Business Practices Flashcards
What are the parameters for Investment Advisers charging performance based fee on an account?
The Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,000,000 invested or a net worth of $2,000,000)
In order for an investment adviser to be compensated with a performance fee, all of the following must be disclosed:
- arrangement may create an incentive for the adviser to make riskier investments
- The IA will is compensated on both unrealized and realized capital gains
- basis for valuing illiquid investments
- periods used to measure performance and their significance
- nature of any index used as a comparison of investment performance
- significance of the index,
- why the adviser believes the index is appropriate
4 Types of compensation for investment advisers:
I. Wrap fees
II. Soft dollars
III. 12b-1 fees paid by a mutual fund to the adviser based on annual net assets
IV. Commissions paid to an affiliated broker-dealer on trades recommended by the adviser
Investment advisory contracts must contain:
- Description of services provided;
- Term of contract;
- Formula for computing fees;
- Prepaid fees returned in early termination
- Assignment of the contract is not permitted w/o customer approval
- If there is discretionary authority to the adviser
- fee for managing equity securities may be higher than debt securities
What is the rule for on notifying clients of a change in ownership (for investment adviser firms)?
The rule on notifying clients of a change of ownership of an investment adviser only applies to investment advisers organized as partnerships.
What is the brochure delivery rule for investment advisers?
- Brochure must be delivered 48 hours prior to entering into either a verbal or written contract
- if the brochure is delivered at the time that the contract is signed, the customer has 5 business days to terminate the agreement without penalty
Under NASAA rules, within 120 days of fiscal year end, each customer must be sent:
An updated brochure and brochure settlement
What defines an investment adviser taking custody?
- Adviser is holding customer funds or has the ability to access customer funds
- if an adviser is permitted to directly deduct fees from client accounts
- a FULL power of attorney over an account which allows the adviser to withdraw funds
The threshold where a State-registered adviser is considered to have taken custody of client funds if it charges prepaid advisory fees, is:
$500, 6 months or more in advance of rendering services
If an adviser takes custody of a customer’s funds or securities, the customer must be:
- Informed in writing of the safekeeping location at the time that custody is taken
- Provided with QUARTERLY account statements
What type of investment advisers are required to be audited on a surprise basis?
Only advisers that take custody of customer assets
When must audit results of an investment adviser be submitted to the administrator?
Within 120 days after completion of the audit
How long does an advisor have to return a business check made out to the advisor in error in order to not be considered to have taken custody? (The advisor does not have custody in this account)
3 business days to put it in the MAIL
If an investment adviser advertises that a performance chart, in and of itself, can be used to measure performance, or to decide which investments to make, it MUST be accompanied with:
a statement that there are limitations and difficulties in using performance charts alone to judge results
Under NASAA rules, a customer must sign and return the margin agreement
PROMPTLY AFTER the INITIAL transaction in the account
Chinese Walls must be maintained between Investment Banking and:
Trading, Sales, and Research
Chinese Walls must be maintained between Trading and:
Sales and Research
If a customer wishes to purchase a non-exempt NEW security, then the customer must receive a:
In connection with the sale of any non-exempt new issue to a customer, the final prospectus must be delivered to the customer, at, or prior to, confirmation of sale. There are no exceptions!
True or False: Broker-dealers and their employees are prohibited from buying IPO shares at the offering price in the underwriting.
True. This is called free riding and withholding.
True or False: Broker dealers can purchase IPO shares in the secondary market.
True
A research report on an issuer CANNOT be published by the underwriter of that issuer’s securities for the time period encompassing:
- 10 days following the effective date for an IPO
2. 5 days following the effective date for a secondary offering
What is the typical allocation procedure for handling trades executed in a single block?
Allocate the securities equally among clients at a uniform price on a pro-rata basis. This is the typical disclosure made to clients.
Under Regulation SP, customers must be given a privacy notice at what time?
Prior to the first transaction
