Chapter 3 17 Qs Federal And State Regulation Of Investment Advisers And Their Reps Flashcards

Question

Investment Counsel

Answer 1

2 criteria under Investment Advisers Act of 1940 1. IA's principal business must be giving investment advice 2. Provide investment supervisory services, which would apply if: - you have discretionary authority and manage account - ongoing responsibility to make recommendations and effect the trades - compensated based on average value of client assets - must continuously monitor and reallocate assets Not included if: 1. Only providing market timing recommendations 2. Impersonal investment advice 3. Not regularly monitoring/reallocating funds 4. Only providing on specific date or intermittently May still use if Investment adviser is insolvent (under USA it is reason for revoking registration)

Answer 2

Insolvency is not cause for cancelation or revocation on federal level It is however under the Uniform securities act

Answer 3

Extra protection is given to clients 1,200 in fee prepayment per client, six months or more in advance USA it is $500 State and federal law offer extra protection to clients of IAs who pay early IAs soliciting clients for substantial prepay must give client balance sheet and ADV part 2a BS must be audited by a cpa State- Those who maintain custody of client assets or with an affiliated BD must also deliver ADV part 2a and BS State registered advisers must file a BS regardless if exercising discretion

Answer 4

If an advisor has custody of client assets or discretion, may have to post a surety bond Net worth (Net capital for BDs) requirement for IAs is 10,000 for discretion, 35k for taking custody If using surety bond 35,000 either way Must maintain positive net worth if accepting prepay of fees over $500 Meet requirements in principal state, meet it in all

Answer 5

If an IA falls under the 10k discretion or 35k custody threshold, then must secure a surety bond for amount in multiple of 5k Must notify administrator by end of next business day. Must also send a financial report to administrator by close of business on next day Occurs on Monday, notify by Tuesday, Financial report on Wednesday Report must include client amount

Answer 6

Does not include intangible assets Includes office furniture

Answer 7

Partner, director, officer or other employed individual by an IA Must be registered if state registered IA, if federal only have to register if you have place of business Defined as doing following: - Makes any recommendations or otherwise renders advice - Manages accounts or portfolios of clients - Determines advice to be given - Sells, offers or negotiates sale of IA services - Supervise employees doing tasks Only an individual can be an IAR

Answer 8

Registration not effective if unemployed Must have.a place of business in state to be required to register if working for a federal covered adviser Register with IA, include personal info in ADV Part 1 IARs never register with SEC, only with States No financial requirement, bankruptcy can be cause for denial

Answer 9

If only providing impersonal investment advice and not actively giving advice, then not an IAR Only register if over 5 clients in 12 month period

Answer 10

Written or oral advice given not specific to individuals or accounts

Answer 11

State registered IA- Firm Notify administrator Federal covered- IAR notifies administrator Note for agents, all parties notify administrator File U5

Answer 12

USA requires materials distributed to 2 people be documented, SEC=10 If in more than one state, must meet principal state 5 year hold period from end of fiscal year (3 for BD), 2 years physical document needed. IA must follow requirement of register spot (fed or state) Partnership articles, charters, article of incorporation and stock cert books must be kept at least 3 years after termination of enterprise. Require the followingL - A journal of cash receipts and disbursements - General and auxiliary ledgers of assets, liabilities, reserv, capital, income and expense accounts - Memorandum of each order and any instruction from client - all checkbooks, bank statements, canceled checks and cash reconciliations - All bills paid or unpaid - all trial balances, financials and internal audit workings - All written communications related to recommendations, receipt, or order except the names/address of those who received a mass communication - record of discretionary accounts and POA - Written agreements between the adviser and client - A copy of recommendations, and a memorandum if no explanation is given Must also keep audited statements for pooled investment vehicles Must include: -Date of the audit -Copy of audited financial statement -Evidence of mailing of audited financial statements within 120 days Not required to keep a copy of the minutes of the BofD, bank statements or trust agreements

Answer 13

Federal covered advisers only under rule 204A-1 Requires: - A copy of code of ethics developed by IA - Record of violations and punishments - Record of all acknowledgements to code of ethics in past 5 years - Adviser access persons are required to document personal transactions an holdings

Answer 14

Should include: - prior written approval before personal transactions - list of securities recommended that the advisory firm is analyzing or recommending, and prohibitions on trading in those securities - Maitenance of restricted lists which firm has inside info - Reminder that investment opportunities should be presented to clients first

Answer 15

1. Has access to non public info on client transactions or of a reportable fund 2. Involved in security recommendations All directors, officers and partners are presumed to be control persons Required material: - record of reports made by access persons - record of people who are or were access people in past 5 years after end of fiscal year in which the approval was granted - Record of decision to approve access person trades

Answer 16

Must provide to new and prospective clients: - 2A Firm brochure - 2A Appendix 1- Wrap fee program - 2B- Brochure supplement (describes certain supervised persons) Must provide Narrative to part 2 questions and must indicate non applicable questions. 18 parts and includes: - description of services - fees and comp - method of analysis, risk loss - Disciplinary info - Custody practices If Fed covered, not required to file through IARD but must have available If state, must make available to all and part 2B must be filed for each supervised person Must detail on cover page that additional info is available on SEC web

Answer 17

Covers- - educational background and business experience - discipline info in past 10 year, unless still material issue - disclosure of additional compensation - supervision- provide name, title and telephone number People included: - any supervised person who formulates invest advice and contacts clients - supervised person with discretionary authority (unless part of a team and no contact, only need top 5 in charge of discretionary advice)

Answer 18

Overall fee not dependent on specific advice Not suitable for buy and hold clients Supply 2A appendix 1, if only business is wrap fee programs then only supply appendix Only one brochure need be created if doing multiple wrap fee programs If separate brochures for rap fee programs are made, then must reference the other programs If you use but do not sponsor a rap fee program, you do not have to provide an appendix 1, just the normal 2A May use another sponsors brochure Must disclose- - Must identify the brochure as a wrap fee program - Fee charged - Negotiability of fee - Portion paid to advice givers - Services provided and statement on overall cost possibly being higher than normal fees - Notice of other fees in addition to wrap fee - Explain that person selling may be compensated for decision and it may be more than what the adviser would receive otherwise - Minimum account sizes - Investment process - Disclose whether related persons act as portfolio manager of program - Discuss conflicts of interest - Describe information about clients that is given to portfolio managers - Explain any restrictions on talking to portfolio managers STATE REGISTERED IAs -must disclose any relationship with any issuer of securities not listed in 2A

Answer 19

(SHOULD ASSUME STATE IF NOT TOLD) 2A Firm brochure- Before or at time an advisory agreement is established Must deliver updated version by 120 days into new year, unless nothing material changed, for free May summarize main points changed Nothing changed, nothing needs to be sent Only have to deliver an interim amendment if a disciplinary event occurred

Answer 20

Must deliver brochure to the client within 48 hours before entering into an advisory contract At time of contract signing if client has 5 business day termination buffer May be refunded the startup/setup fee if terminated in 5 day buffer (less pro rata amount only on initial fee)

Answer 21

Initially and annually must deliver for each supervised person providing advisory service Not required though if: 1. Clients who a brochure or wrap fee program is not needed 2. Clients receiving only impersonal advice, including subscribers paying $500 or more 3, Execs, directors, trustees, general partners or any employee participating in investment activities for at least 12 months

Answer 22

1. Contracts with registered investment companies. Provide info to board due to Invest company act of 1940 so no need. 2. Advisers providing impersonal advice. 500 or greater you must offer it though, either 48 hours/ at time of signing for state or at time of signing for Fed

Answer 23

1. Each year at time of filing annual update 2. Whenever information is materially incorrect No material change, no need to offer updated brochure Must send out amended with updated info if a disciplinary action occurs Federal advisers must file amendments electronically with IARD, but not to SEC just keep a copy in files State are required to file amendments with IARD through the state

Answer 24

Only required for clients with 1,200 in fees collected for future 6 months

Answer 25

To maintain custody of assets, IA must: - Must have a qualified custodian who is putting funds in separate accounts either in clients name or agents name for clients - Must notify client of account opening holding funds and agents information and changes in the account - Account statements are delivered by the custodian (who details all quarterly transactions) or adviser (who must give detail quarterly and is subject to an annual CPA audit of the assets at random) Under NASAA model rule, the IA may maintain custody as long as noted in ADV (exceptions listed below) 1. May keep mutual fund shares with transfer agent 2. Rule not applicable to investment companies ad they follow Investment Company Acot of 1940 Broker-Dealers only have to prove a receipt of receiving customer funds

Answer 26

Custody if third party check held for 3 days SEC never constitutes a check as custody Authorization or permission to withdraw funds from a customers account Fee prepayment is not considered to be of custody of advisor, but a fee would constitute a balance sheet being run IA is not allowed to forward client funds without consent of client Checks drawn by a client must be forwarded under NASAA by Third day (not considered custody under SEC) Discretion and fee prepay is not considered to be custody

Answer 27

Bank or savings association that is FDIC insured A registered broker-dealer holding in customer-accounts Foreign institution that segregates accounts

Answer 28

Typically not, usually done by BD

Answer 29

Must have written authorization to take fee from account Must send notice to client when fee is withdrawn Must notify administrator of safeguards being used in form ADV Deemed to have custody if checks made payable to an unrelated third party are returned to customer Will receive a waiver from the net worth and bonding requirements if only taking custody for fee purposes, and from the audited BS

Answer 30

1. Advisers having custody solely due to direct fee reduction 2. Advisers having custody solely due to pooled investments

Answer 31

The surprise exam report done by a CPA on IAs who have custody of investments and sending their own quarterly statements Filled out by adviser in unison with surprise Audit

Answer 32

Focused on elimination of conflicts of interests that may arise Investment advisors are defined by law as fiduciaries, broker-dealers are not Does not require disclosure of IAR personal transactions

Answer 33

Must give option of executing trades with multiple different BDs Must disclose material disciplinary actions within past 10 years at least 48 hours before contract signing or at signing with 5 day trial Required Discipline Disclosure would include: 1. Adviser or management being found guilty leading to denial, suspension or revoke of registration(s) 2. Court proceedings, such as an injustice, against management pertaining to investment activity or any felony 3. SRO proceeding leading to loss of registration or fine of over 2,500 4. Do not have to notify of lawsuit if not found guilty Failure to disclose would include: -failure to disclose a fee -failure to disclose an affiliation with another BD - State rep with discretionary authority or requires $500 or more in fees 6 months in advance not discussing material items impairing ability of adviser to do business ($1,200 for SEC) - favoring clients in bulk trades - disclose material legal issues from past 10 years within 48 hours before entering into contract for state, or at beginning of relationship for SEC.

Answer 34

Hedge clauses to reduce liability are illegal and not allowable Are allowable however in regards to events outside of firm control such as natural disasters or war May not be used to disclaim statements inheritently misleading

Answer 35

Yes, insurance companies however are exempt.

Answer 36

Dealing only with institutions, other IAs, other BDs and so forth

Answer 37

Must maintain and preserve the records to guard against loss Limit access to authorized personal and Administrator Non-electronic original records be recorded so to be legible

Answer 38

All must register on the state level, and not with the SEC

Answer 39

Name, business address, contact information, website address and date of the brochure Must state it is not approved by either the SEC or States Additional info available at Advisers info.org

Answer 40

No, because the client does not benefit from the fact that commissions on trading are included