Financial Services Regulations and Requirements Flashcards
Investment Advisors Act (IAA) of 1940
The Securities and Exchange Commission (SEC) regulates investment advisors and their activities under the Investment Advisors Act (IAA) of 1940
SEC/State regulatory requirements
Registered Investment Advisors (RIAs) with less than $100 million under management currently
register with their state of office (not home) domicile. Advisors may need to register in multiple states.
If the state has no provisions for registration, advisors can register with the SEC.
Definition of an Investment Advisor
The Investment Advisers Act (IAA) provides a three-pronged definition for determining who is an
investment advisor:
* A person who provides Advice or issues reports or analysis regarding securities
* A person who is in the Business of providing such services
* A person who provides such services for Compensation
- This is an “and” type situation. All three parts must apply and be met for the definition to apply.
Remember A, B, C (Advice, Business, Compensation).
-The SEC defines compensation as “receipt of any economic benefit.” This includes commissions on the
sale of products.
Exceptions to filing as an investment advisor
- A Bank or bank holding company
- A Lawyer, Accountant, Engineer, or Teacher whose performance of advisory services is solely incidental to the practice of his profession
The above exceptions are most frequently tested. Remember: BLAT - A broker or dealer whose performance of advisory services is solely incidental to his conduct as a broker or dealer and who receives no special compensation for the advice
- A publisher of a bona fide newspaper or financial publication of general or regular circulation
- A person whose advice is limited to securities issued and guaranteed by the U.S. government
- An intrastate advisor in unlisted securities (all clients in one state)
- An advisor whose only clients are insurance companies
- A family office (this replaces the 15-client exemption under Dodd Frank)
SEC definition of “family office”
Provides investment advice only to family members, as defined by the rule; certain key employees; charities and trusts established by family members; and entities wholly owned and controlled by family members.
* Is wholly owned and controlled by family members.
* Does not hold itself out to the public as an investment advisor.
Financial Reform Bill
The states will regulate equity indexed annuities. The SEC is barred from oversight of these products. Investment managers who are not currently subject to oversight by the Securities and Exchange Commission may be required to register with the SEC.
Investment advisor registration with the SEC
- Files an ADV form with SEC
- Pays filing fee of $150 (minimum)
- Submits ADV Part 1 and Schedule I updates annually
Form ADV - Part 1: general information
- Applicant
- Locations
- Disciplinary action
- Background of applicant
- Form of business
- Investment philosophy
Form ADV - Part 2: Brochures
- Form ADV Part 2 must describe the nature of the RIA’s business structure and relationships, along with
information about fees, services, conflicts of interest, methods of analysis and investment strategies, risk
of loss, brokerage practices and other significant matters such as disciplinary condition are now required to be presented in the Brochure. - A Brochure will contain up to 18 separate disclosure items.
The Wrap Brochure rules require the RIA to identify whether any related persons are portfolio managers
and what, if any, conflicts of interest are present. - The Final Rule requires an RIA whose Brochure has materially changed since the last annual updating to
deliver to each of its clients (unless exempted) a Material Change Summary within 120 days after the end of the fiscal year. Clients are no longer permitted to receive a 5-day termination right without penalty if the Brochure is not delivered at least 48 hours in advance of entering into the advisory agreement. The Final Rule
obligates the RIA to deliver a current Brochure to any client before or at the time the RIA enters into the advisory agreement with the client. - Supplements containing up to six disclosure items must be prepared with respect to each “supervised person” of the RIA upon whom the client receiving the Brochure relies for investment advice.
Principals’ biographical information is no longer relevant. - ADV Part 2 must follow a prescribed order. If an item is not relevant, the RIA must specifically state that the item is not applicable. Brochure requires plain English.
Form CRS
Form CRS is a uniform disclosure document prescribed by the SEC; it is intended to enhance investors protection by providing succinct and relevant information to retail investors.
Closing the Advisory
An investment advisor ceases operations by filing form ADV-W. Records must be kept for not less than five years from the end of the fiscal year of the last recorded entry
Restrictions under the IAA concerning the assignment of an advisory contract
Investment advisory contracts cannot be assigned unless the client expressly consents to the transfer.
For example, Jack decides to retire and sell his advisor practice to Mike. Jack must obtain a client’s consent to transfer the accounts to Mike.
Prohibitions concerning the use of the initials “RIA”
The initials cannot be used. The advisor must spell out Registered Investment Advisor
FINRA Qualification exams
- To become registered, securities professionals must pass qualifying exams administered by FINRA to
demonstrate their competence in the particular securities activities in which they will work. An individual must pass the exams prior to engaging in those areas of the business. Exams include the following: - Securities Industry Essentials (SIE): introductory-level exam assesses a candidate’s knowledge of basic securities industry information including concepts fundamental to working in the industry; the SIE exam is a prerequisite for the Series exams listed below
- Series 6: can sell mutual funds, unit investment trust (primary offerings only), variable life insurance,
and variable annuities - Series 7: Can sell all securities except commodities and certain options
- Series 63: Meets requirements to be licensed in states other than state of residence
- Series 65: Registered Investment Advisors (state requirement)
- Series 66: Uniform Combined State Law Exam (combines Series 63 & 65)
FINRA registration
FINRA registration procedures are as follows:
1. Associates with broker-dealer firm
2. Registers with FINRA through a B/D on Form U-4
3. Passes appropriate exams
4. Central Registration Depositary (CRD) System makes registration with FINRA uniform among states.
