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Series 66 Exam > Unit 1 > Flashcards

Unit 1 Flashcards

1
Q

Investment Advisers Act of 1940 is on what level?

A

Federal

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2
Q

Uniform Securities Act is one what level?

A

State

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3
Q

NASAA is the

A

advisory body of state securities regulators responsible for the content of the exam.

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4
Q

Non-persons:

A
  1. A minor
  2. A deceased individual
  3. An individual declared mentally incompetent by the courts
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5
Q

3-Prong Test:

A
  • Gives advice to others on securities
  • Does so as part of a regular business activity
  • Receives compensation for performing this activity
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6
Q

Added to the definition of investment advisor:

A
  • financial planners
  • pension consultants
  • others who offer investment advice to the definition of investment advisor
    such as Sports and Entertainment Representatives → a sports agent who advises his client, the football player, to invest his money in specific securities
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7
Q

Exclusions from the Uniform Securities Act

A
  1. Bank
  2. Lawyer, accountant, teacher, or engineer (LATE)
  3. Broker Dealer
  4. Publishers who meet certain criteria
  5. IAR
  6. Federal covered adviser
  7. any other person the Admin excludes
  8. Any person whose advice is only related to US government securities
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8
Q

“Bank” does not include

A

a savings and loan institution or foreign bank but does include a savings institution

Note: Exclusion is unavailable to credit unions and investment advisor subsidiaries

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9
Q

The exclusion for LATE is not available when:

A

any of the professionals have established a separate advisory business *charging a separate fee for advice)

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10
Q

The exclusion for BDs is not available to those offering

A

wrap fee programs

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11
Q

Publishers must meet the following criteria

A
  • General and impersonal
  • Bona fide as opposed to promotional material
  • Regular circulation
    If the issue is published from time to time, the exclusion is lost
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12
Q

What are the exemptions?

A
  1. intra state advisers

2. advisers to insurance companies

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13
Q

What is an intra state adviser?

A

a. Clients are residents of the state in which their principal office is located
b. Do not give advice with securities listed on any national exchange
c. Other than an investment advisor for any private fund

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14
Q

Those who have no place of business in the state but are registered in another state, provided their only clients in the state are:

A
  • BDs registered under the act
  • Other investment advisors
  • Institutional investors
  • Existing clients who are not residents but are temporarily in the state
  • Limited 5 or fewer clients, other than those previously listed, resident in the state during the preceding 12 months (de minimis exception)
  • Any others the Administrator exempts by rule or order
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15
Q

Institution

A
  • Included in the term person
  • Banks, trust companies, S & L associations, insurance companies, investment companies, employee benefit plans with assets of $1 mil+, and governmental agencies
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16
Q

Retail Clients need

A

far more protection than institutional ones

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17
Q

If the client should change legal residence to that state, the investment advisor has

A

30 days to register in that state or discontinue doing business with that client (unless qualifying for the de minimis exception)

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18
Q

An investment advisor or one of their reps who advertises to the public, in any way, the availability of meeting with prospective clients in any location (hotel, country club) in the state is considered to have a

A

place of business in that state

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19
Q

Exemptions for Private Fund Advisors under Federal Law

A
  • Advisors solely to private funds with less than $150 mil AUM
  • Certain non-U.S. advisors with no place of business in the US and minimal AUM (less than $25 mil)
  • Advisors solely to venture capital funds (venture capital fund exception)
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20
Q

Private Fund

A

an issuer that would be an investment company, does not presently propose to make a public offering of its securities

  • No more than 100 shareholders and no public offering
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21
Q

Exemptions for Private Fund Advisors under State Law

A

All investors must be “qualified investors” - $1 mil in assets managed by the investment adviser or a net worth (excluding primary residence) of $2.1 mil

Neither the private fund adviser nor any affiliates are subject to the “bad actor” provisions

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22
Q

Exemption for Foreign Private Advisers

A
  • Has no place of business in the US
  • Has less than 15 clients and investors in the US in private funds
  • Has aggregate AUM of less than $25 million
  • Does not hold itself out to the public in the US as an investment advisor or act as an investment advisor to an investment company registered under the Investment Company Act of 1940
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23
Q

Exemption for Investment Advisors to Venture Capital Funds

A
  • Does not offer its investors redemption rights or other similar liquidity rights (except in certain circumstances)
  • Represents itself as a venture capital fund to investors
  • Is not registered under the Investment Company Act of 1940
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24
Q

A venture capital fund is a

A

polled investment where venture capitalists invest their money and pay an advisor to select opportunities meeting their objectives. If these conditions are met, that investment advisor is exempt from registration under federal (and state) law.

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25
Q

Requirements for Investment Advisers is done

A

on either a federal or state basis - NEVER BOTH

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26
Q

Federal Covered Investment Adviser (Covered Adviser)

A
  • Registered with the SEC
  • Under contract to manage an investment company registered under the Investment Company Act of 1940
  • Not registered with the SEC because they are excluded from the definition of an investment adviser
    Ex: the IA whose advice is limited solely to securities issued by the U.S. government or on of its agencies
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27
Q

Large Investment Advisers

A

At least $100 mil AUM are eligible for SEC registration

But once assets reach $110 mil, SEC registration is mandatory

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28
Q

Mid-Size Advisers

A

At least $25 mil but less than $100 mil

Must register with the state

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29
Q

Ways for a mid-size adviser qualify for SEC registration

A
  • The adviser is not required to be registration with the Admin of the state in which it maintains its place of business
  • Registered, the adviser would not be subject to examination as an investment adviser by the Admin
  • The adviser is required to register in 15 or more states
  • The adviser elects to take advantage of the buffer
30
Q

Small Investment Advisers

A
  • AUM less than $25 mil
  • SEC registration is prohibited unless IA is an advisor to an investment company registered under the IC Act of 1940
  • If the adviser would be required to register in 15 or more states, registration would be permitted instead
  • Registration with the state is required unless exempted under state rules
31
Q

The following are exempt from the prohibition on registration with the SEC (allowed to register with SEC)

A
  • Pension consultants with at least $200 mil under control
  • Mid-size advisers with at least $100 mil but less than $110 mil
  • IA expecting to be eligible for SEC registration within 120 days of filing the application for registration on the Form ADV
  • Internet advisers
32
Q

Advisers to an investment company registered under the Investment Company Act of 1940

A

egister with the SEC regardless of their size.

33
Q

$10 Million Buffer

A

At least $100 mil → may choose to remain state registered

When AUM reaches $110 mil → SEC registration is mandatory

34
Q

$20 Million Buffers

A

Market conditions or obtaining/losing clients can cause AUM to fluctuate

Established to keep advisers from having to switch back and forth

Once recognized with the SEC, an adviser need not withdraw unless it has less than $90 mil AUM

An adviser can choose to stay at the state-level until they reach $110 mil

35
Q

If withdrawing SEC registration and registering with the state, must do so within ____ days.

A

180

36
Q

If registering with the SEC, must do so with ____ day.

A

90

37
Q

When a state-registered IA reported AUM $110 mil or more on the annual updating amendment, they must

A

register with the SEC within 90 days

38
Q

When a new IA files for registration and they believe that they will have at least $100 mil in AUM in the first 120 days, they can

A

register with the SEC

Common if expecting large amounts in a short time.

39
Q

When an SEC-registered IA reported less than $90 mil AUM on the annual updating amendment, they must

A

register with the state(s) within 180 days

40
Q

Filing Form ADV in almost all cases is done through

A

the Investment Adviser Registration Depository (IARD).

The IARD is an electronic filing system.

41
Q

Part 1A of Form ADV

A
  • Asks a number of questions about the investment adviser, its business practices, the persons who own and control the firm, and the persons who provide investment advice on behalf of the firm.

Must be completed

42
Q

Part 1B of Form ADV

A

Asks additional questions required by state securities authorities

Do not have to complete if only registering with SEC

43
Q

Part 2A of Form ADV

A

Requires advisers to create narrative brochures containing information about the advisory firm

Applies to all IA

A → Adviser

44
Q

Part 2B of Form ADV

A

Requires advisers to create brochure supplements containing information about certain supervised persons

Applies to all IA

B → Bodies (people who work there)

45
Q

A person is presumed to control an IA organized as a corporation if:

A
  • the person directly or indirectly has the right to vote 25% or more of a class of the corporation’s voting securities
  • Has the right to receive upon dissolution
  • Has contributed 25% or more of the capital of the partnership
46
Q

Control person is defined 3 different ways:

A

Securities Exchange Act → 10%

Investment Company Act → more than 25%

Advisers Act and the USA → 25% or more

47
Q

State-registered advisers file

A

both Part 1 and Part 2 with the Admin of each state in which they are registering

48
Q

There is a specific area in Part 2 where

A

where state-registered advisers must identify each of the principal executive officers and management persons and their formal education and business background

49
Q

Form ADV

Must be updated each year within

A

90 days after the end of the adviser’s fiscal year

50
Q

Fees associated with annual renewals

A

SEC - pays a fee

USA - does not pay a fee

51
Q

Notice Filing

A

instead of registering with the state(s), covered advisers pay state filing fees and give notice to the Admin

52
Q

Federal covered advisers must make a notice filing with the state if

A

they have a place of business in the state

or

have 6 or more clients in that state in a 12-month period, regardless of place of business

53
Q

If a federal covered adviser only deals with institutions, other IAs, etc.,

A

notice filing is not required

54
Q

Provide a Consent to Service of Process

A

appoints the Admin as the applicant’s attorney to receive and process noncriminal securities-related complaints against the applicant

Submitted with the initial application and remains in force permanently (does not need to be supplied with each renewal of a registration

55
Q

Registration with the SEC takes effect on

A

the 45th day after filing of a complete application and, as with all securities professionals, at noon of the 30th day in the case of state-registered investment advisers

56
Q

Renewal date for state registration of AI is

A

December 31.

Even if you register in November, your first year will be a short one.

57
Q

USA defines an agent as

A

any individual who represents a BD or an issuer in effecting transactions in securities for their clients.

58
Q

USA defines an agent as

A

any individual who represents a BD or an issuer in effecting transactions in securities for their clients.

59
Q

Form ADV-W

A

If an adviser no longer desires to engage in the business, Form ADV-W must be filed to withdraw the registration voluntarily

Covered advisers → takes 60 days

State-registered advisers → 30 days

Admin retains jurisdiction over the former registrant for a period of 1 year

60
Q

Exempt Reporting Advisers (ERAs)

A

A person exempt from registration is required to complete and electronically file reports using the IARD system on certain items set forth in Form ADV, which will be made publicly available on the SEC’s website.

File an abbreviated Form ADV Part 1 (they don’t answer all of the questions), but do not have to prepare a Form ADV Part 2.

61
Q

Substantial Prepayment of Fees

A

Federally covered → prepayments of more than $1,200 per client, 6 months or more in advance

State → more than $500 per client, 6 months or more in advance

62
Q

Net worth required of IA with discretionary authority is

A

$10,000

63
Q

Net worth required of IA taking custody of client funds is

A

$35,000

64
Q

If the IA is using a surety bond instead, the requirement in either case is

A

$35,000

65
Q

Principal office

A

the executive office of the IA from which the managers of the IA direct, control, and coordinate the activities of the IA

66
Q

A state-registered IA need only meet the financial requirements

A

of the state in which its principal office is located

67
Q

Section 222 of the IA Act of 1940 states that when it comes to federal covered advisers, any financial or bonding requirements, as well as rules relating to recording keeping, are solely under

A

federal jurisdiction

68
Q

When below min requirement, IA must

A

obtain a bond in an amount of the net worth deficient rounded up to the nearest $5,000

69
Q

What is scalping?

A

the practice whereby an investment advisor, before the dissemination of a securities recommendation, trades on the anticipated short-run activity that may result from the recommendation

70
Q

Time Period for Maintenance of Records

A

Must be readily accessible for 5 years. During first 2 years, must be maintained in the principal office
After, may be preserved in electronic or microfilm format or any other form in compliance.

71
Q

As long as a state-registered IA meets the recording keeping requirements of their home state,

A

that was sufficient for any state in which they are registered

Series 66 Exam (18 decks)

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