Ch 5 Federal Regulations Governing Investment Advisers Flashcards
Define “assignment” as it relates to IA contracts.
The transfer of ownership of a client’s account from one advisory firm to another. Client consent is required.
What must a federal covered adviser do if its assets under management fall below $90 million?
Withdraw its federal registration and register with a state Administrator(s)
Due to SEC Release 1092, what other candidates are included in the expanded IA definition?
Sports and entertainment reps, pension consultants and financial planners
True or False: According to the USA, investment advisers may generally charge performance-based fees.
False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.
For how long does the registration of an adviser that is registered with the SEC remain in effect?
Until it has been withdrawn, cancelled, or revoked by the SEC.
Define testimonial.
An advertisement in which an individual recommends the IA’s services based on personal experiences with the firm.
True or False: A pension consultant being paid to create an asset allocation program for a plan must register as an IA.
True. The consultant must register as an IA since it is providing securities-related advice for compensation.
Under the IA Act of 1940, are banks and bank holding companies excluded from the IA definition?
Yes
True or False: Bank holding companies are excluded from the IA definition under the USA.
False
True or False: Notification to existing clients is required for a minority change in ownership of an IA.
True. However, if a majority change occurs, client consent is required since this would be considered an assignment.
May a solicitor receive compensation from an IA?
Yes, if the IA is registered, a written agreement exists, and a court has not limited the solicitor’s activities.
Regardless of assets under management, IAs must register with the SEC if any client is a ______________________________.
registered investment company.
The program where a single fee is charged in lieu of commissions and advisory fees is generally called a ______ program.
wrap program.
If employed by a federal covered IA, is an IAR required to register in all states in which she is conducting business?
No. If the IAR has no place of business in the state, no state registration is required.
If an IA maintains custody of a client’s funds or securities, how often must account statements be provided to clients?
Statements must be sent quarterly.
If a firm provides advice solely based on U.S. government securities, is it required to register as an IA with the SEC?
No. U.S. government securities advisers are excluded from the IA definition under the IA Act of 1940.
Is an exculpatory provision in an advisory contract permitted?
No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited.
An newly hired investment adviser representative wants to put the initials “IAR” on her business card. Is this allowed?
No. However, she may spell out “Investment Adviser Representative.”
True or False: A person soliciting for an IA must annually provide a disclosure regarding the IA’s performance.
False. However, at the time of contact, the solicitor must provide clients with a solicitor disclosure document.
An IA has custody if it inadvertently receives client securities and hasn’t returned them within ____ business days.
3 business days.
If an IA maintains custody of client funds, are unannounced audits required?
Yes. IAs must arrange for unannounced audits on an annual basis.
What is required of an IA to assign an advisory contract to another adviser?
Written permission of the client
Define assignment.
The transfer of an advisory contract by the adviser or any change in the overall management of the advisory firm.
May an IA use testimonials in its promotional material?
No
True or False: IAs are permitted to charge different fees to different clients for the same service.
True. Provided proper disclosure is made, charging clients different fees is permitted.
True or False: An IA maintaining custody of client assets need not notify the Administrator.
False. The Administrator must be notified in writing using Form ADV.
An IA inadvertently receives client funds/securities and doesn’t return them within three business days. Is this custody?
Yes
Define the term custody.
The legal responsibility for, or control over, another person’s assets
When an adviser files Form ADV with the SEC, when does registration become effective?
Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings.
True or False: Bank holding companies are not considered IAs under the USA.
False. They are excluded from the definition under the IA Act of 1940, not under the USA.
True or False: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts.
False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500.
An adviser is registered with the SEC under the Investment Advisers Act of 1940. What is the firm considered?
A federal covered adviser
The IA Act of 1940 considers any communication that is directed to more than ___ person(s) to be advertising.
one
Before an IA may assign a client’s contract to another advisory firm, it must obtain the ________ ________.
client’s consent.
An IA manages more than $110 million in assets and has only insurance companies as clients. Is SEC registration required?
No. An SEC exemption is provided to IAs whose only clients are insurance companies.
An IA is established as a partnership and two of its five partners retire. Is this considered an assignment?
No, since it is only a minority change of partners. A majority must retire for it to be considered an assignment.
When an IA has custody, with whom are the assets held?
Assets are held by a qualified custodian. Clients must be notified of custodian’s name, address, and manner of holding.
May investment adviser’s advertising refer to testimonials?
No. Testimonials may not be circulated to clients.
If an IA has $20 million under management and advises an investment company, with whom must it register?
Any IA that advises an investment company must register with the SEC (regardless of its AUM).
If an adviser exercises full discretionary control over a client’s account, does this constitute custody?
Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.
An investment adviser with more than $___________ under management must register with the SEC.
$110 million
True or False: Bank holding companies are not considered IAs under the Investment Advisers Act of 1940.
True
What is the federal law that governs investment advisers?
The Investment Advisers Act of 1940
Will a client always pay lower fees in a wrap account?
No. Depending on the frequency of the client’s trading, he may ultimately pay more than if the fees are paid separately.
What is required of an IA if the firm goes through a majority change in ownership?
The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided.
Define solicitor.
Any person who, directly or indirectly, solicits any client for, or refers any client to, an IA.
For an IA to act as both an adviser and broker-dealer, what must be disclosed to clients before trades are effected?
The fact that the IA may be collecting both advisory fees and commissions
An IA is created as a sole proprietorship is then converted to a partnership. This is considered client contract __________.
assignment.
Does a solicitor for an IA provide securities recommendations?
No. Solicitors only solicit new clients; they do not recommend or approve transactions.
Identify the acronym: NRSRO
Nationally Recognized Statistical Ratings Organization
Is registration with the SEC required of an adviser that manages $87 million of assets?
No. An established FCA must register with the state Administrator if the AUM falls below $90 million.
True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA’s services separately.
True
Define the local exemption from SEC registration for an IA.
The IA’s clients reside in the state in which its office is located and its advice is not related to exchange-listed securities
True or False: An IA that has full discretion over a client’s account at a separate BD is considered to have custody.
True
Is an IAR who is employed by a federal covered adviser required to register in the state?
Yes. IARs of federal covered advisers must register in any state in which they have a place of business.
A client has just learned that his account will now be handled by another IAR. Is this considered an assignment?
No. Control of the account has not changed simply based on an IAR leaving the firm.
When is a pension consultant required to register as an investment adviser?
When it is being paid to provide securities-related investment advice
Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $____________.
$2,200,000
True or False: If an adviser’s only clients are insurance companies, it is exempt from SEC registration.
True
When assigning an IA contract to another IA, _______ _______ must be obtained from the client prior to assignment.
written consent
Is an organization that provides ratings of securities and is nationally known considered an IA under the USA?
No
If ABC Advisers has $112 million under management, it must register with ________.
SEC.
Identify the acronym: RIA
Registered Investment Adviser
Under the IA Act of 1940, an IA may charge performance fees to clients with at least $_________ under management.
$1,100,000 under management.
The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than _____ clients.
10 clients.
According to the USA, all investment advisory contracts must be in __________ form.
written form.
Define investment supervisory services.
The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client.
If an IA is in possession of checks drawn by its client and made payable to third parties, how may custody be avoided?
By ensuring that it forwards the check within three business days
True or False: An IA may offer discounted fees to clients if proper disclosure is made in its brochure and Form ADV.
True
The rule governing the disclosure requirement of an IA to its clients is referred to as the __________ Rule.
Brochure Rule.
Define impersonal advisory services.
Services costing less than $500 per year that are not tailored to meet the investment objectives of a specific client
True or False: A pension consultant that advises a plan regarding the accountant it should hire must register as an IA.
False. IA registration is not required if a consultant provides incidental advice that is not securities-related.
True or False: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the U.S.
True
If a pension consultant advises a plan regarding the law firm it should hire, must the consultant register as an IA?
No. IA registration is not required since the consultant is providing incidental advice that is not securities-related.
An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?
No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.
