Chapter 1 - Investment Advisers

Question 1

Investment advisers

Answer 1

• receive compensation of some kind for investment advice
• includes financial planners
• includes those who publish investment advice/recs/analysis

Question 2

Three-pronged test for an investment adviser

Answer 2

1) offers advice or analyses concerning securities
2) is in the business of offering such advice (even if not primary service)
3) receives compensation for offering these services

Question 3

Are you an investment adviser if you evaluate pension plans or select managers for a pension plan?

Answer 3

Yes, you are an investment adviser

Question 4

List of people who ARE NOT investment advisers

Answer 4

1) an investment adviser representative
2) a bank, savings institution or trust company
3) a lawyer, accountant, engineer or teacher who provides incidental advice
4) a broker-dealer or its agent who provides incidental advice and no compensation
5) a publisher of any bona fide news stuff (hard copy or electronic) that doesn’t give specific investment advise
6) any person that is a federally covered investment adviser
7) any one that the Administrator exempts

Question 5

Have to register as an investment adviser in your state unless…

Answer 5

• you have no place of business in that state
• all clients are investment companies (institutional investors)
• de minimus rule: if any adviser has no more than 5 non-institutional clients in a state during the last 12 months, they are not required to register

Question 6

de minimus rule for exemption from state registration

Answer 6

• if any adviser has no more than 5 non-institutional clients in a state during the last 12 months, they are not required to register

Question 7

Advisers registered at the federal level are called

Answer 7

Federal Covered Advisers

Question 8

NSMIA covers what?

Answer 8

the separation of federal and state registration

Question 9

If adviser has less than $100m in assets under their care, they only have to register for _____ registration

Answer 9

state

Question 10

If adviser has $110m or more in assets under care, they have to register on the _____ level

Answer 10

federal

Question 11

If adviser has between $100m and $110m, they can choose to register at ____ or _____ level

Answer 11

state or federal

Question 12

Additional factors that result in having to register at the federal level include…

Answer 12

• adviser to registered investment companies
• pension consultant
• affiliated with an SEC-registered adviser
• mid size adviser ($25-100m AUM) to a business development company
• mid size adviser not required to register in their state
• advisers in Wyoming
• principal office is outside US
• mid size who are registered in 15 or more states
• small advisers (under $25m) that are registered in 15 or more states
• interactive website advisers
• advisers who expect to be eligible for SEC registration within 120 days
• whoever the SEC deems

Question 13

A federally registered adviser must switch to state level registration is their AUM drops below

Answer 13

$90m

Question 14

Under Dodd-Frank, the following are EXEMPT from the definition of an investment adviser:

Answer 14

• a bank or bank holding company that is not an investment company and does not act as an investment adviser
• a lawyer, accountant, teacher, engineer who provides incidental advise
• broker dealer whose advise is solely incidental
• publisher of news stuff
• a person who only gives advise on US gov’t securities and certain exempt securities
• nationally recognized statistical rating agency that does not give recs or manage assets
• a family office
• others designated by SEC

Question 15

For registration, Part 1 of Form ADV includes the following information:

Answer 15

• information about ownership and nature of their practice, including names of principals
• location of main office
• types of services offered
• whether adviser keeps custody of assets
• locations of books and records
• relevant regulatory/disciplinary history

Question 16

For registration, Part 2 of Form ADV includes the following information:

Answer 16

• fees or fee structure
• types of clients and investments
• methods of analyzing investments
• educational and business backgrounds of advisers

Question 17

For state registration, an adviser must submit parts ________ of the ADV, while a federal registrant only needs to submit parts _______

Answer 17

parts 1&2, a federal registrant only needs to submit parts 1 & 2A

Question 18

For registration, applicants must submit a ________ and _______

Answer 18

Form ADV and U4

Question 19

An application for registration becomes effective at _____ on the _____ after the application is initially filed.

Answer 19

Noon on the 30th day

Question 20

If a state administrator wants to initiate a hearing based on the applicant’s admission, they may do so within ____ following the registration

Answer 20

90 days

Question 21

If a firm is registering with the SEC on a federal level, the SEC has _____ to approve or deny registration

Answer 21

45 days

Question 22

An administrator has the power to set an earlier effective date if they choose. T/F

Answer 22

True

Question 23

Can an applicant perform functions that would require registration before registration is approved?

Answer 23

No, but can do clerical tasks

Question 24

An adviser’s registration remains effective until __________ of the year for which the registration was filed

Answer 24

midnight on December 31st

Question 25

When an adviser files an application for a successor firm for the unexpired portion of the year, do they need to pay an application fee?

Answer 25

No

Question 26

Advisers who have custody over client assets must have a net worth of ________

Answer 26

$35,000

Question 27

Advisers who do not have custody over client assets must have a net worth of _______

Answer 27

$10,000

Question 28

Discretionary authority is when an adviser can do what?

Answer 28

Make trades without permission

Question 29

Any adviser who requires prepayment of fees in excess of $500 per customer must maintain a _____ net worth

Answer 29

positive

Question 30

If you don’t meet capital requirements, you must file the following documents by COB the NEXT business day

Answer 30

• trial balance of all ledger accounts
• statement of all client funds or securities
• total of all clients’ debit balances
• total number of client accounts

Question 31

Administrator may require adviser to purchase a _____ bond if not meeting capital requirements

Answer 31

surety bond ($5000 increments)

Question 32

Net capital requirements are based on place of ______- office

Answer 32

principal office

Question 33

Can’t require net capital requirements greater than _______ or _______

Answer 33

state of principal office or as mandated in the Investment Adviser Act of 1940

Question 34

Post-registration requirements include:

Answer 34

• financial reports on their own and firm’s financial condition
• recordkeeping
• audits
• access persons
• bond or insurance
• brochure rule

Question 35

Record keeping for post-registration includes

Answer 35

• must keep virtually every client form and marketing literature for 5 years (begins at the end of the fiscal year in which record was created). must be easily accessible for 2 of the 5 years
• if adviser goes out of business, must keep records for an additional 3 yrs
• a state can’t require an adviser to keep more records than are required by law
• the state Administrator can review records in their own state and cross-state to aid an investigation

Question 36

Audits for post-registration includes

Answer 36

• can be audited at any time or for any reason that the Administrator sees fit if in the public interest (sometimes adviser has to pay a fee to have audit conducted)
• can’t conduct audit of Federal Covered Adviser unless principal office is in that state

Question 37

Access persons for post-registration

Answer 37

• employees, directors, officers and fiduciaries with access to inside information
• must be monitored and send brokerage information for review

Question 38

Bond or insurance requirements for advisers with custody or authority

Answer 38

• if have custody or authority over assets, may be required to purchase a surety bond (or post some cash or exceed net capital requirements)

Question 39

Brochure rule

Answer 39

• must make certain disclosures to prospective and existing clients
• must be in plain english
• must include: types of services required, fee structure, conflicts of interest and additional fees, material disciplinary actions against firm, educational and business background of management/advisory pannel

Question 40

The brochure/disclosure statement must be delivered to clients at least _____ before an advisory account is opened

Answer 40

48 hours, if not advisory client will have five business days to terminate the contract without penalty fees
- brochure must be delivered before the contract is signed

Question 41

State level registration can be terminated for the following reasons

Answer 41

• denial because not in interest of the public
• revocation for public harm
• suspension for less serious infractions (paperwork etc)
• withdrawal using From ADV-W (becomes effective after 30 days - still under jurisdiction for 1 year)
• restriction/limitation to only certain settings/capacities

Question 42

There are 12 categories for which an adviser might be disciplined:

Answer 42

1) Filing incomplete applications
2) Willfully violating securities regulations
3) Prior felony convictions or security related misdemeanors within last 10 years
4) Court-ordered limitations
5) Prior disciplinary orders
6) Other securities violations in last 10 years
7) Unethical behavior
8) Insolvency
9) Foreign violations - violations or revoked license within last 5 years
10) Unqualified adviser
11) Failure to supervise
12) Failure to file