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From Flashcardlet > Unit 10 > Flashcards

Unit 10 Flashcards

1
Q

Investment Advisers Act of 1940

A

The federal legislation that defines the term investment adviser and requires person that fall within the definition to register with the SEC or with the states in which they do business
National Securities Markets Improvement Act of 1996 NSMIA), IARs registered with SEC or state

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2
Q

2 primary purposes of Investor Act of 1940

A

Regulation of persons, both natural and legal, in the business of giving investment advice; and
Establishment of standards of ethical business conduct for the industry

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3
Q

Broker

A

Any person engaged in the business of effecting transactions in securities for the account of others

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4
Q

Dealer

A

Any person regularly engage in the business of buying and selling securities as principal for his own account, but does not include a bank, insurance company, or an investment company

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5
Q

Fiduciary

A

A person legally appointed and authorized to hold assets in trust for another person

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6
Q

Person associated with an investment adviser

A

Any partner, officer, or director of the IA indirectly controlling or controlled by the IA, including EEs of the IA
Clerical and administrative personnel are not included

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7
Q

Supervised person

A

Any partner, officer, director, EE, etc. who provides investment advice on behalf of the IA and is subject to the supervision and control of the IA

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8
Q

Difference between an associated person and a supervised person

A

Supervised person includes all EEs even those who perform clerical tasks and are not required to become registered
Associated persons do not include clerical and administrative persons

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9
Q

Principal office and place of business

A

The executive office of the IA from which the officers, partners, or managers of the IA direct, control, and coordinate the activities of the IA

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10
Q

Who is an IA?

A

Any person who for compensation engages in the business of advising others as to the value of securities or the advisability of investing in securities or as part of a regular business issues analyses or reports concerning securities

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11
Q

SEC Release IA-1092

A

An IA:
1. provides investment advice, reports, or analyses with respect to securities
2. Is in the business of providing advice or analyses
3. Receives compensation, directly or indirectly for these services
If a person engages in all 3 of these, he is an IA and must register with state or SEC

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12
Q

Release IA-1092 includes:

A

Financial planners- they give advice and no comprehensive financial plan does not include securities
Pension consultants- advise EB plans on how to fund their plans with securities
Sports and Entertainment Representatives- provide financially related services to entertainers and athletes that include advice related to investments

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13
Q

Exclusions from definition of IA under Federal law

A

Lawyer, teacher, accountant, engineer whose advice is solely incidental to the practice of his profession is excluded- The federal law only specifies 4 exclusions!!
Broker dealer whose performance of such services is solely incidental to the conduct of his business as a B/D
Authors, publishers, newspaper people, etc.
Persons whose advice relates solely to securities issued or guaranteed by the federal government are excluded

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14
Q

Exclusions from IA definition under state law

A

Banks, savings institutions, and trust companies
Lawyer, accountant, teacher, engineer whose advice is incidental to the practice of his profession is excluded
Broker/dealers or its agents who performance of such services is incidental
IARs are excluded
Any person who is a federal covered adviser is excluded
Any person excluded by the Investment Advisers Act of 1940 is excluded
Any other person the Administrator specifies is excluded

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15
Q

Differences between Federal and State

A

Publishers and authors are considered IA if their advice is specific to each and every subscriber
No stated exclusion under the USA for those giving advice solely on US government securities, but they are excluded because they are federal covered advisers

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16
Q

The investment advisers act of 1940

A

The investment advisers act of 1940 mixed unlawful for nonregistered investment advisor to use the mail or any instrumentality of interstate commerce in connection with his business
unless an exemption is available, registration with the SEC or with the state is required

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17
Q

The investment advisers act of 1948

A

The investment advisers act of 1948 exempts the following classes of investment advisers from the registration requirements:
• intrastate advisers
o advisers whose clients other than the investment advisor are residents of the state in which the advisor has its principal office in place of business and who do not give advice dealing with securities listed on any national exchange are exempt
• advisers to insurance companies – advisers whose only clients are insurance companies are exempt
• private fund advisors

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18
Q

NSMIA

A

eliminated state registration requirements for federal covered advisers, largely based upon assets under management

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19
Q

Large Investment Advisers

A

> $100 million in assets are eligible for SEC registration

>$100 million in AUM, SEC registration is mandatory unless covered by an exemption

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20
Q

Small Investment Advisers

A

<$25 million state only unless there is a GOOD reason

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21
Q

Mid-size Advisers

A

New category created by Dodd-Frank
Between $25 million and $100 million
Generally they are prohibited from SEC registration, but they can qualify if:
It is not required to register in the state where it maintains its principal office

22
Q

Exceptions under Dodd-Frank

A

Pension consultants with > $200 million under control
Mid-size advisers between $100 million and $110 million
Investment advisers affiliated with an adviser already registered with the SEC
Investment advisers expecting to be eligible for SEC registration with 120 days of filing Form ADV
Multistate advisers
Internet advisers

23
Q

$20 million buffer

A

Assets can drop from $110 million to $90 million and companies can still maintain SEC registration

24
Q

USA Exemptions from IA registration

A

IAs who have no place of business in the state, but are registered in another state, provided their only clients in the state are:
B/Ds registered under the Act
Other IAs
Institutional investors; including EB plans with assets of >$1 million
Existing clients who are not residents but a temporarily in the state
Limited to 5 or fewer clients, other than those listed above, resident in the state during the preceding 12 months (called the de minimus exemption)
Any other the Administrator exempts by rule or order

25
Q

USA definition of a single person

A

The following are deemed as a single client:

  1. A natural person and
    a. Any minor child of a natural person
    b. Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence
    c. All accounts of the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries
    d. All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries
26
Q

State fees

A

IA exempt from state registration are not exempt from paying state filing fees and giving notice to the Administrator
The procedure followed is called notice filing

27
Q

IA SEC registration

A

An IA registered under state law whose assets reach $100 million AUM has 90 days to register with the SEC
An IA whose AUM fall below $90 million no longer qualifies for SEC registration and has 180 days to register with the state

28
Q

IAs use the Form ADV to:

A

Register with the SEC
Register with one or more state securities authorities; or
Amend those registrations
Filing in almost all cases is down through the Investment Adviser Registration Depository (IARD)

29
Q

Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates:

A

Registration
Regulatory review
Public disclosure information
FINRA is the developer and operator of IARD

30
Q

Form ADV

A

Has 4 parts
• Schedule A (direct owners and executive officer
• Schedule B (indirect owners)
• Disc

31
Q

Control person

A 
Directly or indirectly has the right to vote 25% or more of a class of stock of a corporation’s voting securities
This is a different percentage from the definition of control under the Act of 1934 (which was 10%)
32
Q

Form ADV

A

1A- contains info about the IA
1B asks questions asked by state authorities
Federal covered advisers do not complete 1B
2A is known as the investment adviser’s brochure and tends to focus on customer related information

33
Q

Form ADV

A

must be updated each year by filing an annual updating amendment within 90 days after the end of the adviser’s fiscal year
of critical importance is the verification of AUM ensuring that the adviser is eligible to continue being registered with the SEC

34
Q

Form ADV Fees

A

There are fees for the initial filing
Registration remains in effect until it is withdrawn
If there is a change in the form of business organization, a new ADV is required, but no fee
Form ADV-W becomes effective after 60 days of filing with state

35
Q

Investment counsel

A

2 criteria under the Investment Advisers Act of 1940
• The IA’s principal business must be giving investment advice- this basically excludes financial planners and others for whom investment advice is only a part of what they do
• Provide investment supervisory services- discretionary authority and ongoing supervisory management services

36
Q

Prepayments

A

Under the USA, when an IA accepts prepayments of fees >$500 for a contract period of 6 months or more, it is known as a substantial prepayment
Under the IA of 1940, the amount is $1,200

37
Q

Federal covered advisers

A

A covered IA who requires or solicits clients for substantial prepayment of fees must include a balance sheet with the adviser’s ADV Part 2A

38
Q

State covered advisers

A

A covered IA who requires or solicits clients for substantial prepayment of fees must include a balance sheet with the adviser’s ADV Part 2A

39
Q

IAs

A

IA that has discretionary authority or custody of client funds or securities or solicits substantial prepayment of fees must disclose any financial condition that is likely to impair their ability to meet contractual commitments (SEC)

40
Q

IAs

A

The Administrator may require an IA who has custody of client funds or has discretion over a client’s account to post a surety bond or maintain a minimum net worth
The requirement is higher for custody than for discretion
Typically the net worth requirement for discretionary authority is $10,000
Typically the net worth requirement for custody authority is $35,000

41
Q

IAs vs. B/Ds

A

For IAs, the financial requirement is net worth

For B/Ds, it is net capital

42
Q

IAs

A

Failure to maintain the minimum net worth
Of an IA’s net worth falls below the minimum net worth, it must
On the next business day, it must notify the Administrator that the net worth is less than the minimum required
Then the IA must file a financial report with the Administrator on the next business day
Then the IA must obtain a bond in the amount of the net worth deficiency rounded up to the nearest $5,000

43
Q

IA net worth

A

For NASAA purposes, the term net worth means an excess of assets over liabilities
Does not include goodwill, patents, copyrights, all other intangibles

44
Q

USA minimum financial requirements of an IA

A

Advisers must maintain a minimum net worth of $35,000

45
Q

IAR termination procedures

A

If IAR terminates and the IA is federally covered, the IAR must notify the Administrator
If IAR terminates and the IA is state covered, the IA must notify the Administrator

46
Q

Rule 204A-1 Investment Adviser Code of Ethics

A

A list of IA’s access persons

A record of all written acknowledgements

47
Q

Access person is any of the adviser’s personnel who:

A

Has access to nonpublic information regarding any client’s purchase or sale of securities
Is involved in making securities recommendations to clients or who has access to recommendations that are nonpublic

48
Q

Investment Adviser Code of Ethics (204A-1) requires:

A

A record of each report made by an access person
A record of the names of persons who are currently, or within the past 5 years wee access persons of the IA
A record of any decision and the reasons supporting the decision to approve the acquisition of securities by access persons, for at least 5 years after the end of the fiscal year in which approval is granted

49
Q

Records must be kept for 5 years

A

Form ADV Part 2 us a disclosure document that, under state and federal laws is required to be given to clients
2A- Firm brochure
2A Appendix 1: Wrap Fee Program disclosure
2B of Form ADV: Brochure Supplement (describes certain supervised persons)
Narrative Format
If the IA is federal covered, it is not required to file the brochure supplements through the IARD. A copy of the supplements must be preserved andmade available to SEC staff upon request
Only in the case of state registered IAs is it required to file the brochure supplemtns
IARs are always registered on a state level only, not the SEC
Under federal law, contracts may be oral or in writing
In state law, it must be in writing

50
Q

Brochure

A

Within 120 days of the end of the fiscal year, a free, updated brochure must be delivered to each client that either includes a summary of material changes or is accompanied by a summary of materials changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure

51
Q

Brochure

A

If there are no material changes, then nothing – not the brochure nor the brochure supplement, nor the summary – is required to be sent

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