Chapter 3

Question 1

Investment Advisers Act of 1940

Answer 1

Federal Legislation that defines the term investment Adviser and requires persons that fall within the definition to register with the SEC or states.
2 primary purposes
1) The regulation of persons, both natural and legal, in the business of giving investment advice.
2) Establishment of standards and ethical business conduct for the industry.

Question 2

Dealer

Answer 2

Any person reglarly engaged in the business of buying and selling securities as principal for his own account, but does not include a bank, insurance company, an investment company.

Question 3

Person Associated with an Investment Adviser

Answer 3

Partner, Officer, or director of the investment adviser or any person directly or indirectly controlling or controoled by the investment adviser. Including employees except for clerical and administerial.

Question 4

SEC Release IA - 1092

Answer 4

SEC which defines who acts as an investment adviser and who doesn’t.
It includes Financial Planners
Pension Consultants
Others who offer investment advice as part of their financial practice.

Question 5

Release IA-1092

Answer 5

Investment Adviser is anyone who
Provides investment advice, reports, analyses with respect to securities.
Is in the business of providing advice or analyses.
Receives compensation, directly or indirectly. Advice could be in oral or written form, issues reports, analyses, and recommendations about specific securities as an investment advice.

Question 6

Exclusions from Definition of Investment Adviser Under Federal Law

Answer 6

1) Any Bank, or Bank Holding Company
2) Lawyer, Accountant, Teacher, Engineer
3) B/D
4) Publisher of any Bona Fide newspaper, magazine or business or financial publication of general and regular circulation. And it’s not primarily a vehicle for distributing investment advice. An example is newspapers of regular circulation.
Any person whose advice relates solely to securities issued or guaranteed by the federal government.

Question 7

Exclusions from the Definition of Investment Adviser Under State Law

Answer 7

1) Banks, Savings Institutions, Trust Companies
2) Lawyer, Accountant, Teacher, Engineer
3) B/D
4) Bona Fide newspaper, magazine, new column, newsletter, whether in hard copy or electronic, that does not cosist of rendering specific advice.
5 IAR
6) Federal covered Adviser is excluded
7) Any person excluded by IAA of 1940
8) As Administrator sees fit.
Term Bank, doesn’t include a savings and loan association or a foreign bank.

Question 8

Exemption from the Registration Requirements under Federal Law

Answer 8

Advisers whose clients are residens of the state in which the adviser has its principal office and place of business and who do not give advice dealing with securities listed on exchanges.
Advisers whose only clients are insurance companies.
De Minimis Exception - Preceeding 12 months, had fewer than 15 clients, none of which are investment companies, and do not hold themselves to be IAs.

Question 9

Federal Covered Advisers

Answer 9

Required to be registered under SEC because they meet threshold requirements
Excluded from the definition of an investment adviser by the investment advisers act of 1940
Under contract to manage an investment company registered under the Investment Company Act of 1940

Question 10

Exemptions from Registration Requirements Under the USA

Answer 10

Clients are:

1) B/Ds registered under the Act
2) Investment advisers
3) Institutional Investors, including large employee benefit plans.
4) Existing customers in vacation
5) Limited to 5 or fewer clients other than those listed above during the preceding 12 months.
6) any other by rule of the administrator.

Question 11

ADV

Answer 11

Part I is filed with SEC
Part II is kept at main office.
45 days to accept or reject.
For partners, officers, directors ADV part II discloses education past high school, or those responsible for rendering the advice.

Question 12

Schedule I

Answer 12

Investment Advisers can register with SEC if in 120 days they may have over $100 million under management.
Also for those that are registered in at least 30 states.
ADV-I used to determine eligibility and must be submitted no later than 90 businss days from end of fiscal year. Used for renewals, not amendments.

Question 13

Changes requiring prompt notification

Answer 13

Change in registrant name
Change in principal office
Change in location of books and records
Change in contact person preparing form
Change in organizational structure of the partnership or corporation
Change in disciplinary actions
Change in custody/discretion of customer funds/securities.
Any material Changes of part i and ii of adv.
90 days to register with sec
180 days to register with state.

Question 14

Fees

Answer 14

ADV is in effect until withdrawn But there are annual fees. If there is a change in corporation structure there are no fees but ADV must be updated.

Question 15

Withdrawal of IAs

Answer 15

is 60 days after filing with SEC

Note that withdrawal from state is 30 days for agents.

Question 16

Investment adviser Code of Ethics

Answer 16

Code of Ethics Persuant to Advisers Act of 1940
Record of any violation to code of ethics
A record of all written acknowledgements for 5 years.
Requires access persons to report their personal securities transactions and holdings.

Question 17

Personal Trading Procedures

Answer 17

Prior written approval before access person can place personal transaction.
Maintenance of lists of issuers of securities that advisory firm is analyzing recommending.
Maintenance of restricted lists and inside information.
Blackout periods when access persons are not allowed to enter orders.
Opportunities must be offered first to clients, before the adviser or its employees may act on them.
Prohibitions on short swing trading
Limitation of brokerage firms
Duplicate statements and confirmations.
Procedures for assigning new securities analyses to employees whose personal holdings do not represent apparent conflicts of interest.

Question 18

3 exceptions to transaction reports

Answer 18

Automatic reinvestments, or eriodic purchases. Dividend reinvestment plan,
Access person has no discretion, control, or influence.
Only one access person.

Question 19

Reportable Securities Exceptions

Answer 19

Direct Hodings or obligations of the US Government
Money Market Instruments, CD’s included.
Money Market Funds
Other Mutual Funds unless he she is the undewriter or the adviser for the fund.
Unit investment trusts if invested in unaffiliated mutual funds.

Question 20

The Brochure Rule

Answer 20

Must be delivered at least 48 hours before advisory contract or at time of contract provided the individual has 5 days to terminate contract. There are 2 exceptions for the deliver of the brochure.
Investment Companies of act of 1940
Advisers entering a contract for impersonal advice if it’s less than $200. Must be re-delivered annually at no charge.

Question 21

Wrap Fee Programs

Answer 21

Does not use ADV part II, instead, it uses Schedule H of ADV. It must be filed with SEC or State. Material Changes must be filed promptly, nonmaterial changes must be filed within 90 days after adviser’s fiscal year end.

Question 22

Required H Disclosures

Answer 22

Amount of Wrap Fee charged
Whether fees are negotiable
Portion being paid to the IARs
Services Provided under the program, including the types of portfolio management services.
A statement that the program may cost the client more or less than purchasing these services seperately.
Any additional fees. Buy and Hold fees are not suitable.

Question 23

Safekeeping IA

Answer 23

1) Have Qualified Custodian - separate accounts for each client under client’s names, or under your name as agent or trustee for the clients.
2) You give notice to your clients - notify of the custodian name and address and the manner in which the funds or securities are maintained, promptly when the account is opened and following any changes.
Account Statements Delivered to:
a) By Qualified Custodian - sends account statement at least quarterly, identifying amounts of funds and a description of all transactions.
b) By Adviser - Quarterly Statement to each of your clients for whom you have custody or securities, identifying amounts and all transactions. Independent Accountant must verify all of those funds and securities by actual examination at least once annually.
3) The client designates independent representative.

Question 24

Public Accountant Audit

Answer 24

At least annually, audito’rs report filed within 30 days if no preceeding, otherwise, within one business day, electronic filed by first class mail directed to Director of the office of compliance inspections and examination/administrator.

Question 25

Exceptions to the Rule

Answer 25

Shares of Mutual Funds
Private offerings
a)Acquired from issuer not involving public offering.
b) Uncertificated, ownership where there is book entry with issuer or transfer agent in the name of the client.
c)Transferable only with consent of the issuer or holders of the outstanding securities of the issuer.
2) Registered Investment Companies

Question 26

Definition of Custody

Answer 26

Possession of Funds or Securities
USA - third party clients drawn by clients if not sent within 24 hours. SEC never considers third party checks to be custody.
Power of attorney under which you are authorized or permitted to withdraw client funds or securities.
General Partner or Limited Partner, managing members of a limited liability company, or comparable position such as trustee of a trust.

Question 27

Qualified Custodian

Answer 27

Bank or Savings Institution association that has deposits insured by FDIC under the FDIA.
A registered Broker/Dealer holding client assets in customer accounts,
Foreign Financial Institution that customarily Holds financial assets provided that the foreign financial institution keeps the advisory client’s assets segragated.

Question 28

USA and deduction fees

Answer 28

Written authorization to deduct fees
Notice of fee deduction each time it’s withdrawn and concurrently send qualified custodian notice of the amount of the fee to be deducted and sent the client itemizing the fee. includes fee and formula, amount ofassets and time period. Notice must be provided to administrator in ADV
If it complies with these safeguards, it must not meet the 35,000 net worth standard.

Question 29

Differences in Custody Between SEC and State

Answer 29

Federal covered advisers using a qualified custodian do not need to include a balance sheet. State covered advisers do need to include an audited annual balance sheet.
Federal Covered Advisers do not need to include itemized deductions with brochures. State covered adviseres need to send itemized deductions with brochure.