Financial Services Regulations Requirements Flashcards
Investment Advisers Act of 1940 (and subsequent changes under 2010 Dodd-Frank Wall street Reform and Consumer Protection Act) changed thresholds for registration with SEC to follow
Small Advisers: < $25M AUM are regulated by one or more states (unless state in which adviser has principal office has not enacted statute)
Midsized Adviser: $25M - $100M of AUM - regulated by one or more states if adviser is registered with the state where it has its principal office and place of business and the adviser is subject to examination by that state authority.
Large Adviser: Those with more than $100 million of AUM must register with the SEC (unless an exemption is available), and state adviser laws are preempted for these advisers. (Note that special transitional rules apply to advisers whose AUM fluctuates between $90 and $110 million.)
Investment Advisers Act of 1940 provides three criteria for adviser registration, all of which must be met (ABC)
A - Advice: If an individual gives advice, issues reports, or recommends to a client that they acquire a specific security. Or if recommend that they generally invest in securities. Furthermore, an individual who provides advice to a client as to the selection or retention of an investment manager also meets this first test.
B - Business: any individual who provides financial planning services, including advisory services for comp. Even an advertisement could trigger this.
C - Compensation: One receives compensation for services if a separate fee (including any part of an annual fee or regular retainer) is charged for investment advisory services. However, the SEC’s position is that the commissions received from sales of products also can be considered compensation in this context.
Following individual are excluded from definition of investment advisor
- LATE - Lawyers, Accountant, Teacher, or Engineer whose performance is solely incidental
- broker/dealer whose services are solely incidental to conduct of business and who receives no special comp
- Bank or Bank Holding Company (as defined by Inv. Advisers Act of 1940)
- Publisher of bona fide newspaper
- Person whose advice is limited to securities issues and guaranteed by US gov
Exemptions from requirement to register as investment adviser
- An intrastate adviser (single-state adviser) for unlisted securities
- An adviser whose only clients are insurance companies
- Foreign private advisers
- Charitable organizations and plans
- Commodity trading advisers
- Private fund advisers
- Venture capital advisers
- Advisers to Small Business Investment Companies (SBICs)
Broker-Dealer Exception to Investment Advisers Act – definition of solely incidental
As per the SEC, investment advice is solely incidental to brokerage services when the advisory services rendered are “in connection with and reasonably related to the brokerage services provided.” If advice is not solely incidental, a broker-dealer is subject to the Advisers Act regardless of the form of compensation it receives.
Broker-Dealer Exception to Investment Advisers Act – definition of special compensation
Generally, to avoid receiving special compensation, a broker or dealer relying on this exclusion must receive only commissions, markups, and markdowns.
Broker-Dealer Exception to Investment Advisers Act – definition of bundled fees
According to the SEC, a broker or dealer that receives a fee based on a percentage of assets that compensates the broker or dealer for both advisory and brokerage services receives special compensation.
Broker-Dealer Exception to Investment Advisers Act – definition of separate or identifiable charge
The SEC has determined that a broker-dealer charges special compensation when it charges its customer a separate fee for investment advice or when it charges its customers different commission rates, one with advice and one without, because the difference represents a clearly definable charge for investment advice
Investment Adviser Registration
- submitted electronically through Investment Adviser Registration Depository (IARD)
- must pay a filing fee
- Within 45 days, SEC must grant registration or institute admin proceeding to determine whether it should be denied
- Must spell out RIA (cannot use initials)
- Must keep financial records for not less than 5 years
- File Form ADV-W to terminate
Part 2A of Form ADV (adviser’s brochure)
Spells out details of advisory relationship and other business interests. Shows costs of services.
An investment adviser must deliver the statement required by this section to an advisory client or prospective advisory client not less than 48 hours prior to entering into any written or oral investment advisory contract with such client or prospective client or at the time of entering into any such contract if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
Securities Act of 1933
Requires registration of initial public offerings
Glass-Stagall Act of 1933
Prohibited financial institutions from consolidating and offering any combination of traditional commercial banking, investment banking (brokerage firms), and insurance
Securities Exchange Act of 1934
- Requires companies with previously issued securities to keep info current
- created SEC to enforce securities laws
- requires brokers and dealers to register with the SEC
Maloney Act of 1938
Brought the over-the-counter (OTC) market under the regulation of the SEC and called for self regulation of OTC securities dealers (FINRA)
Federal Bankruptcy Act of 1938
As amended in 1978, provides for the liquidation of hopelessly troubled firms and provides for the reorganization of troubled firms that might be able to survive
Investment Company Act of 1940
Defines/regulates investment companies (open-end, closed-end, and UIT)
Suitability vs. Fiduciary - Fiduciary Standard
