Chapter 1 - Investment Advisers Flashcards Preview

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Flashcards in Chapter 1 - Investment Advisers Deck (42):

Investment advisers

- receive compensation of some kind for investment advice
- includes financial planners
- includes those who publish investment advice/recs/analysis


Three-pronged test for an investment adviser

1) offers advice or analyses concerning securities
2) is in the business of offering such advice (even if not primary service)
3) receives compensation for offering these services


Are you an investment adviser if you evaluate pension plans or select managers for a pension plan?

Yes, you are an investment adviser


List of people who ARE NOT investment advisers

1) an investment adviser representative
2) a bank, savings institution or trust company
3) a lawyer, accountant, engineer or teacher who provides incidental advice
4) a broker-dealer or its agent who provides incidental advice and no compensation
5) a publisher of any bona fide news stuff (hard copy or electronic) that doesn't give specific investment advise
6) any person that is a federally covered investment adviser
7) any one that the Administrator exempts


Have to register as an investment adviser in your state unless...

- you have no place of business in that state
- all clients are investment companies (institutional investors)
- de minimus rule: if any adviser has no more than 5 non-institutional clients in a state during the last 12 months, they are not required to register


de minimus rule for exemption from state registration

- if any adviser has no more than 5 non-institutional clients in a state during the last 12 months, they are not required to register


Advisers registered at the federal level are called

Federal Covered Advisers


NSMIA covers what?

the separation of federal and state registration


If adviser has less than $100m in assets under their care, they only have to register for _____ registration



If adviser has $110m or more in assets under care, they have to register on the _____ level



If adviser has between $100m and $110m, they can choose to register at ____ or _____ level

state or federal


Additional factors that result in having to register at the federal level include...

- adviser to registered investment companies
- pension consultant
- affiliated with an SEC-registered adviser
- mid size adviser ($25-100m AUM) to a business development company
- mid size adviser not required to register in their state
- advisers in Wyoming
- principal office is outside US
- mid size who are registered in 15 or more states
- small advisers (under $25m) that are registered in 15 or more states
- interactive website advisers
- advisers who expect to be eligible for SEC registration within 120 days
- whoever the SEC deems


A federally registered adviser must switch to state level registration is their AUM drops below



Under Dodd-Frank, the following are EXEMPT from the definition of an investment adviser:

- a bank or bank holding company that is not an investment company and does not act as an investment adviser
- a lawyer, accountant, teacher, engineer who provides incidental advise
- broker dealer whose advise is solely incidental
- publisher of news stuff
- a person who only gives advise on US gov't securities and certain exempt securities
- nationally recognized statistical rating agency that does not give recs or manage assets
- a family office
- others designated by SEC


For registration, Part 1 of Form ADV includes the following information:

- information about ownership and nature of their practice, including names of principals
- location of main office
- types of services offered
- whether adviser keeps custody of assets
- locations of books and records
- relevant regulatory/disciplinary history


For registration, Part 2 of Form ADV includes the following information:

- fees or fee structure
- types of clients and investments
- methods of analyzing investments
- educational and business backgrounds of advisers


For state registration, an adviser must submit parts ________ of the ADV, while a federal registrant only needs to submit parts _______

parts 1&2, a federal registrant only needs to submit parts 1 & 2A


For registration, applicants must submit a ________ and _______

Form ADV and U4


An application for registration becomes effective at _____ on the _____ after the application is initially filed.

Noon on the 30th day


If a state administrator wants to initiate a hearing based on the applicant's admission, they may do so within ____ following the registration

90 days


If a firm is registering with the SEC on a federal level, the SEC has _____ to approve or deny registration

45 days


An administrator has the power to set an earlier effective date if they choose. T/F



Can an applicant perform functions that would require registration before registration is approved?

No, but can do clerical tasks


An adviser's registration remains effective until __________ of the year for which the registration was filed

midnight on December 31st


When an adviser files an application for a successor firm for the unexpired portion of the year, do they need to pay an application fee?



Advisers who have custody over client assets must have a net worth of ________



Advisers who do not have custody over client assets must have a net worth of _______



Discretionary authority is when an adviser can do what?

Make trades without permission


Any adviser who requires prepayment of fees in excess of $500 per customer must maintain a _____ net worth



If you don't meet capital requirements, you must file the following documents by COB the NEXT business day

- trial balance of all ledger accounts
- statement of all client funds or securities
- total of all clients' debit balances
- total number of client accounts


Administrator may require adviser to purchase a _____ bond if not meeting capital requirements

surety bond ($5000 increments)


Net capital requirements are based on place of ______- office

principal office


Can't require net capital requirements greater than _______ or _______

state of principal office or as mandated in the Investment Adviser Act of 1940


Post-registration requirements include:

- financial reports on their own and firm's financial condition
- recordkeeping
- audits
- access persons
- bond or insurance
- brochure rule


Record keeping for post-registration includes

- must keep virtually every client form and marketing literature for 5 years (begins at the end of the fiscal year in which record was created). must be easily accessible for 2 of the 5 years
- if adviser goes out of business, must keep records for an additional 3 yrs
- a state can't require an adviser to keep more records than are required by law
- the state Administrator can review records in their own state and cross-state to aid an investigation


Audits for post-registration includes

- can be audited at any time or for any reason that the Administrator sees fit if in the public interest (sometimes adviser has to pay a fee to have audit conducted)
- can't conduct audit of Federal Covered Adviser unless principal office is in that state


Access persons for post-registration

- employees, directors, officers and fiduciaries with access to inside information
- must be monitored and send brokerage information for review


Bond or insurance requirements for advisers with custody or authority

- if have custody or authority over assets, may be required to purchase a surety bond (or post some cash or exceed net capital requirements)


Brochure rule

- must make certain disclosures to prospective and existing clients
- must be in plain english
- must include: types of services required, fee structure, conflicts of interest and additional fees, material disciplinary actions against firm, educational and business background of management/advisory pannel


The brochure/disclosure statement must be delivered to clients at least _____ before an advisory account is opened

48 hours, if not advisory client will have five business days to terminate the contract without penalty fees
- brochure must be delivered before the contract is signed


State level registration can be terminated for the following reasons

- denial because not in interest of the public
- revocation for public harm
- suspension for less serious infractions (paperwork etc)
- withdrawal using From ADV-W (becomes effective after 30 days - still under jurisdiction for 1 year)
- restriction/limitation to only certain settings/capacities


There are 12 categories for which an adviser might be disciplined:

1) Filing incomplete applications
2) Willfully violating securities regulations
3) Prior felony convictions or security related misdemeanors within last 10 years
4) Court-ordered limitations
5) Prior disciplinary orders
6) Other securities violations in last 10 years
7) Unethical behavior
8) Insolvency
9) Foreign violations - violations or revoked license within last 5 years
10) Unqualified adviser
11) Failure to supervise
12) Failure to file