Flashcards in 2 - Investment Advisers & Ethics Deck (104)
What three activities define an investment adviser?
An investment adviser must: (1) provide securities advice; (2) as a part of a regular, ongoing business; and (3) receive compensation for such services. This includes financial planners, pension consultants, and sports & entertainment representatives if the above criteria are met.
Who is excluded from the definition of investment adviser, even if the three investment adviser criteria are met?
(1) an investment adviser representative; (2) a bank, savings institution, or trust company; (3) a lawyer, accountant, teacher, or engineer ("LATE") who gives investment advice that is solely incidental to the practice of his profession; but, if any of these professionals hold themselves out as offering investment advice the exclusion is lost; (4) a broker dealer or its agent whose advisory services are: (a) solely incidental to the conduct of its brokerage business and (b) who receives no special compensation for them; (5) a publisher of any bona fide media publication, in whatever form, that renders general investment advice (i.e. does not take into account the specific investment situation of any client); (6) any person that is a federal covered adviser; (7) an adviser to a family office; or (8) such other persons as the Administrator may by rule or order designate
Define investment adviser
An investment adviser: (1) provides investment advice, (2) as part of an ongoing business, and (3) receives compensation for such advice.
Define investment adviser representative
An investment adviser representative is an individual who solicits or renders advice regarding securities or manages the accounts or portfolios of clients.
An investment adviser has an office in the state. Does it have to register in the state?
Yes. An investment adviser with a physical office in the state must register in the state.
Do federal covered advisers register in any state?
No. Federal covered advisers register with the SEC.
Do investment advisers under contract to manage an investment company register with the state or the SEC?
The SEC. Investment advisers under contract to manage an investment company are federal covered investment advisers and register with the SEC.
What four professionals are excluded from the definition of investment adviser, provided the advice is rendered incidentally to their profession?
Lawyers, accountants, teachers, and engineers (LATE). The exclusion is lost if any of these professionals charges specifically for investment advice. Note: the exclusion is NOT available to economists.
Do supervisors of investment adviser representatives need to register as investment adviser representatives?
Yes. Supervisors of investment adviser representatives must register even if the supervisor never speaks with clients.
Do investment adviser representatives register at the state or federal level?
Investment adviser representatives always register at the state level, even if the investment adviser they work for registered at the federal level.
When does the registration of federal covered investment advisers expire?
The registration of a federal covered investment adviser does not expire. The registration remains effective until withdrawn, cancelled, revoked, or suspended by the SEC.
When does the registration of state covered investment advisers expire?
The registration of a state covered investment adviser expires each December 31.
What is the state de minimis exemption for investment advisers?
Investment advisers are exempt from registering at the state level if it has no office in the state, solicits business from five or fewer retail clients in the state, and is registered in another state.
What is consent to service of process as it relates to the registration of securities professionals?
Consent to service of process allows the Administrator to accept legal documents on an individual's behalf.
At the state level, when does an investment adviser's application for registration become effective?
At the state level, an investment adviser's registration becomes effective at noon on the 30th day after the application is filed.
At the federal level, when does a federal covered investment adviser's application for registration become effective?
Within 45 days after the application is filed a federal covered investment adviser's registration will be granted or proceedings will be instituted to determine whether the application should be denied.
How many reasons must an Administrator have to take disciplinary action against an investment adviser?
An Administrator must have at least two reasons to take disciplinary actions against an investment adviser. One of these reasons must be that the disciplinary action is in the public's best interest.
Is lack of experience a proper ground for an Administrator to deny a registration?
No. A lack of experience alone is not grounds for denial of a registration.
Is a lack of qualification a proper ground for an Administrator to deny a registration?
Yes. A lack of qualification, including not having passed the Series 63 examination, is a valid reason to deny a registration.
What are the notice, hearing, and written findings requirements when a state securities Administrator subjects an individual to disciplinary action?
The Administrator must provide notice and give an opportunity for a hearing. If a hearing is held, the Administrator must provide written findings that support the disciplinary action.
Under what circumstances must an individual subject to disciplinary proceedings be given a hearing?
An individual subject to disciplinary actions must be given a hearing if the individual requests one. A hearing must be held within 15 days of such request.
When can an Administrator cancel the registration of an investment adviser?
An Administrator can cancel the registration if the investment adviser is: (1) no longer in business; (2) no longer in existence; (3) a court finds the investment adviser to be mentally incompetent; or (4) the investment adviser cannot be located after a reasonable search.
When does a withdrawal of state registration occur?
A withdrawal of state registration occurs 30 days after filing with the Administrator, unless disciplinary actions are pending. An individual cannot withdraw to avoid disciplinary actions.
After a registration is withdrawn, for how long may an Administrator initiate disciplinary actions?
An Administrator has jurisdiction to initiate disciplinary proceedings for one year after withdrawal.
What are the requirements for an investment advisory contract?
(1) Must be in writing; (2) Compensation must based on assets under management (except in limited circumstances when it can be based on percentage of capital gains, performance of the portfolio); (3) No assignment to another investment adviser or investment adviser representative without the customer's consent; (4) Notification for changes in majority interests in a partnership (does not apply to corporation); (5) No stipulations waiving compliance with the Uniform Securities Act.
When can an investment adviser assess a performance fee?
An IA can charge a performance fee only to "qualified clients," defined as clients with at least $1 million in assets with the firm or at least $2 million in net worth.
What is the brochure rule?
A rule requiring that every investment advisory client receive a disclosure statement (an "investor brochure") containing all information that is found in form ADV II. This rule applies to federal covered and state investment advisers.
What are the rules under the Investment Adviser's Act of 1940 when an investment adviser has custody of client funds?
The client securities must be segregated and properly marked; client funds must be deposited in separate bank accounts; the investment adviser must notify the client as to the place and manner in which the funds and securities are being maintained; an itemized list of such funds and securities must be delivered to the client at least every three months; such funds and securities must be verified annually by an independent CPA on a surprise basis.
When must an investment brochure be delivered to a client entering into an investment advisory contract?
Clients must receive the brochure: (1) at least 48 hours before signing the investment advisory contract, or (2) at the time the contract is signed, provided, that the customer can cancel the contract within 5 days without penalty.