SIE Knowledge of Capital Markets Question 26: Answer and Explanation

Question: 26

Which of the following in NOT true regarding the definition of investment advisers?

• A. The Congress passed the act defining them as the result of a concern from the SEC about persons advising investors about what to buy and sell.
• B. They are defined in the Securities Exchange Act of 1934.
• C. An investment adviser is a person who provides guidance, receives a fee for providing guidance, and receives a significant proportion of the adviser's income from providing guidance to investors.
• D. If a person provides any guidance to an individual about buying or selling investments as only a small part of their work, that person is not defined as an investment adviser.

Correct Answer: B

Explanation:

B: Choice B is correct because investment advisers are not defined in the Securities Exchange Act of 1934, which regulates the secondary market. The 1934 Act built on the Securities Act of 1933, which regulates the primary market. After the stock market crash of 1929, and even after the Securities Act of 1933 and the Securities Exchange Act of 1934 provided some responses to the market crash, the SEC was concerned about persons providing advice to those who purchase or sell securities. So, Congress passed the Investment Advisers Act of 1940 to define and regulate investment advisers. Choice A is incorrect because Congress did pass the Investment Advisers Act of 1940 in response to a concern from the SEC about the behavior of persons providing guidance to investors about buying and selling securities. Choice C is incorrect because an investment adviser is a person who does all three of the following: provides specific kinds of guidance to investors, receives a fee for providing guidance, and receives a significant proportion of the adviser's income from providing guidance. Choice D is incorrect because the definition may not apply to a person who provides investment guidance as a very small part of their work.