Registration as an investment adviser is defined in general as "a natural person or entity who for compensation engages in the business of providing advice to others regarding securities" according to the Investment Advisers Act of 1940. The frequency that advice is given out regarding securities will determine whether someone is "in the business of providing investment advice" or not. The compensation paid to an investment adviser can include direct or indirect payments, either getting paid right from the person who is being advised or getting their pay via a third party. The words investment adviser is a fairly broad term, but there are specific people who are currently regulated, but do not fall under the investment adviser umbrella.
Those people include registered representatives and brokers, at least on the condition that the investment advice they provide is not the main business of their brokerage. Limitations on registered advisers charging performance based fees say that they must also not get any added bonus payment or special payment for their words of wisdom. Also included are publishers who work for a publication that is regularly and generally circulated. These publishers must give "impersonalized" advice to investors as well. The definition of this exemption has widened and now it also includes those that provide services recommending stock over the phone and through email.
Each state has its own policies regarding registration as an investment adviser and exemption for investment advisers. Even though all hedge fund managers will be considered an investment adviser, depending on where they are located, they may or may not have to register as one. A manager will be considered exempt from having to register as a an investment adviser, according to the Advisers Act, if they have had fewer than 15 clients in the last year or they do not publicly advertise themselves as an investment adviser. They can gain an exempt status if they do not advise registered investment or business development companies.
In general, hedge fund managers who complete registration as an investment adviser may get compensated based on performance by the investors, if each investor can be considered a "qualified client." The Investment Advisers Act of 1940 says that a person can be considered qualified client if the fund manager can be reasonably certain that they have a net worth of more than $1.5 million when the investment is actually made, in addition to having more than $750,000 under the control of the fund manager. Some states, however, use lower thresholds, like $1.0 million and $500,000.
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