Question 1

IA Contract Limitations -- Does the Investment Advisors Act of 1940 require contracts to be in writing?

Accepted Answer

No. A). The Investment Advisors Act of 1940 does NOT require that the investment advisory contract be in writing.

Question 2

IA Contract Limitations -- Are oral contracts allowed under the Investment Advisors Act of 1940?

Accepted Answer

Yes.

Question 3

IA Contract Limitations -- Does the USA and NASAA require contracts to be in writing?

Accepted Answer

Yes.

Question 4

IA Contract Limitations -- Under the IA Act of 1940, what are the 3 prohibitions of Investment Advisory contracts?

Accepted Answer

Investment advisory contracts must NOT: 1). base compensation on a share of capital gains -or- capital appreciation -or- contingency fees (EXCEPT in the case of “Qualified Clients” — see below) 2) . allow assignment WITHOUT client consent 3) . fail to advise clients of changes in partners.

Question 5

IA Contract Limitations -- Under the IA Act of 1940, can Investment Advisory contracts allow assignment WITHOUT client consent?

Accepted Answer

No.

Question 6

IA Contract Limitations -- Under the IA Act of 1940, would a minority partner selling their interest be considered an assignment of the contract?

Accepted Answer

No. same as what we looked at under the USA.

Question 7

IA Contract Limitations -- Are IAs required to advise clients of changes in partners?

Accepted Answer

Yes.

Question 8

Generally, investment advisor fees are based on a percentage of

Accepted Answer

the total value of the fund averaged over a period of time.

Question 9

What are performance-based fees?

Accepted Answer

Fees based on a share of capital gains or capital appreciation.

Question 10

When are performance-based fees allowable?

Accepted Answer

performance-based fees are ONLY allowed for certain Qualified Clients.

Question 11

What is a Qualified Client?

Accepted Answer

Qualified Client: a natural person or a company who enters into a contract for At least $1 million under management -or- More than $2.1 million net worth EXCLUDING the person’s primary residence at the time that the contract is entered into. [Do not confuse with Qualified PURCHASER of a Private Fund 2nd category (100-499 inv./not pub offering/Qual inv only: $5M owned by 2+, person w/$25M discrect, or trust not formed for for acquiring assets).]

Question 12

What happens when we have performance-based fees -- 1). Defined Periods used to measure performance for compensation MUST be

Accepted Answer

set forth in the contract, and the performance must be compared to an established appropriate securites index (such as S&P 500 Index).

Question 13

What happens when we have performance-based fees -- 2). The formulas for determining when increases and decreases in fees shall occur must be disclosed

Accepted Answer

in the contract upfront.

Question 14

What happens when we have performance-based fees -- 3). Performance-based fees MAY provide for compensation on the basis of a share of capital gains or capital appreciation of funds under management, for a DEFINED period. You can only do that when performance-based fees have been approved for

Accepted Answer

Qualified Clients.

Question 15

What happens when we have performance-based fees -- If not for Qualified Clients, can IA compensation be based a share of capital gains or capital appreciation?

Accepted Answer

No.

Question 16

What happens when we have performance-based fees -- 4). Performance on managed accounts is calculated AFTER

Accepted Answer

deducting advisory fees and expenses.

Question 17

What happens when we have performance-based fees -- A disclosure must be made which states that an IA MAY receive increased compensation on

Accepted Answer

the UNREALIZED appreciation, as well as REALIZED gains in the client’s account.

Question 18

What happens when we have performance-based fees -- 5). Fees may vary depending on

Accepted Answer

investment returns.

Question 19

What happens when we have performance-based fees -- 6). Performance-based fees may induce an Investment Advisor to

Accepted Answer

take higher risk in selecting investments.

Question 20

What happens when we have performance-based fees -- 7). The IA MUST be sure that the client understands

Accepted Answer

the method of compensation AND the risks involved.

Question 21

Past Performance, Fee Changes, Form ADV -- Does past performance does have to be included in the investment advisory contract?

Accepted Answer

No. C). Past performance does NOT have to be included in the investment advisory contract.

Question 22

Past Performance, Fee Changes, Form ADV -- Any change in fees REQUIRES that clients

Accepted Answer

sign a revised contract showing the change in fees.

Question 23

Past Performance, Fee Changes, Form ADV -- Form ADV (ADV stands for Advisor) is the

Accepted Answer

application form for the registration of investment advisers that is filed with the SEC.

Question 24

Past Performance, Fee Changes, Form ADV -- How many parts does Form ADV have?

Accepted Answer

Two.

Question 25

Past Performance, Fee Changes, Form ADV -- What is Part 1 of Form ADV?

Accepted Answer

1). Part 1 — provides detailed information about the IA for the SEC, including the direct owners and executive officers of the IA, but does not require a list of the IA’s clients.

Question 26

Past Performance, Fee Changes, Form ADV -- What is Part 2 of Form ADV?

Accepted Answer

2). Part 2 — provides the required disclosures about the IA for prospective clients and existing clients.

Question 27

The Brochure Rule - Form ADV Pt. 2 -- What is The Brochure Rule, also known as Part 2 of Form ADV?

Accepted Answer

Disclosures to existing and prospective clients.

Question 28

The Brochure Rule - Form ADV Pt. 2 -- 1). IAs must make CERTAIN disclosures to

Accepted Answer

prospective clients and to existing clients.

Question 29

The Brochure Rule - Form ADV Pt. 2 -- 2). Part 2 is further subdivided into:

Accepted Answer

a). Part 2A — The Brochure and b). Part 2B — The Brochure Supplement

Question 30

The Brochure Rule - Form ADV Pt. 2 -- 3). Part 2A — The Brochure includes

Accepted Answer

a description of the IA’s business practices and conflicting interests in client transactions and personal trading.

Question 31

The Brochure Rule - Form ADV Pt. 2 -- What do The Brochure (Form ADV Pt. 2) disclosures have to be?

Accepted Answer

These disclosures must be WRITTEN and in “Plain English."

Question 32

The Brochure Rule - Form ADV Pt. 2 -- 4). Part 2B — The Brochure Supplement consists of disclosures about the individuals who provide the investment management including:

Accepted Answer

a). Education and experience over the last 5 years b). Disciplinary actions over the last 10 years, and c). Additional compensation from other sources for investment services rendered.

Question 33

The Brochure Rule - Form ADV Pt. 2 -- 5). An IA must amend the Part 2 information EACH YEAR within

Accepted Answer

90 days of fiscal year end to provide a current brochure.

Question 34

The Brochure Rule - Form ADV Pt. 2 -- A Summary of Material Changes must be prepared by the IAs amending their brochures, AND

Accepted Answer

be included in the brochure OR be a stand-alone document.

Question 35

The Brochure Rule - Form ADV Pt. 2 -- Who must a stand-alone document be filed with?

Accepted Answer

A Stand-alone document must be filed with the SEC.

Question 36

The Brochure Rule - Form ADV Pt. 2 -- What are the requirements for a delivery of the brochure to clients: 1) . Format. 2) . When for a new client. 3) . When for existing clients. a). What can the annual amendment be? 4) . Criteria for satisfaction of this rule.

Accepted Answer

1) . Format: Paper -or- written 2) . When for a new client: Before or at the time of entering into a new contract. 3) . When for existing clients: Send an annual amendment within 120 days after fiscal year end. 4) . What can the annual amendment be? -- Can be EITHER the brochure with the Summary of Material Changes -OR- just the Summary with an OFFER to provide the current brochure. 5) . Criteria for satisfaction of this rule: delivery of Part 2 of Form ADV. a). BEFORE or AT THE TIME of entering into a contract with a new client -and- b). annual amendments to existing clients within 120 days AFTER fiscal year end. The annual amendment CAN be the brochure with the Summary of Material Changes, -or- just the Summary with an OFFER to provide the current brochure. c). delivery of the Part 2 of Form ADV satisfies the delivery requirement of the brochure.

Question 37

The Brochure Rule - Form ADV Pt. 2 -- 7). IAs requiring prepayment of more than $1,200 in fees (formerly $500) per client 6 months or more in advance MUST provide in the brochure

Accepted Answer

an audited balance sheet for the most recent fiscal year.

Question 38

The Brochure Rule - Form ADV Pt. 2 -- 8). SEC filing requirements: IAs must file:

Accepted Answer

a). Initial, amended and annual brochures electronically. These disclosures are then publicly available through the SEC website. b). Annual amendments (Parts 1A and 2A) must be filed within 90 days of the fiscal year end. c). The Brochure Supplement (Part 2B) does NOT need to be filed with the SEC.

Question 39

The Brochure Rule - Form ADV Pt. 2 -- 9). IAs DO NOT have to deliver brochures to clients who:

Accepted Answer

a). receive only general or IMPERSONAL investment advice, b). are registered as an investment companies or c). are business development companies.

Question 40

Brochure Rule Exception -- G). No contract provision can require a client to WAIVE

Accepted Answer

any right available under federal or state law. Such as to require mediation.

Question 41

Brochure Rule Exception -- What is a Hedge Clause?

Accepted Answer

A Hedge Clause in a client’s advisory contract is a disclaimer intended to relieve the advisor from liability for conduct where the client MAY have cause under state or federal law.

Ch 06(4-7) Federal Acts | IA Act of 1940 - Contracts, Brochure Rules, Anti-Fraud, Custody, and Solicitors Flashcards

Investment Advisors Act of 1940. Advisory Contracts and Brochure Rules Anti-Fraud Provisions and Disclosures Custody of Client Funds and Securities Solicitors (Rule 206)

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Ch 06(4-7) Federal Acts | IA Act of 1940 - Contracts, Brochure Rules, Anti-Fraud, Custody, and Solicitors Flashcards

Investment Advisors Act of 1940. Advisory Contracts and Brochure Rules Anti-Fraud Provisions and Disclosures Custody of Client Funds and Securities Solicitors (Rule 206)

Brainscape's Knowledge Genome^TM