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My son does not have any securities licenses but has been DESTROYING the market for almost two years. I want to start trading based on his advice. I don't need warnings about "what if you lose money, will it spoil your relationship?" I need to know if the SEC/IRS can somehow come after him or me if I take his advice without paying him. My guess is "no".

Now, I have read in a few places that I could actually pay him because I would be the only one getting advice from him (less than 15 people) and he is family. Is that just wishful thinking on the part of the other postings I have found? If I do pay him I want to make everything 100% legal so neither one of us ends up in hot water.

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    Can you edit to make the question clear? Title say friend, and free. Body has you paying your son. Feb 14 '21 at 1:34
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    Why do you think the SEC or IRS would come after him or you?
    – RonJohn
    Feb 14 '21 at 3:49
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    Is this "friend" advising you to buy/sell based on information about a company they own or are employed by that is not public information?
    – yoozer8
    Feb 14 '21 at 5:06
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Assuming that your son is not employed by a financial institution and your son is also not employed by any firm that he is trading in, then the general answer is that he will not get in trouble with the SEC.

Each state has a de minimis rule. It is always much smaller than the federal rule. A person can provide advice to some number of people without running afoul of state law. That number is usually very small (3). Your son would still have to conform to all aspects of the state and federal securities laws, he just would not be required to register. Federal law is more flexible than state law is. It is far easier to run afoul of state law than federal law in a situation like this.

The IRS is another matter. Any such transaction would have to be structured as an arm's length transaction. The IRS has a variety of penalty taxes that could be triggered if the transactions do not look like they are being operated as if you were strangers that did not trust or like each other. At the minimum, either of you could find yourself paying a gift tax to both the state and federal governments. Other issues could be triggered if the account is a retirement account or an IRA.

As a rule of thumb, if your son said "go buy Apple stock today," and no money changed hands, then nobody would care as long as he had no insider information and did not work for a financial institution. If your money is commingled with his, or, if funds changed hands such as by paying him, then it could trigger legal or regulatory issues. The one other exception to that would be if your son were performing some type of market manipulation, then if you followed his advice, you may be deemed as manipulating the markets as well.

If the money is any sizable amount and you were either considering commingling your accounts or paying your son, it would probably be worth a trip to an accountant. It would also be a good idea for your son to understand the Investment Advisors Act, the two principal Securities Acts, the Investment Company Act, and your state's Blue Sky Laws. Most states have adopted the version provided by the Uniform Law Commission, but there are notable exceptions. If you are in Louisiana because it is a Civil Law state and not a Common Law state, other issues come about as well. If the both of you live in different states, then the laws of both states must be conformed with.

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  • The fourth paragraph, "As a rule of thumb..." is the essence of the answer.
    – RonJohn
    Feb 14 '21 at 8:00
  • @RonJohn yes. Most people do not run up against the other possible items. Feb 14 '21 at 20:47
  • We both live in Kentucky. No commingling. No payment. No insider info. No market manipulation. Just able to read trends insanely well. He loses sometimes but the wins are huge and offset the losses and then some. One cash account. One IRA. Sounds like we will consult with a local lawyer/accountant just to be safe. Thanks so much Feb 17 '21 at 18:19
  • @AndrewSteitz , it's your money... but keep in mind that the last two years were stockpicker's paradise, as the markets were doing well. Even a monkey could have picked winning stocks. This might change, though. Again, it's your money...
    – Aganju
    Feb 19 '21 at 17:33
  • @Aganju - appreciate the warning. Don't know too many monkeys that multiplied their portfolio by 10x, yeah, 900%, in 18 months. Took a beating last week (down 30%) but still up 50% on the year so... And I didn't even get in on the GameStop short squeeze! Mar 2 '21 at 14:45

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