Ch 4 State Regs Of IAs

Question 1

Who is an investment advisor?

Answer 1

any person who provides Advice about securities and asset allocation as a regular Business receiving Compensation for that advice

Question 2

Who is excluded and exempt from state registration?

Answer 2

Excluded:
The Publisher was Broke because they were LATE to the Bank
Publishers
Broker dealers and their agents
LATE (lawyers, accountants, teaches, engineers) as long as they don’t get comp
Banks, trust companies
Federal covered advisors under NSMIA

Exempt:
Institutional exemption: No place of business (no office) in the state and only institutional investors OR
De minimis exemption: No place of business and directs communications to <6 non-institutional clients LTM (leading a seminar to prospects is directing communication)

Question 3

Federal covered advisors under NSMIA:

Answer 3

IA who is registered with SEC

Question 4

ADV Part 1, A and B

Answer 4

A: completed by all IAs. Includes info about IA, business practices, firm ownership, about those providing advice, how they maintain client assets (if applicable) and size of AUM (discretionary and non)
B: completed by IAs registering with state only. Additional disclosure reporting, including criminal and civil issues.

Question 5

ADV Part 2A and appendix 1

Answer 5

Completed by all IAs.
Client disclosures
Conflicts of interest
Fees
Types of securities and analysis used
Education and background of those providing advice
Balance sheet if collects prepaidfees >$1200 (if federal) or $500 (if state registered), 6 months or more in advance

Appendix 1: for wrap fee programs

Question 6

When is annual renewal required for IA?

Answer 6

90 days before year end
Federal level registration users fiscal year
State level registration uses calendar year

Question 7

ADV-W, E, H, and NR

Answer 7

W: full withdrawal (no longer operating as IA) or partial (withdrawing from the federal or state registration they have)

H: advisor who is unable to file forms electronically. It extends electronic filing deadline by 7 days

E: an 3rd party audit of client funds held in custody by IA is required and this form is used by independent accountants to file results within 120 days

NR: advisors who have partners or managed outside the US and allows SEC secretary to be served legal papers on their behalf

Question 8

Advisory contracts

Answer 8

No exculpatory provisions (max lawsuit amount) or mandatory arbitration, no performance fees (% of profit) unless qualified client ($1.1M+ AUM or $2.2M+ net worth).

Can only give client to another firm (eg merger) with client consent
Must state clients will be notified of partner changes

Question 9

When must brochure be provided?

Answer 9

48 hours before signing or at signing if client can cancel within 5 days without penalty.

No need to provide procure to registered investment companies or contracts for services <$500

Also provide brochure or summary of changes (eg AUM, # accounts) annually within 90 days of fiscal year

Question 10

Requirements when IA has custody of client funds and securities

Answer 10

Notify admin
Appoint custodian to hold funds in separate account (eg Schwab) and tell client who it is
Provide quarterly statements to client (from IA or custodian)

Question 11

IA minimum financial requirements and when to report deficiency

Answer 11

Determined by admin in home office state

$35K for custody or $10K for limited discretion only

Notify deficiency within 1 day and get surety bond for difference

If fees of >$500 are paid 6+ months in advance, must always have positive net worth

Question 12

Record keeping requirements

Answer 12

Books, records, correspondence for 5 years with first 2 easily accessible
File ads with admin
File financial reports within 30 days of material changed

Includes roster of anyone who attended a seminar conducted by the advisor

Question 13

Form ADV Part 2B - Brochure Supplement

Answer 13

Like a resume for the advisor + disciplinary history
Must provide before or at time advisor begins advising client.
Not necessary if same info is covered in brochure

Question 14

When must balance sheet be provided

Answer 14

Audited version must be provided if advisor as custody of client funds/securities, discretionary authority over account, and solicits prepayment of advisory fees (>$1200 6 mos in advance of fed-registered; >$500 6 mos in advance of state)

Question 15

Who is eligible for federal registration?

Answer 15

$100M+ AUM

Question 16

Limited vs full vs oral discretionary authority for state IAs

Answer 16

Full: can trade securities and remove assets. Advisors with full discretion are considered to have custody of the assets

Partial: cab trade but not remove assets from the account

Oral: can be used in lieu of written for 10 business days. BDs never have oral discretion.

Question 17

USA requirements if an advisor has custody

Answer 17

Notify admin via ADV
Use a qualified custodian (FDIC insured institution or BD)
Written notification to clients on how funds will be maintained
Send quarterly settlements to client

Question 18

Client Financial and Disciplinary disclosures

Answer 18

Legal or disciplinary action in last 10 years
SRO proceedings if fine >$2500
Required when: discretionary authority, custody, prepayment of $500+ 6+ mos

Question 19

When would federal covered advisors be asked to notice file?

Answer 19

When they have a place of business in a state
When they have >5 non-institutional clients in the state

Question 20

How to register as an IAR with the state:

Answer 20

File ADV through IARD
File consent to service of process
Pay fee
Meet minimum financial requirements and/or post surety bond

Question 21

IAR continuing education requirement

Answer 21

Annual
6 credits Regulatory and Ethics content (3 much cover ethics specifically)
6 credits Products and Practice (not required if IA is a FINRA member aka dual registered IA/BDs)

1 credit = 50 minutes

Question 22

Who is automatically registered when their IA becomes registered in a new state?

Answer 22

Officers, directors, and partners with management responsibilities (ie not silent partners)