people who effect securities transactions, and the line between them determines registration, standard of conduct, examination, and enforcement exposure. This toolkit runs both: the adviser definition and its exclusions, federal versus state registration and the exempt reporting categories, the fiduciary duty and recurring conflicts, the compliance rules generating most examination findings, private fund formation and the fee and valuation practices enforcement targets, broker-dealer registration and Regulation Best Interest, the finder problem, and the examination and enforcement process.

What this toolkit is for, and who should use it

A person who introduces companies to investors for a percentage of the raise is probably an unregistered broker. A person who publishes stock recommendations for a subscription fee is probably an investment adviser. Neither believes they are, and both are wrong in ways that carry rescission rights, disgorgement, and enforcement exposure.

This toolkit is for a firm evaluating whether it must register, a registered firm building or auditing a compliance program, and counsel advising either.

Roadmap at a glance

  1. Who is an investment adviser.
  2. Registration — federal, state, and exempt reporting.
  3. Fiduciary duty and conflicts.
  4. The compliance program.
  5. Custody.
  6. Marketing.
  7. Books, records, and communications.
  8. Private funds.
  9. Broker-dealer status and the finder problem.
  10. Regulation Best Interest and dual registration.
  11. Examinations.
  12. Enforcement, and a build sequence.

Stage 1 — Who is an investment adviser

  • Section 202(a)(11): a person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in them, directly or through publications.
  • "For compensation" means any economic benefit, need not be paid by the person advised, and need not be separately stated. This is the element misjudged most often.
  • Exclusions, each narrow: banks; lawyers, accountants, engineers, and teachers whose advice is solely incidental to their profession; brokers and dealers whose advice is solely incidental and who receive no special compensation; publishers of bona fide publications of general and regular circulation; certain government securities advisers and rating agencies; and family offices under a separate rule.
  • Advice about asset allocation, about selecting managers, and about whether to hold all count.

Resources

Stage 2 — Registration

  • Section 203A divides authority: generally state registration below $100 million in regulatory assets under management, SEC registration at or above $110 million, with a band in between and exceptions for advisers to registered funds, advisers required to register in fifteen or more states, internet advisers, and others.
  • Form ADV: Part 1 structured data including disciplinary history; Part 2A the plain-English brochure; Part 2B supplements for advisory personnel; and Part 3 (Form CRS) the retail relationship summary in prescribed format.
  • Annual updating amendment within 90 days of fiscal year end, and prompt amendments for disciplinary events, custody changes, and control changes.
  • Exempt reporting advisers under the private fund adviser exemption (solely private funds, under $150 million in U.S. assets) or the venture capital fund adviser exemption, filing portions of Form ADV publicly and remaining subject to the antifraud provisions, the pay-to-play rule, and examination authority.
  • State registration brings its own examination requirements for representatives, net worth or bonding rules, and in several states custody prohibitions and advertising rules stricter than the federal regime.

Stage 3 — Fiduciary duty and conflicts

  • An adviser is a fiduciary, enforced through the antifraud provisions, with duties of care and loyalty.
  • Care: advice in the client's best interest based on a reasonable understanding of their objectives; best execution where the adviser trades; and monitoring consistent with the engagement's scope.
  • Loyalty: eliminate conflicts or make full and fair disclosure specific enough for informed consent. "May have a conflict" is inadequate where a conflict exists.
  • Recurring conflicts: proprietary and affiliated products; share class selection where a cheaper class was available; cash sweep arrangements; principal and cross trades; soft dollars within the § 28(e) safe harbor; allocation of investment opportunities; fee and expense allocation in private funds; outside business activities; and personal trading.
  • Rollover recommendations are the highest-risk retail transaction, examined under the Advisers Act duty, Regulation Best Interest, and the Department of Labor framework simultaneously. Document the comparison of costs, services, and alternatives, including leaving the assets in the plan.

Stage 4 — The compliance program

  • Rule 206(4)-7-7): written policies and procedures reasonably designed to prevent violation, reviewed annually for adequacy and effectiveness, with a chief compliance officer who is competent, knowledgeable, and empowered.
  • Tailor the manual to the actual business. A vendor template never customized is the classic finding, as is an annual review documented in a one-page memo.
  • Code of ethics under Rule 204A-1: standards of conduct, compliance with the securities laws, personal securities reporting by access persons, pre-clearance of IPOs and limited offerings, and violation reporting.
  • Other required policies: business continuity, cybersecurity and identity theft prevention, privacy under Regulation S-P, proxy voting, valuation, trade allocation and errors, gifts and entertainment, political contributions under the pay-to-play rule, and anti-money laundering now that FinCEN has extended program requirements to advisers.
  • Test the program. A compliance manual without periodic testing produces findings; testing with documented remediation prevents them.

Stage 5 — Custody

  • Rule 206(4)-2-2): an adviser with custody — including through fee deduction, a general power of attorney, or serving as general partner of a fund — must use a qualified custodian, ensure quarterly account statements are sent to clients, and undergo an annual surprise examination, unless an exception applies.
  • Pooled vehicles may rely on an annual audit by a PCAOB-registered firm distributed to investors within 120 days (180 for funds of funds). Missing the deadline is a custody rule violation, and it happens most often at first-time funds that engaged the auditor late.
  • Inadvertent custody is a routine deficiency: a standing letter of authorization, a misplaced client check, or access to a client's login credentials.
  • Identify every arrangement that could constitute custody, and document the analysis.

Stage 6 — Marketing

  • Rule 206(4)-1-1) consolidated the advertising and cash solicitation rules.
  • Testimonials and endorsements are permitted with disclosure of client status, compensation, and material conflicts, plus oversight, a written agreement for compensated promoters, and disqualification screening.
  • Performance: net performance with equal prominence to gross; prescribed one-, five-, and ten-year periods; related performance including all similar portfolios unless exclusion does not change results; extracted performance with the total portfolio's performance; and predecessor performance requiring personnel and account continuity.
  • Hypothetical performance — model, backtested, targeted, or projected — only with policies ensuring relevance to the intended audience and sufficient information to understand the criteria and assumptions, which generally makes it inappropriate in mass advertising including a public website.
  • General prohibitions on untrue statements, unsubstantiated claims, misleading omissions, unfair treatment of risks and benefits, and cherry-picking.
  • Substantiate every claim before it runs, and retain the substantiation with the advertisement.

Stage 7 — Books, records, and communications

  • Rule 204-2 requires extensive and specific records: financial records, order memoranda, communications relating to advice, advertisements and their substantiation, performance calculation support, client agreements, and compliance records — retained five years, the first two in an easily accessible place.
  • Off-channel communications have produced the largest penalties of recent years across the industry, with admissions and mandated compliance consultants. The lesson is not to ban messaging; it is that a policy nobody enforces, in a firm where senior personnel are the worst offenders, is an aggravating fact.
  • Provide an approved, captured channel people will actually use, monitor for leakage, and discipline consistently at every level.
  • Preserve on notice: a document request, a subpoena, or a complaint triggers a hold covering personal devices.

Stage 8 — Private funds

  • Fund exclusions from the Investment Company Act: § 3(c)(1) for funds with no more than 100 beneficial owners (250 for a qualifying venture capital fund), and § 3(c)(7) for funds owned exclusively by qualified purchasers.
  • The offering under Regulation D, with accredited investor verification for Rule 506(c), no general solicitation for 506(b), a Form D, and blue sky notices.
  • Performance fees only from qualified clients under Rule 205-3, tested by looking through to investors for a fund. Charging carried interest to a non-qualified client is a straightforward violation.
  • Fees and expenses — the largest enforcement category. Recurring problems: expenses charged without authorization in the partnership agreement; broken-deal expenses allocated entirely to the fund; accelerated monitoring fees on exits without disclosure; management fee offsets miscalculated; operating partners presented as adviser personnel but paid by portfolio companies; and shared expenses allocated without a documented methodology.
  • Valuation of illiquid holdings is a structural conflict because it drives fees and reported performance. A defensible process has a written policy, consistent methodology, an independent input where practical, documented committee review, and back-testing against realizations.
  • Side letters — preferential liquidity and information rights are the two categories raising the most serious concerns.
  • Form PF for larger advisers, with current-event reporting for defined triggers.
  • Note that the SEC's 2023 private fund rules were vacated by the Fifth Circuit, leaving the fiduciary and antifraud obligations as the operative constraint.

Stage 9 — Broker-dealer status and the finder problem

  • Exchange Act § 15(a) requires registration to effect securities transactions. A broker effects transactions for the account of others; a dealer buys and sells for its own account as part of a regular business.
  • Factors indicating broker activity: transaction-based compensation (close to dispositive); soliciting investors; participating in negotiations or advising on the merits; handling funds or securities; regularity of participation; and prior involvement in securities sales.
  • There is no general federal finder exemption. Rule 3a4-1 provides a safe harbor for associated persons of an issuer receiving no transaction-based compensation; a proposed federal finder exemption was never adopted; and several states have limited exemptions with conditions.
  • Consequences of unregistered activity: injunctive relief, disgorgement, and penalties; a rescission right for purchasers under § 29(b); an unenforceable fee agreement; and a disclosure item complicating every subsequent financing.
  • Registration requires an SRO membership — for nearly all firms, FINRA — with a New Member Application taking six months to a year, principal qualification examinations, supervision under Rule 3110, advertising review under Rule 2210, and the net capital and customer protection rules.

Resources

Stage 10 — Regulation Best Interest and dual registration

  • Rule 15l-1 requires a broker-dealer making a recommendation to a retail customer to act in the customer's best interest without placing its own interests ahead, through four obligations:
    • Disclosure of capacity, fees and costs, services and material limitations, and conflicts;
    • Care — reasonable diligence, care, and skill; a reasonable basis to believe the recommendation is in the customer's best interest given their profile; and consideration of reasonably available alternatives and cost;
    • Conflict of interest — identify and disclose or eliminate; mitigate conflicts creating incentives for associated persons; and eliminate sales contests, quotas, bonuses, and non-cash compensation tied to specific securities within a limited period; and
    • Compliance — written policies reasonably designed to achieve compliance.
  • Reg BI is not a fiduciary standard, and it applies at the time of a recommendation rather than continuously — but the documentation expectations are substantial and several states impose more.
  • Dual registrants must disclose capacity at the time of each recommendation, deliver Form CRS explaining both, supervise for both regimes, and address wrap fee and trading-away disclosure.

Stage 11 — Examinations

  • Begins with a document request letter covering one to three years: the compliance manual and annual reviews, the code of ethics and personal trading records, client lists and account information, advisory agreements, fee calculations, trade blotters, allocation records, marketing materials, custody arrangements, business continuity and cybersecurity policies, and email.
  • Response windows are short — often two weeks — and the volume is large.
  • Recurring priorities: fiduciary duty and conflicts; fee calculation and billing accuracy; the marketing rule; custody; complex or illiquid products sold to retail investors; cybersecurity and resiliency; anti-money laundering; the use of artificial intelligence in advice and operations; branch supervision; and off-channel communications.
  • Handling it: involve counsel at the request stage; designate a single point of contact; produce completely and on time; prepare witnesses including on what they do not know; and do not remediate silently — the staff should learn of a fix from you, with documentation.
  • Most examinations end with a deficiency letter requiring a written response describing corrective action; serious findings are referred to enforcement.

Stage 12 — Enforcement and the build sequence

  • Enforcement proceeds through a formal order, subpoenas, testimony, and a Wells notice with an opportunity to respond. Settlement is the norm — censure, cease-and-desist, disgorgement with interest, penalties, undertakings, and sometimes a compliance consultant or a bar.
  • SEC v. Jarkesy, 603 U.S. 109 (2024) held that a defendant facing civil penalties for securities fraud is entitled to a jury trial in federal court, pushing contested fraud actions out of the in-house forum and changing settlement dynamics.

A build sequence for a new adviser: determine the registration jurisdiction and whether an exemption applies before accepting a client; screen owners and supervised persons for statutory disqualification; file Form ADV with narrative disclosure that describes the actual business; adopt a tailored compliance program with a code of ethics and the required policies; appoint an empowered CCO; establish the custody arrangement and confirm no inadvertent custody; build the books and records system including compliant archiving on day one; set up performance calculation and marketing review before anything goes out; execute written client agreements; and calendar the annual obligations.

A diagnostic for an existing firm: Can you produce a fee calculation for any account in ten minutes and prove it matches the agreement? Are all business communications captured, including on personal devices? Does anything on the website constitute hypothetical performance? Has anyone read the compliance manual in the last year? Is there any arrangement constituting custody that has not been identified as custody? Each has been the opening question of a bad examination.

Master resource index

Articles

Guides

Checklists

Related toolkits

External and primary sources

  • Investment Advisers Act: 15 U.S.C. § 80b-2 (definitions); § 80b-3 (registration and exemptions); § 80b-6 (prohibited transactions)
  • Rules 206(4)-1-1) (marketing); 206(4)-2-2) (custody); 206(4)-7-7) (compliance); 204A-1 (code of ethics); 204-2 (books and records); 205-3 (performance fees)
  • Exchange Act § 15(a) and Rule 15l-1 (Regulation Best Interest); Rules 15c3-1 and 15c3-3; Rule 3a4-1
  • Investment Company Act § 3(c)(1) and § 3(c)(7); Regulation D; FINRA rules 2111, 2210, and 3110
  • SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963); SEC v. Jarkesy, 603 U.S. 109 (2024)
  • Advisers Act: 15 U.S.C. § 80b-2(a)(11) (definition), § 80b-3 (registration), § 80b-3(b)(3) and § 80b-3(m) (private fund and exempt reporting adviser exemptions), § 80b-3a (federal/state division), § 80b-6 (antifraud), § 80b-6(4), § 80b-4 (records), § 80b-5 (advisory contracts).
  • Adviser rules: 17 C.F.R. § 275.203(m)-1, § 275.204-2 (books and records), § 275.204A-1 (code of ethics), § 275.206(4)-1 (marketing), § 275.206(4)-2 (custody), § 275.206(4)-7 (compliance), § 275.206(4)-8 (pooled vehicles); Form ADV Parts 1A, 2A, 2B, and 3 (Form CRS).
  • Broker-dealer: 15 U.S.C. § 78c(a)(4) (broker), § 78o(a) (registration), § 78o(b)(4) (statutory disqualification), § 78o(l); 17 C.F.R. § 240.15l-1 (Regulation Best Interest), § 240.17a-3 and § 240.17a-4 (records), § 240.15c3-1 (net capital), § 240.15c3-3 (customer protection).
  • Fund structuring: 15 U.S.C. § 80a-3(c)(1) and § 80a-3(c)(7); 17 C.F.R. § 230.506(b)–(c); 17 C.F.R. § 275.205-3 (performance fees and qualified clients).
  • Interpretive authority: SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963); Release No. IA-5248 (June 5, 2019); FINRA Rules 2111, 3110, 3210, and 4511.

This toolkit is educational and not legal advice. SEC, FINRA, and state rules change frequently, several rules discussed here have been the subject of litigation, and state registration and conduct requirements differ. Consult qualified securities counsel before registering, relying on an exemption, or responding to an examination.