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Frank 63 > IAs > Flashcards

IAs Flashcards

1
Q

What’s the ABC test to define an IA?

A

Advice about securities, provided as a
Business, receiving
Compensation

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2
Q

What’s an IAR?

A

Anyone at IA who makes recommendations, solicits sale of services or supervises those who do.

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3
Q

When would IAs have to post a Surety Bond?

A

If they have custody of funds or securities, or discretionary authority AND
they don’t meet minimum financial requirements

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4
Q

What’s baseline requirement of IA registration?

A

All must be registered by SEC or one or more states

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5
Q

List five criteria for being a Federal Covered Adviser under Investment Advisers Act 1940:

A
  1. AUM >$110m
  2. Adviser to registered investment co (mutual fund)
  3. Do business in 15 or more states
  4. From Wyoming
  5. Pensions consultants to plans with assets >$200m
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6
Q

If an affiliate of a Federal Covered Adviser considered to be Federally Covered?

A

Yes if principal office is the same

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7
Q

What’s the grace period for a newly formed Adviser that believes it will become Federally Covered?

A

120 days

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8
Q

What’s the Brochure Rule?

A

Disclosures in plain English which must be delivered 48 hours before entering contract or at time of contract when contract can be cancelled within five days without penalty.
Can have different brochures for different types of clients

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9
Q

Two types of client who do NOT need to receive brochure?

A
  1. Those paying less than $500/year for impersonal services only
  2. Investment companies
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10
Q

What’s the basic rule on IA registration in a state?

A

If ineligible for Federal registration, must register in a state unless exempt or excluded from definition of being an IA.

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11
Q

What constitutes custody of client funds/securities?

A
  • Ownership or access
  • Discretionary authority
  • Inadvertently holding for longer than 3 days
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12
Q

What must an IA do if it has custody?

A
  • Inform Administrator
  • Use qualified custodian
  • provide written notice to clients
  • send quarterly statements
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13
Q

What are minimum financial requirements for IAs?

A

Net worth (assets less liabilities):
Custody: $35k
Limited discretion: $10k
Prepaid fees over $500: positive net worth

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14
Q

Record keeping requirement for IAs?

A

Five years easily accessible

First two in office

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15
Q

Who apart from Federal Covered advisors are excluded from state registration as IA?

A
  • IARs
  • Banks, S&Ls, Trust Co’s
  • professionals whose advice is incidental and not specifically compensated
  • BDs and their agents (no special adviser comp)
  • Publishers (general circulation and impersonal advice)
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16
Q

When must Federal Covered Advisors notice file in a state?

A
  • they have a place of business in state

- six or more non-institutional clients in state

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17
Q

Who regulates IARs?

A

State level. Must register in at least one state (office).

Exempt from further states if satisfies de minimis provision of 5 clients or fewer.

18
Q

What does state law demand of IA agreements with clients?

A

Written contracts which cannot waive compliance with 1949 Act, and which cannot be assigned without consent

19
Q

To whom may IAs charge performance fees?

List 4

A
  1. Registered investment companies
  2. Qualified clients with $1m under management with an adviser or $2m net worth excluding home
  3. Non US residents
  4. Knowledgable individuals associated with IA (officer, partner etc)
20
Q

As fiduciaries, what’s conflict of interest standard for IAs?

A

Affirmative duty of good faith - conflicts of interest fully disclosed at or before any transaction.
Abstain if disclosure doesn’t obviate IA putting their interest first.

21
Q

What can soft dollars be used for?

A

Benefit of client - research reports, software, access to analysts or data, conference fees

22
Q

What CANNOT soft dollars be used for?

A

General operating expenses or travel.

No hardware.

23
Q

What’s rule on IAs and IARs around borrowing/lending to clients?

A

Generally prohibited unless it’s a financial institution involved in business of making loans, is an affiliate of IA or is a BD.

24
Q

What’s rule on discretion for IAs?

A

Can be verbal for 10 days but must then become written.

25
Q

Under what circumstances can IAs engage in principal trades?

A

If disclosed and receives written consent

26
Q

Under what circumstances can IAs engage in cross trades?

A

One half unsolicited
Disclosed
Written consent from both sides
(Otherwise a conflict of interest)

27
Q

What constitutes IA advertising?

A

Communication with more than one client

28
Q

Three requirements of IA advertising?

A
  1. No testimonials
  2. Cannot describe a report or service as free unless generally without obligation
  3. Cannot be false or misleading
29
Q

Which state governs IA net worth requirement?

A

State of principal place of business only. Opening an office in another state with higher requirement won’t change anything

30
Q

When must Federal Covered Adviser supply brochure?

A

Before or at time it enters into an investment advisory contract, unless client is investment company or receives only impersonal services for less than $500/year

31
Q

What’s annual requirement with respect to brochures?

A

File update within 90 days of FY end AND

Within 120 days of end of FY, supply updated brochure or details of material changes

32
Q

What’s in ADV 2B - the Brochure Supplement?

A

Resumé of all supervised persons and their outside business activities.
May be included in main brochure.
Must be updated on material change.

33
Q

When might ADV be required to include balance sheet?

A

When it has full discretionary authority over client’s account, OR takes pre-payment of advisory fees ($1200 for federal, $500 for state, each six months or more in advance)

34
Q

What must an IA do if material changes happen?

A

File update promptly (within 30 days)

35
Q

What must an IA do if minimum net worth drops below a threshold?

A

Notify Administrator by end of next business day. Must file a report on its financial condition by end of the following business day.

36
Q

When must IAs disclose SRO proceedings?

A

Only if fine exceeds $2500

37
Q

Advisors to investment companies must always register with the SEC. True or False?

A

True - irrespective of amount of assets under management

38
Q

How long do Federal IS registrations remain in place for?

A

Until cancelled, withdrawn or revoked.

39
Q

Denial of registration of an IA must be based on…

A

Denial being in public interest AND a provision of USA has been or will be violated

40
Q

Is compensation in form of sharing capital gains or percentage appreciation in the account allowed?

A

No. not even with client consent.

Percentage of value of fund averaged over prescribed period could be.

41
Q

Who’s on the NASAA?

A 
50 states
DC
Puerto Rico
Canada 
Mexico
US Virgin Islands

Frank 63 (5 decks)

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