Ch 5 Fed Reg Of IAs Flashcards
When to register with fed vs state
AUM Test
>$100M = SEC
$100M-$110M = choose
<$100M = state
Client type test: must register with SEC if:
IA advises 1+ investment company (eg mutual fund), business development company, pension fund of $200M+, or private fund $150M+ (aka hedge fund) OR no physical office OR it’s a new IA and thinks it’ll bit SEC AUM test within 120 days OR would have to be registered with 15+ states
When does an IA need to withdraw federal regulation?
AUM falls under $90M
Must then register with state
SEC release IA 1092:
Expanded the 1940 IA definition to include sports/entertainment reps (eg contract negotiation), pension consultants, and financial planners
How does Federal exclusions from IA definition differ from state exclusions:
- Federal does not exclude federal banks and bank holding companies
- LATE are excluded unless they establish a separate entity to provide advice
- Fed excludes Advisors that only advise on fed (not muni or foreign) gov securities
- Does not exclude federal covered advisors, obviously
- Fed also excludes credit rating agencies
- Fed also excludes offices that manage one family
- Like state, federal excludes publishers, BDs, BD agents unless they manage wrap accounts
Which IAs are exempt from federal registration?
- Advisors to insurance companies (because insurance is heavily regulated)
- Advisors to Private funds (eg hedge fund) of <$150M AUM
- Advisors to venture capital (because generally not sold to public)
- Foreign private advisors - no place of business in US, <15 US clients in private fund, AND <$25M AUM from US clients
- intrastate: all clients are in one state and doesn’t advise on exchange-list securities (very rare to qualify for this exemption)
- Private and venture must still file state notice
IF VIP - Insurance, Foreign, Venture, Intrastate, Private fund
When does a federally covered IAR register in a state?
Even though an IA would never need to state register (though maybe notice file) IARs would need to if they have a physical office in that state
Federal rules (1940 act) advisory contract rules:
- Don’t have to be in writing but best practice to
- no exculpatory clauses (Max lawsuit damages) or arbitration clauses
- Can only assign to another advisor with client consent (eg merger, majority change in partners). Changing an IAR is Not considering assignment change
- Generally no performance-based fees (exceptions apply)
When can a federally covered advisor charge performance fees and what kind of fees are allowed?
Arrangements with:
- non-US clients
- Qualified clients ($1.1M+ AUM or $2.2M net worth)
- Qualified purchasers - $5M+ invested
- registered investment companies
- Business development companies
- Private investment companies (eg hedge funds of <101 shareholders)
- Knowledgeable individuals associated with the advisor (eg officer, director, non-clerical employee)
- Hedge funds with only qualified purchasers ($5M in investments or companies that invest $25M+)
Fulcrum fees
averages fee over a specified period and adjusts the fee up or down based on capital gains or losses compared to a defined benchmark
Wrap fees and requirements
- Advisor includes or wraps all charged into one annual fee
- Best for clients that benefit from paying one transaction cost m and getting unlimited trading
- Must provide a special wrap disclosure to SEC instead of regular brochure unless it’s a mutual fund asset allocation program (manages a portfolio of no load or waived load funds rather than individual securities) or a managed account program (charge advisory fees together with transaction commissions)
- Note that if a wrap account is sponsored by a BD, BD must dual register
Bunched order and rules:
When you bunch orders for multiple clients together to get lower brokerage fees on the purchase, shares within the bunch will be at different prices and you can’t allocate the lower price ones to certain clients (can use an average price or random selection)
Can IAs pay referral fees to solicitors?
- can pay if advisor is registered and there’s a written contract
- Disclose compensation agreement if agreement results in $1000+ in 12 month period
- Non-affiliated solicitors (eg attorney or CPA) must provide client advisors brochure and solicitors disclosure statement (whether they’ll be compensated and how much)
- Note that BDs can never pay fees to solicitors
Federal record keeping rules compared to state:
- Fed requires a copy to be kept if any ad sent to 10+ people (where as state is 2+)
- Neither requires a list of who it was sent to unless it’s provided to 10 or fewer (fed) or just 1 person (state)
- Both require 5 with first 2 easily accessible and 3 years after registration is withdrawn
- must keep a record of all transactions within 10 days of the quarter, excluding US gov securities
Advisor advertising standards:
both state and fed define ad as any communication directed at >1 person
- cannot list recommendations unless they list all made within the last year (ie can’t cherry pick the best ones to highlight)
- Cannot refer to any service as free unless it has no strings attached (eg can’t require a F2F with an IAR)
- Cannot use IAR abbreviation but can spell it out
- Can use a testimonial if it’s not misleading
- Performance based advertising is prohibited unless market conditions are disclosed (eg if IA earned X and S&P 500 earned Y)
When must a brochure be provided by a federally covered advisor and when is not required?
- At or before entering contract. Note that the 48- hour rule is a state rule, not federal
- Don’t have to provide to: clients that are registered investment companies or clients that pay <$500 for impersonal advisory services
Federal Financial and disciplinary disclosures
- Disclose material disciplinary actions within last 10 years (unless SRO proceeding with fine <$2501)
- Requested when discretionary authority over client, custody of client funds, or required prepayment of >$1200 more than 6 months in advance
