Chapter 4 Flashcards
What was the Investment Advisers Act of 1940 designed to do?
Regulate advice, publications, and reports prepared and distributed by investment advisors. It is the federal statute that is the primary source of all the rules and regulations governing Investment Advisors at the federal level.
According to the 1940 Act, what is the definition of an I/A?
A person who receives compensation for advising other about securities or about the advisability of investing in securities.
According to the 1940 Act, what is considered compensation?
management fees, wrap fees, commissions, hourly rates, and any other form of economic benefit.
According to the 1940 Act, would a person whose service is only related to U.S. Government securities be considered an I/A?
No.
According to the 1940 Act, who else would be exempt from the definition of an I/A?
1) Any bank or bank holding company.
2) Any lawyer, accountant, teacher, or engineer (LATE) whose performance of such advisory services is incidental to the practice of their profession.
3) Any publisher of any bona fide newspaper, new magazine, business, or financial publication of GENERAL or regular circulation.
According to the 1940 Act, what are two exemptions from registration?
1) An I/A whose only clients are insurance companies.
2) Any I/A whose had few than 15 clients during the past 12 months and doesn’t hold itself out to the public as an investment advisor nor acts an investment advisor to an investment company.
According to the 1940 Act, what are 5 books and records that must be kept by the I/A?
1) Journals of cash receipts and disbursements.
2) Account number on the order memorandum (name of customer isn’t required).
3) Checkbooks, bank records, and bill relating to the business (doesn’t need a log of telephone calls).
4) A copy of each notice, circular, advertisement, or other communication circulated to 10 or more persons.
5) All records pertaining to the calculation of performance or rate of return where recommendations are distributed to 10 or more persons.
According to the 1940 Act, how long must books and records be maintained?
5 years from the end of the fiscal year in which the entry was made. (Federal = Five)
According to the 1940 Act, how long must an I/A keep a copy of all books and records after termination.
3 years.
According to the 1940 Act, for a qualified client (750K under management or 1.5mm NW), what are the parameters for I/A’s charging performance based fees?
They may provide for compensation on the basis of a share of capital gains or capital appreciation of funds under management for a defined period. Performance on managed accounts is calculated after deducting advisory fees and expenses.
According to the 1940 Act, how often must brochures be offered to existing customers?
Annually
According to the 1940 Act, does the offer to provide the brochure have to be filed with the SEC?
No. Part II of form ADV may be provided to clients to satisfy the “brochure rule”. One exception, the brochure doesn’t have to be delivered to or offered to an existing prospective client in connection with an investment company contract or a contract for impersonal advisory services.
According to the 1940 Act, when and how much I/A’s disclose when they act as B/D in any capacity?
Before completion of the transaction and must obtain written consent of the client for the transaction.
According to the 1940 Act, can testimonials be used in advertisements?
No.
According to the 1940 Act, when can advertisements refer to past recommendations that were profitable?
If the advisor offers to furnish a list of all recommendations made within the previous year.
