Chapter 4 Flashcards
Investments advisers have to register with whom and with what form?
Either the SEC or one or more states, using Form ADV
Form ADV Part 1
Includes information about an adviser’s business, ownership, clients, employees, business practices, affiliation and any disciplinary events of the adviser or its employees.
Form ADV Part 2
Part 2 consists f a series of items that contain disclosure requirements for an investment adviser’s brochure as well as other required supplements.
Form ADV Part 2A
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
Delivering the brochure
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
Who are federal covered advisers not required to provide a brochure to?
1) Investment companies
2) Clients whose contracts are only for impersonal advisory services and they pay less than $500 per year
When must an adviser provide an updated brochure?
120 days after the end of the adviser’s fiscal year
Investment Adviser Exceptions (6)
- IARs
- Banks, savings institutions, trust companies
- Lawyers, Accountants, Teachers, Engineers
- Broker-dealers and their agents
- Publishers
- Federal Covered Advisers (under NSMIA)
AUM of 110M+
Federal Covered Adviser
Must register with SEC
May be subject to Notice Filing in the state in which they have an office
AUM 100M - 110M
IA may choose to register with SEC OR State Admin
AUM 25M - 100M
Mid-Sized Adviser
Must register with state Admin
AUM less than 25M
Small Adviser
Must register with state Admin
When does an IA need to withdraw its federal registration?
When the IA falls below 90 million
If an investment adviser has ONE client that is a registered investment company (such as amutual fund), where do they need to register?
With the SEC
Federal Covered Advisers (8)
- Advisers to investment companies
- Advisers to business dev companies
- Advisers that are not regulated by the state in which they have their principal office
- Pension consultants for employee benefit plans that have assets of at least $200M
- Internet advisers that provide advice through an interactive website based on client-provided info
- Advisers to private funds with assets of $150M+
- New advisers that believe they will be eligible for SEC Registration within 120 days
- Multi-state advisers that would otherwise be required to register in 15 or more states
When is state registration required for the Investment Adviser AND an Investment Adviser Rep?
If it has an office in the state OR more than 5 non-institutional clients
When does a federal covered IA and IAR have to register in the state?
Covered IA: Never
Covered IAR: if they have an office in the state (not based on number of clients)
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):
1) IA Federally Covered = $1200, six months in advance or more
2) IA State Level = $500
Client cancellation (Brochure Rule)
If you give the client the brochure more than 48 hours before they sign, they cannot cancel.
Brochure Rule Exclusions (2)
- Contracts with registered investment companies
- Contracts for impersonal advisory services costing less than $500 per year
What does an investment adviser have to do if they DO have custody?
- Notify the administrator in writing
- Appoint a qualified custodian to hold client funds and securities in a separate account
- Tell clients who the custodian is and manner which assets are held
- 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
Minimum Financial Requirements for IAs
Who determines the requirement?
What is the Minimum Requirement?
When to report a deficiency?
- State administrators where the IA’s home office is located
- Minimum: $35K for custody, $10K for discretion only
- Within 1 business day
IA Recordkeeping Requirements
1) Maintain books and records for how many years?
2) When must financial reports be reported to the administrator?
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
Form ADV
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.
When publishing past recommendations, how long must the adviser go back for?
1 year of all recommendations of the same type.
The maximum criminal penalties for violations of the USA are:
3 years in prison and a 5K fine
How long must a surety bond stay in place after an IA closes their practice?
3 years
An investment dviser includes, but is not limited to:
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
When does the USA permit the administrator to designate an officer?
1) Subpoena witnesses and compel their attendance
2) Administer oaths and affirmations
3) Require books and records to be furnished
