Chapter 7 Part 2 Flashcards
Other permissible uses of soft dollars include
“traditional research reports and other related publications,
discussions with research analysts concerning the securities they follow, software for analyzing portfolios, the attendance fees for a conference or seminar where company executives discuss their company’s performance, market and economic data serviccs, and certain types of trading software”
Unacceptable Soft-Dollar Arrangements
payment for advertising and marketing, travel expenses, meals and entertainment, overhead and administrative expenses, employee salaries, accounting fees, professional licensing fees, computer terminals, and the correction of trading errors
The general rule regarding handling conflicts of interest may be referred to as
the Disclose or Abstain Principle
abstain Aeling as an issuer or affiliate of
an issuer of securities
abstain Recommending unregistered, nonexempt securities or the use
of nonregistered broker-dealers
abstain Any activity that seeks to
defraud or deceive clients
abstain Charging
unreasonable fees
abstain Failing to disclose to all customers the availability of
fee discounts
abstain Using contracts that seek to limit or avoid
an adviser’s liability under the law (hedge clauses)
abstain Limiting a client’s options with regard to the pursuit of a
civil case or arbitration
abstain Borrowing money from or
lending money to clients
An investment advisory firm must keep all information concerning its clients
confidential. However, firms may release the information if required lo do so by law, or with the client’s approval
written contracts are
not required under federal law
Advisers may not include provisions in contracts that claim to
waive compliance with the Advisers Act or any of its rules or hedge clauses that absolve the adviser from liability, (e.g., through exculpatory contract provisions).
contract language may not lead clients to believe they have waived any available right to
take legal action against the adviser. This means advisory contracts may not contain mandatory arbitration provisions
A client may be asked to voluntarily sign a
predispute arbitration agreement at the time of account opening
A client’s contract may not be
assigned by the adviser without the client’s consent
Assignment is the
direct or indirect transfer of an advisory contract by the adviser or any change in the overall management or control of the advisory firm. If an adviser is a corporation, the acquisition of a majority of the adviser’s shares by another entity is a change of control requiring client consent. If an adviser is organized as a partnership, the death or resignation of a majority of the partners is a change of control requiring client consent. The death or resignation of a minority of the partners does not constitute a change of control. However, the adviser must notify clients within a reasonable period. Client consent is required for a contract to be assigned to another adviser
Performance based fees are fees that are based on
a share of the capital gains or capital appreciation in the account. Congress placed a general prohibition on performance fees in the Advisers Act. However, several exceptions are allowed for sophisticated investors who understand the investment adviser may be compensated on unrealized gains and may have an incentive to make speculative investments
The Advisers Act permits performance-based fees for certain clients. The types of clients who may be charged a performance-based fee include
registered investment companies, such as mutual funds; Qualified clients that have at least $1,000,000 under management with the adviser or have more than $2,000,000 in net worth; Clients that are not U.S. residents; Knowledgeable individuals associated with the investment adviser, such as an executive officer, director, trustee, general partner, or nonclerical employee who has participated in the investment activities of the adviser for at least 12 months; Section 3(c)(7) hedge funds
