Chapter 4

Question 1

Investments advisers have to register with whom and with what form?

Answer 1

Either the SEC or one or more states, using Form ADV

Question 2

Form ADV Part 1

Answer 2

Includes information about an adviser’s business, ownership, clients, employees, business practices, affiliation and any disciplinary events of the adviser or its employees.

Question 3

Form ADV Part 2

Answer 3

Part 2 consists f a series of items that contain disclosure requirements for an investment adviser’s brochure as well as other required supplements.

Question 4

Form ADV Part 2A

Answer 4

All clients must have the disclosure document, which includes:
1. The advisers name , address, website and date of brochure
2. Registration doesn’t imply expertise
3. Description of advisory firm
4. Fees and compensations, types of clients, capital is at risk
5. Disciplinary information
6. Adviser’s code of ethics
7. Soft-dollar arrangements
8. Whether the firm has been subject to bankruptcy during the last 10 years
9. Financial conditions

Question 5

Delivering the brochure

Answer 5

State Registered: Not less than 48 hours prior to entering into an advisory contract
or
at the time of entering the contract; client has the right to terminate within 5 business days

vs

Federal Covered Adviser: either before or at the time it enters into an investment advisory contract with a client

Question 6

Who are federal covered advisers not required to provide a brochure to?

Answer 6

1) Investment companies
2) Clients whose contracts are only for impersonal advisory services and they pay less than $500 per year

Question 7

When must an adviser provide an updated brochure?

Answer 7

120 days after the end of the adviser’s fiscal year

Question 8

Investment Adviser Exceptions (6)

Answer 8

1. IARs
2. Banks, savings institutions, trust companies
3. Lawyers, Accountants, Teachers, Engineers
4. Broker-dealers and their agents
5. Publishers
6. Federal Covered Advisers (under NSMIA)

Question 9

AUM of 110M+

Answer 9

Federal Covered Adviser
Must register with SEC
May be subject to Notice Filing in the state in which they have an office

Question 10

AUM 100M - 110M

Answer 10

IA may choose to register with SEC OR State Admin

Question 11

AUM 25M - 100M

Answer 11

Mid-Sized Adviser
Must register with state Admin

Question 12

AUM less than 25M

Answer 12

Small Adviser
Must register with state Admin

Question 13

When does an IA need to withdraw its federal registration?

Answer 13

When the IA falls below 90 million

Question 14

If an investment adviser has ONE client that is a registered investment company (such as amutual fund), where do they need to register?

Answer 14

With the SEC

Question 15

Federal Covered Advisers (8)

Answer 15

1. Advisers to investment companies
2. Advisers to business dev companies
3. Advisers that are not regulated by the state in which they have their principal office
4. Pension consultants for employee benefit plans that have assets of at least $200M
5. Internet advisers that provide advice through an interactive website based on client-provided info
6. Advisers to private funds with assets of $150M+
7. New advisers that believe they will be eligible for SEC Registration within 120 days
8. Multi-state advisers that would otherwise be required to register in 15 or more states

Question 16

When is state registration required for the Investment Adviser AND an Investment Adviser Rep?

Answer 16

If it has an office in the state OR more than 5 non-institutional clients

Question 17

When does a federal covered IA and IAR have to register in the state?

Answer 17

Covered IA: Never
Covered IAR: if they have an office in the state (not based on number of clients)

Question 18

The IA’s balance sheet if it has custody of client funds or securities or collects prepaid fees of (for IA Covered, and IA state):

Answer 18

1) IA Federally Covered = $1200, six months in advance or more

2) IA State Level = $500

Question 19

Client cancellation (Brochure Rule)

Answer 19

If you give the client the brochure more than 48 hours before they sign, they cannot cancel.

Question 20

Brochure Rule Exclusions (2)

Answer 20

1. Contracts with registered investment companies
2. Contracts for impersonal advisory services costing less than $500 per year

Question 21

What does an investment adviser have to do if they DO have custody?

Answer 21

1. Notify the administrator in writing
2. Appoint a qualified custodian to hold client funds and securities in a separate account
3. Tell clients who the custodian is and manner which assets are held
4. Give quarterly statements to client
   -If sent by IA, must arrange for a surprised annual audit
   -CPA must report audit results to administrator and provide Form ADV-E within 120 days of the completion of the audit

Question 22

Minimum Financial Requirements for IAs

Who determines the requirement?
What is the Minimum Requirement?
When to report a deficiency?

Answer 22

1. State administrators where the IA’s home office is located
2. Minimum: $35K for custody, $10K for discretion only
3. Within 1 business day

Question 23

IA Recordkeeping Requirements

1) Maintain books and records for how many years?

2) When must financial reports be reported to the administrator?

Answer 23

1) IAs have to keep it for FIVE years, with the first two years at the appropriate office vs BD’s have to keep it for 3 years.

2) Financial reports have to be reported within 30 days

Question 24

Form ADV

Answer 24

IA’s regulatory filings and disclosures are made on Form ADV and go to the state administrator.

Federal Covered Advisers file them with the SEC.

Question 25

When publishing past recommendations, how long must the adviser go back for?

Answer 25

1 year of all recommendations of the same type.

Question 26

The maximum criminal penalties for violations of the USA are:

Answer 26

3 years in prison and a 5K fine

Question 27

How long must a surety bond stay in place after an IA closes their practice?

Answer 27

3 years

Question 28

An investment dviser includes, but is not limited to:

Answer 28

1) Any partner, officer, director of an IA
2) Any person who recommends or otherwise renders advice regarding securities
3) Manages accounts or portfolios of clients
4) Determines which recommendations or advice regarding securities should be given
5) Solicits, offers, or negotiates the sales of (or sells) investment advisory services
6) Supervises employees who perform any of the previous functions

Question 29

When does the USA permit the administrator to designate an officer?

Answer 29

1) Subpoena witnesses and compel their attendance
2) Administer oaths and affirmations
3) Require books and records to be furnished