When the SEC or its staff publishes anything related to rules, regulations, or interpretations, one of the most common prefatory pontifications is that the application of such rules, regulations, or guidance “depends on the facts and circumstances.” Read: We’re not going to paint ourselves into a corner and give specifically prescriptive advice that can be misconstrued and exploited.
To support this assertion, I searched the exact phrase “facts and circumstances” on the SEC.gov website. It generated 8,466 results.
This is the double-edged sword of a ‘principles-based’ approach to regulation: it affords regulatees and potential regulatees both the interpretive flexibility to apply such regulation to their unique situation and, at the same time, imbues the uncertainty of not knowing whether their interpretation and application of such regulation to their unique situation are valid. This is partially why I am gainfully employed to provide legal and compliance counsel to investment advisers and financial planners.
Unfortunately, this same “facts and circumstances” analysis must be applied to even the most threshold of questions under the Investment Advisers Act of 1940: Who exactly is required to register as an investment adviser?
This question is particularly acute for financial coaches who provide advice regarding certain financial and investment-adjacent topics, but are not registered as investment advisers with either the SEC or any state securities authority.
What follows is a discussion of the “facts and circumstances” that would indicate that a financial coach must register as an investment adviser.
Know Your A-B-C-S: Determining Investment Adviser Status
For anyone who’s taken the Series 65 or Series 66 examination (the NASAA Investment Advisers Law Examination and the NASAA Uniform Combined State Law Examination, respectively), the “ABC Test” for determining whether a person needs to register as an investment adviser likely rings a bell.
However, for current or aspiring financial coaches who have never studied for a qualifying examination to associate with a registered investment adviser, the ABC Test may seem little more than a forced reference to Sesame Street. Truth be told, it is actually a legitimate and helpful mnemonic to help recall the definitional elements of the term “investment adviser” under the Investment Advisers Act of 1940 (and who, therefore, must register as an investment adviser accordingly).
In overly-simplified form, the ABC Test is often stated as follows:
- Advice
- Business
- Compensation
In other words, a person who is in the Business of rendering Advice about securities for Compensation is, absent an exclusion or exemption, required to register as an investment adviser.
However, astute readers will notice that one keyword is not part of the A, B, or C mnemonic – and that word is “securities”. This one word is so important, both for purposes of this article and assessing investment adviser registration generally, that I am going to be so bold as to suggest that the age-old ABC Test be revised to henceforth be known as the ABCS Test:
- Advice
- Business
- Compensation
- Securities
Need to assess whether you’re required to register as an investment adviser? Let’s learn (or re-learn) our ABCS.
The Investment Advisers Act Of 1940 & Investment Advisers Act Release No. 1092
There are 2 primary bodies of law from which investment adviser regulation originates: 1 Federal, 1 state. The Federal regulatory regime for investment advisers is the Investment Advisers Act of 1940, and the state regulatory regime for investment advisers is the Uniform Securities Act of 2002 or some state-specific derivation thereof (or, previously, the Revised Uniform Securities Act of 1985 or the Uniform Securities Act of 1956). Both the Advisers Act and the Uniform Securities Act define the term “investment adviser,” albeit differently in at least one important respect, which we’ll discuss below.
When unpacking the definitional elements of “investment adviser,” it will also be helpful to draw from Investment Advisers Act Release No. 1092: Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services. Though originally published in 1987, it still serves as a helpful insight into the SEC staff’s thinking as applied to the round pegs that don’t necessarily fit into the square hole of what is traditionally considered to be an investment adviser. Release 1092 will be referred to throughout this article with financial coaches in mind.
Section 202(a)(11) of the Advisers Act defines an investment adviser as follows:
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…
What follows in the definition is a list of those that are excluded from the definition of investment adviser, but we’ll get to those exclusions in a later section. Let’s first unpack this definition and tie it back to the ABCS test.
“ADVISING OTHERS”
The “advising others” component of the definition of an investment adviser is perhaps the easiest to satisfy, as the rendering of advice to others includes advice that is rendered to nearly all third parties.
Pursuant to various SEC staff no-action letters on this “advising others” element of the ABCS test, the SEC staff has only excluded from the definition of investment adviser those persons that limit the provision of investment advice to wholly owned subsidiaries or parent companies (i.e., closely affiliated entities within the same company org chart).
In addition to not actually providing any investment advice to any third party outside of the direct company hierarchy, such excluded entities did not otherwise hold themselves out to the public as providing investment advisory services to any third party.
Thus, if a financial coach is, in fact, providing their financial coaching services to a third party, the “advising others” element is clearly satisfied.
“IN THE BUSINESS”
Release 1092 is particularly helpful when assessing whether a financial coach is considered to be in the “business” of advising others (with respect to securities for compensation), as what constitutes a “business” is facially vague. Though technically, there are 2 different references to the “business” of an investment adviser within the definition (“engaging in the business” and “part of a regular business”), the SEC staff has explicitly stated that the language difference is, effectively, form over substance.
The “business” of advising others need not constitute the principal business activity of a financial coach in order for such financial coach to otherwise meet the definition of investment adviser. Instead, Release 1092 states that “the giving of advice need only be done on such a basis that it constitutes a business activity occurring with some regularity. The frequency of the activity is a factor, but is not determinative.”
This elaboration provides some further clues as to what constitutes being in the “business”, but what exactly constitutes “some regularity”? In this regard, the SEC staff sets a fairly low bar, as “anything other than rare, isolated and non-periodic instances” of advising others with respect to securities for compensation is enough to meet the “business” element of the ABCS test.
In addition, a person who “holds himself out as an investment adviser or one who provides investment advice” or who “receives any separate or additional compensation that represents a clearly definable charge for providing advice about securities, regardless of whether the compensation is separate from or included within any overall compensation” is considered by SEC staff to be in the “business” of advising others.
Baked into this guidance is a clear attempt to make the “business” element of the ABCS test but a puddle to skip rather than a river to ford. I have to imagine most financial coaches will advise others in more than “rare, isolated and non-periodic” instances if endeavoring to make their endeavors a going concern, and will likely at least have a website or some social media presence on which their services are offered to the public (thus satisfying the “holding out” component of the guidance above).
However, there is one seeming caveat that appears in Release 1092 that isn’t necessarily apparent in the definition of investment adviser in the Advisers Act: advising others in a general, non-specific manner. Stated conversely, only “specific investment advice” about “specific securities” or “specific categories of securities” – including analyses or reports about specific securities or specific categories of securities – are deemed to satisfy the “business” element of the ABCS test. This specificity requirement is a bit muddy, but it appears the intent was to exclude from the definition of investment adviser those that provide only general advice that is not tailored to the individual recipient, and that does not concern specific securities or categories of securities.
In other words, a general recommendation to allocate assets to securities is not enough for someone to be deemed to be in the “business” of advising others. A recommendation to allocate assets to stocks, bonds, mutual funds, or exchange-traded funds, on the other hand, would seem to be specific enough as all such securities are “categories” of securities rather than securities in the undelineated sense of the term.
“FOR COMPENSATION”
The SEC staff sets another low bar for what satisfies the “compensation” element of the ABCS test in Release 1092, as “compensation” is intended to include “the receipt of any economic benefit.” The compensation received for the provision of advice regarding securities also need not be separate from compensation received for some other, wholly unrelated service, and instead can only represent a portion of aggregate compensation received for a variety of services.
For example, if a financial coach is compensated in the form of a single subscription fee for a weekly newsletter, online community membership, and quarterly securities portfolio analysis, the fact that no separate compensation is paid solely for the quarterly securities portfolio analysis is irrelevant.
The compensation also does not necessarily need to be paid by the recipient of the advice directly. If a third party compensates a financial coach for the provision of advice regarding securities, the compensation element of the ABCS test is still satisfied. An example of such an arrangement could be a financial coach who provides free financial coaching services to clients but is compensated by the sponsor of a security that is recommended by the financial coach to clients.
Again – the SEC staff’s intent here was to cast a wide net.
“THE VALUE OF SECURITIES OR CONCERNING SECURITIES”
At least with respect to financial coaches, it is this fourth and final element of the ABCS test where the rubber really starts to meet the road. Whereas the first 3 elements described above are fairly easy to satisfy, a financial coach may fall outside the purview of the Advisers Act and the definition of an investment adviser by failing to meet the “securities” element of the ABCS test.
Even if a financial coach is in the business of advising others for compensation, if such advice does not concern securities, then it does not concern the Advisers Act or cause the financial coach to meet the definition of investment adviser therein.
Like the definition of an investment adviser, the definition of a security is also included directly in Section 202(a)(18) of the Advisers Act:
…any note, stock, treasury stock, security future, 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 (including a certificate of deposit) or on any 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, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing.
Notably, not included within the definition of a security are real estate, a commodity future, precious metal, art, and non-variable insurance. Within the definition of investment adviser, “securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest” are also functionally excluded for purposes of the ABCS test.
With respect to financial coaches in particular, advice given in the following areas would also not be captured by the “securities” hook:
- Goal setting
- Debt reduction
- Budgeting
- Establishing appropriate savings
- College aid strategies
- Property & casualty insurance needs analysis
- Optimization of credit card benefits
- Employer salary negotiation
- Vehicle lease versus buy decisions
- Rent versus own decisions (with respect to housing)
- Mortgage refinancing
The list above is by no means exhaustive, but should hopefully convey the point that there can still be a lot of ‘meat on the bone’ for financial coaches who wish to add value but still wish to avoid the investment adviser regulatory regime.
But, as Release 1092 reminds us, the securities hook can be more easily set than one might realize:
The staff believes that a person who provides advice, or issues or promulgates reports or analyses, which concern securities, but which do not relate to specific securities, generally is an investment adviser [assuming the other parts of the ABCS test are met]. The staff has interpreted the definition of investment adviser to include persons who advise clients concerning the relative advantages and disadvantages of investing in securities in general as compared to other investments. A person who, in the course of developing a financial program for a client, advises a client as to the desirability of investing in, purchasing or selling securities, as opposed to, or in relation to, any non-securities investment or financial vehicle would also be “advising” others within the meaning of Section 202(a)(11).”
Thus, even the mere comparison of investing in securities in general as opposed to real estate, for example, is enough to trigger the securities element of the ABCS test.
Release 1092 goes on to explain why certain promoters (formerly known as solicitors) may also need to register as an investment adviser:
A person providing advice to a client as to the selection or retention of an investment manager or managers also, under certain circumstances, would be deemed to be ‘advising’ others within the meaning of Section 202(a)(11).
The point is that there generally must be some form of advice, analysis, report, or valuation regarding securities for a financial coach to fall within the definition of investment adviser – at least under Federal law.
Categories Excluded From The Definition Of Investment Adviser
Even if someone otherwise meets the definition of investment adviser in the Advisers Act, there are several categorical exclusions that apply to the following persons:
- Certain banks and bank holding companies;
- Lawyers, accountants, engineers, or teachers whose performance of such services is solely incidental to the practice of their profession;
- Note: This limited exclusion pertaining to the lawyer, accountant, engineer, or teacher assumes the following:
- They do not hold themselves out to the public as providing investment advice;
- They provide such investment advice only in a manner that is connected with and reasonably related to the legal, accounting, engineering, or teaching professions (respectively); and
- They charge fees based on the same factors used with respect to their legal, accounting, engineering, or teaching professions (respectively).
- Any broker or dealer whose performance of such services is solely incidental to the conduct of their business as a broker or dealer and who receives no special compensation therefor;
- The publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation;
- Note: This exclusion is colloquially referred to as the “Publisher’s Exclusion”.
- Most nationally recognized statistical rating organization;
- Family offices; and
- Other persons not within the intent of the SEC.
- Note: This limited exclusion pertaining to the lawyer, accountant, engineer, or teacher assumes the following:
My guess is that most of these available exclusions will not be applicable to financial coaches – with the potential exception of the Publisher’s Exclusion.
WHEN THE PUBLISHER’S EXCLUSION MAY APPLY TO A FINANCIAL COACH
In order for a financial coach to fall within the Publisher’s Exclusion, the financial coach must issue a publication that is “bona fide” in the sense that it must reflect a genuine endeavor to facilitate protected First Amendment speech about investment-related topics and not simply be a disguised means of rendering specifically tailored investment advice.
In addition, the Publisher’s Exclusion requires that the publication must solely facilitate disinterested, impersonal investment discussion and general, non-specific advice. Touting investment products in which the publisher has a financial interest, for example, would not be appropriate (i.e., the publisher shouldn’t stand to benefit from any impersonal advice or recommendations made through a publication). The “impersonal” aspect of the Publisher’s Exclusion means that the publication must offer only advice that is not tailored to the individual needs of a specific client, group of clients, or portfolio.
The publication itself must also be in “general and regular circulation,” which essentially means that it should not be purely reactionary to market events or otherwise infrequently available to the general public. The term “regular” has been interpreted to mean “important to the securities market.”
The takeaway with respect to the Publisher’s Exclusion is that even if a financial coach otherwise meets the definition of investment adviser by satisfying the ABCS test, the financial coach may still be able to skirt the definition of investment adviser if all of the conditions of the Publisher’s Exclusion described above are met.
For those who are interested, the U.S. Supreme Court addressed the Publisher’s Exclusion in Lowe v. SEC, 472 U.S. 181 (1985).
State Securities Laws
Thus far, this article has solely addressed the Federal side of the U.S. regulatory regime with respect to investment advisers. For readers who are familiar with my prior work, you’re likely bracing yourself for a long-winded bemoaning of the state-by-state regulatory patchwork that advisers and would-be advisers have to contend with in addition to the Federal regulatory regime. I feel like I complain about it constantly.
Prior soapboxing notwithstanding, I’ll at least mention in passing that the Uniform Securities Act of 2002 contains a functionally identical definition of investment adviser. It is worth noting, however, that there has been one additional sentence added that, in my opinion, adds more confusion than clarity. The additional sentence reads as follows:
The term [investment adviser] includes a financial planner or other person that, as an integral component of other financially related services, provides investment advice to others for compensation as part of a business or that holds itself out as providing investment advice to others for compensation.
Notice any particular term missing from the additional sentence above? A term that, as omitted, appears to significantly broaden the definition of “investment adviser” for model state securities regulation? I’ll give you a hint: It rhymes with “securities”.
If read literally, it would appear that a financial planner (or financial coach, for purposes of this article) need not render advice concerning securities in order to be swept within the definition of an investment adviser, as the term “securities” is nowhere to be found in reference to financial planners and the financially related services they render. This would, in turn, seem to create a glaring incongruity with the definition of investment adviser contained in the Advisers Act.
Luckily, Comment 17 in the Uniform Securities Act of 2002 appears intended to avoid such incongruity and cites Release 1092 in the process:
The purpose of this sentence is to achieve functional regulation of financial planners who satisfy the definition of investment adviser… (similar approach in Securities and Exchange Commission interpretative Release).
Why the drafters did not simply include the “concerning securities” condition in the additional sentence regarding financial planners is beyond me, but Comment 17 provides enough reassurance for me not to step back atop my soapbox.
Interestingly, the same Comment 17 goes on to state the following:
This reference [to financial planners] is not intended to preclude persons who hold a formally recognized financial planning or consulting designation or certification from using this designation. The use by a person of a title, designation or certification as a financial planner or other similar title, designation, or certification alone does not require registration as an investment adviser.
Setting aside what a credentialing organization like CFP Board may have to say about the matter, at least for purposes of the Uniform Securities Act of 2002, a financial coach could conceivably use their CFP marks without automatically triggering the need to register as an investment adviser.
Understanding The Boundaries: Examples That Show When A Financial Coach Is Considered An Investment Adviser
To help illustrate when an unregistered financial coach may cross the line and fall within the definition of investment adviser under the Advisers Act, let’s tease out a few examples with a fictional financial coach that we’ll refer to as Frank the Tank:
- Frank the Tank buys the bulldozeyourdebt.com website domain and begins to offer an online course for $99 in which he educates recent college graduates on how to quickly pay off their student loans, how much they should set aside in a savings account, and why they should all invest in I bonds.
- Result: Though I bonds may be securities, they are obligations of the U.S. government, and those who render investment advice exclusively with respect to such U.S. government securities are excluded from the definition of investment adviser.
- Frank the Tank gets his insurance license and begins to pitch term life insurance to his Debt Bulldozer online course attendees. He earns a commission for any term life insurance product sales.
- Result: non-variable insurance, like term life insurance, is regulated by state insurance commissions, and is therefore not considered a security.
- One attendee of the Debt Bulldozer course asks Frank the Tank whether he should invest in Bed Bath & Beyond Frank the Tank isn’t sure he has enough time to do so, but for an additional $100, he provides a detailed analysis of the stock and a ‘buy’ recommendation to the course attendee. Since Bed Bath & Beyond subsequently filed for bankruptcy, Frank the Tank vowed never to discuss a security ever again.
- Result: Even though Frank the Tank was compensated for his stock pick, this isolated incident is likely not enough to render him in the “business” of providing advice for compensation concerning securities.
- Since his Debt Bulldozer online course hasn’t gained much traction, Frank the Tank begins to periodically post investment commentary on Substack to a handful of readers for a small subscription fee. He never names any specific securities, but he does advocate for investing in low-cost exchange-traded funds generally instead of letting unallocated cash sit in a bank account.
- Result: Frank the Tank is likely unable to avail himself of the Publisher’s Exclusion, as his investment commentary is described as “periodically” posted to a “handful” of readers (i.e., not in general and regular circulation). Pursuant to Release 1092, even a comparative analysis of the pros and cons of securities versus non-securities investments would generally be enough to render someone an investment adviser (assuming the other elements of the ABCS test are met, which are in this particular fact pattern).
- Frank the Tank’s Substack takes off, and he moves his investment commentary over to his own bulldozeyourdebt.com website. He now has hundreds of thousands of readers, publishes general, non-specific advice about investments once a week, and charges a nominal subscription fee. To boost revenue, he accepts a publicly traded beer company as a sponsor. Occasionally, he will tout the sponsor beer company’s stock as part of his investment commentary.
- Result: The Publisher’s Exclusion is off the table due to the disinterested nature of his publication’s discussion of the stock of the beer company that is also a paid sponsor.
- Frank the Tank decides to expand his knowledge and obtains his CFP He buys the heyimacfp.com website domain and starts offering one-on-one paid coaching sessions, during which he offers specific advice to clients about tracking financial goals, managing cash flow, managing savings-to-debt ratios, and investing in real estate and commodity futures.
- Result: Likely not an investment adviser, as financial goal tracking, managing cash flow, and managing savings-to-debt ratios do not specifically concern securities. Direct real estate and commodity futures are not securities. The mere credentialing as a CFP professional is not enough to automatically result in an individual falling within the definition of an investment adviser. Frank the Tank is beginning to push the envelope here, though, and would want to remain mindful of how he holds himself out to the public and ensure the advice he is rendering does not bleed over into securities.
- Frank the Tank begins to offer his Debt Bulldozer course attendees a quarterly assessment of their securities portfolios. Because he’s not yet confident in his securities portfolio analysis skills, he does not initially charge any separate fee for this service.
- Result: Assuming Frank the Tank still charges $99 for his Debt Bulldozer course, the fact that he receives no separate compensation specifically for his securities portfolio assessments is not enough to moot the compensation he receives for the Debt Bulldozer Course overall (i.e., part of the $99 course fee would likely be imputed to the securities portfolio assessments).
- After a long night of drinking and streaking, Frank the Tank signs up for TikTok and begins to proclaim indexed universal life insurance as God’s greatest gift to mankind and recommends that everyone ‘invest’ in IULs. He receives compensation from the life insurance companies that issue such products.
- Result: Though the SEC originally tried to regulate indexed annuities like IULs as securities pursuant to Rule 151A of the Securities Act of 1933 (adopted in January 2009), a last-minute amendment to the Restoring American Financial Stability Act of 2010 (part of the Dodd-Frank Act regulatory avalanche) and Court of Appeals for the District of Columbia Circuit decision reversed Rule 151A and resulted in IULs remaining under the regulation of state insurance commissions. Thus, IULs are not currently regulated as securities.
Even in Release 1092, the SEC staff couldn’t resist couching their interpretive position with the tried-and-true “facts and circumstances” qualifier: “Whether a person providing financially related services of the type discussed in this release is an investment adviser within the meaning of the Advisers Act depends upon all the relevant facts and circumstances.”
As much as I hate to admit it, the SEC staff is not wrong in this regard. As has hopefully been conveyed above (and specifically in the illustrative examples outlining Frank the Tank’s own journey as a financial coach), just a few tweaks to a fact pattern can have significant consequences for financial coaches who are assessing the potential requirement to register as an investment adviser.
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This article originally appeared in Michael Kitces’ Nerd’s Eye View on December 6, 2023.
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