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)
McCarran-Ferguson Act of 1945
Made it clear that insurance was to be regulated at the state level, as long as the states implemented and executed this regulation adequately
Security Investor Protection Act of 1970
Established the Securities Investor Protection Corporation (SIPC)
Insures customers’ accounts up to $500,000 in securities and cash, with a limit of $250,000 of cash coverage (in the event of the failure of a brokerage firm)
Gramm-Leach-Bliley Act of 1999
Addresses the manners in which financial institutions manage the private information of individuals; repealed the Glass-Steagall Act of 1933
USA PATRIOT Act of 2001
Requires broker-dealers, among others, to have internal policies, procedures, and controls to meet the know your customer mandate as an effort against funding terrorism by money laundering
Sarbanes-Oxley Act of 2002
Toughens the accountability for accuracy of financial information released by corporations; requires independence on corporate boards and sets stricter rules for auditors
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Created the Consumer Financial Protection Bureau and the Financial Stability Oversight Council; also addresses transparency and accountability for derivatives. Changed original Investment Advisors Act of 1940 thresholds for registration with SEC.
Financial Industry Regulatory Authority (FINRA)
With the approval of the SEC, FINRA combines the regulatory functions of the NASD and the regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE). FINRA is a self-regulatory organization—it
Registration process with FINRA
- Pass the SIE (Securities Industry Essentials) Exam
- Associate with broker or dealer
- Register w/ FINRA through broker or dealer and complete a background & information check using Form U-4
- Pass appropriate FINRA Series licensing exam
- Receive Central Registration Depository number and documentation for securities licenses held
- Complete annual education requirement through broker or deals - the firm element (related to profession and securities products) and regulatory element (ethics, compliance, etc.)
What form do you terminate registration with a firm with FINRA
Form U-5
Series 6
Entitles holder to sell all open-end investment companies (mutual funds), variable annuities, variable life insurance, and initially offered (not secondary) unit investment trusts
(think MVA - mutual, variable)
Series 7
Broadest license and entitles holder to sell any security, including individual stocks and ETFs.
Think SBO - stocks, bonds, options
Series 24
General Securities Principal - supervise and manage branch activities (Series 7 or Series 62 is prerequisite)
Series 63
This is the Uniform Securities Agent State Law Examination. State securities laws require individuals to pass a qualification exam to sell securities within their states. Almost all states require
Series 65
NASAA - Investment Advisors Law Exam (RA) - be an investment advisor (can be waived if CFP certificant)
Series 66
Uniform Combined State Law Exam - Combines Series 63 and Series 65 (can provide investment advise and sell securities to any client in any state). Must pass Series 7 exam before they can qualify
Banks - what are they/what can they do
Organization chartered by fed or state gov and can do following: - accept deposits and pay interest, make loans, invest customer funds in securities, honor instruments drawn on accounts, issue cashier’s checks, provide Safe-Deposit box
National banks are subject to regulation by which three independent federal agencies
- Office of Comptroller of Currency (OCC) - Agency charters, supervises, and regulates national banks and federal branches of foreign banks in US
- Federal Reserve Board - makes monetary policy
- Federal Deposit Insurance Corporation - Insures deposits in US banks and savings and loan associations against bank failures
Note: State-chartered banks are subject to regulation by state banking commissions or departments. Additionally, the FDIC supervises state banks that are not members of the Federal Reserve System
FDIC Insurance
Provides insurance for cash/cash-equivalent deposits (ex. CD but not securities, MFs, etc.) Basic amount is $250,000 but deposits in different categories of legal ownership are seprately insured. Most common ownership categories are:
- single
joint
retirement (ex. IRA)
- Rev Trust - $250k is per beneficiary
Note that each co-owner’s shares from every joint account that she owns at the same insured bank are added together with her other joint account shares at the same bank, and the total is insured up to $250,000.
Credit Unions
- sponsor number of financial products. Membership may be restricted on basis of employer or other affiliation.
- Earnings from loan interest and investments are allocated to members in form of dividends.
- Each member may vote to elect board of directors that is responsible for setting guidelines & leadership
- National Credit Union Share Insurance Fund (NCUSIF), agency of fed gov, regulates unions unless chartered by separate state. Similarly insures up to $250k per account.
Investment Bank
a securities broker-dealer that underwrites new issues. An investment bank’s functions may include the following: Advising corporations on effective strategies to raise long-term capital Raising capital for issuers by distributing new securities Buying securities from issuers and reselling them to the public Distributing large blocks of stock to the public and institutions Helping issuers comply with securities laws
Brokerage company
intermediary that facilitates transactions involving sales of investments or real estate. Brokers are agents that arrange trades for clients and charge commissions. Brokers, or agents, arrange trades between buyers and sellers. Dealers, or principals, buy and sell securities for their own accounts, often called position trading. When selling from their inventories, dealers charge their clients markups rather than commissions. A markup is the difference between the current interdealer offering price and the actual price charged to the client. The SEC is the primary regulatory body overseeing the sale and purchase of securities; however, much of this responsibility has been delegated from the SEC to FINRA
Mutual Fund Company
Pools money from shareholders and invests funds in various types of securities. Regulated by the SEC
Savings & Loan Associations (Thrift Institution)
Accept savings and provide home loans. S&Ls not permitted to provide demand deposits (ex. checking accounts) but can offer interest-bearing NOW (negotiable order of withdrawal) accounts. All federal and many state-chartered S&Ls are regulated by OCC.
Suitability vs. Fiduciary - Fiduciary Standard
