United StatesInvestment Advisers Act of 1940 section 206, prohibited transactions by investment advisers
In force.
An AI sector rules rule binding private bodies.
- Enforcement body
- Securities and Exchange Commission
- Instrument type
- an act of a legislature
- Obligation class
- Prohibition, Disclosure
- Audit expectation
- none
As of .
What it requires
- It reaches you if you are an investment adviser, meaning 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 (subject to the exclusions in section 202(a)(11) of the Advisers Act): do not use the mails or any means or instrumentality of interstate commerce, directly or indirectly, to employ any device, scheme, or artifice to defraud any client or prospective client (section 206(1)).
- Do not engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client (section 206(2)).
- Before completing a transaction in which you act as principal for your own account and knowingly sell a security to or purchase a security from a client, or act as broker for a person other than the client and knowingly effect a sale or purchase for the client's account, disclose to the client in writing the capacity in which you are acting and obtain the client's consent; this does not apply to a transaction with a customer of a broker or dealer that is not acting as an investment adviser in relation to the transaction (section 206(3)).
- Do not engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative, as the Commission defines such acts, practices, and courses of business by rule (section 206(4)).
What this law does
Section 206 of the Investment Advisers Act makes it unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, to employ any device, scheme, or artifice to defraud any client or prospective client. Section 206 also makes it unlawful for an investment adviser to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.
It further bars an investment adviser, acting as principal for its own account, from knowingly selling any security to or purchasing any security from a client, and bars an adviser acting as broker for a person other than the client from knowingly effecting a sale or purchase of any security for the client's account, in either case without disclosing to the client in writing before completion of the transaction the capacity in which it is acting and obtaining the client's consent.
The prohibitions of that paragraph do not apply to any transaction with a customer of a broker or dealer if the broker or dealer is not acting as an investment adviser in relation to the transaction. Section 206 also makes it unlawful for an investment adviser to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative, and the Commission defines such acts, practices, and courses of business by rule.
An investment adviser is 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.
The definition does not include, among others, a bank (with an exception for a bank acting as adviser to a registered investment company), a lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of the profession, a broker or dealer whose performance of such services is solely incidental to the conduct of its business and who receives no special compensation, or a family office as defined by Commission rule.
The Commission may bring an action in the proper district court of the United States to enjoin any act or practice constituting a violation of the Advisers Act or of any rule, regulation, or order under it.
Guidance on this law
How the bodies that enforce this law read it. Guidance binds nobody by itself, so LexLint never raises a finding from it; the duty is this law's.
- Commission Interpretation Regarding Standard of Conduct for Investment Advisers, the Securities and Exchange Commission
When LexLint raises it
When your app profile says your app provides financial services or makes high-risk automated decisions.