Vanderbilt Law Review

First Page



There were many questionable business methods which could be used by advisers prior to the passage of the Act. In 1939, it was not uncommon for an adviser to arrange that one client buy a certain security and that another sell the same one. Where the adviser operated on the then commonly accepted basis of receiving a proportion of profits made by his clients, he could not lose by using this technique. The adviser's sole concern was to seek new clients to replace those whose assets or credulity were exhausted. Adviser custody of clients' funds was the basis of most deceptive practices. Instead of buying and selling in the interest of the client there was frequently a shifting of high quality securities to the adviser's personal account and the placing of his unwanted issues in the client's account. These basic practices and the infinite variations thereof resulted in the passage of the Investment Advisers Act of 1940. It is significant that the reputable advisers supported the measure.