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IACCP TEST > Intro to Advisors Act > Flashcards

Intro to Advisors Act Flashcards

1
Q

Definition of Conflict of Interest

A

Any activity or relationship in which an Advisor’s interests compete with the interests of its clients.

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2
Q

Definition of Investment Advisor

A

1) Any person or firm that provides advice or analysis on securities by making direct/indirect recommendations to clients or by providing research/opinions on securities or securities markets or as to the value of securities. 2) Receives compensation in any form for the advice provided; and 3) Engages in regular business of providing advice to others regarding securities

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3
Q

Who all are EXCLUDED from the definition of “Investment Advisor”?

A

1) Banks/Bank Holding Companies
2) Lawyers/Accountants/Engineers/Teachers
3) Broker-Dealers if advisory services are solely incidental and no special compensation received
4) Publishers of bona fide newspapers or magazines
5) Persons or Firms whose advise is related to securities that are direct obligations of the US
6) NRSROs (National Recognized Statistical Rating Organizations)
7) Family Offices
8) Such other persons designated by SEC rulemaking

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4
Q

Definition of Security

A

Any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract.

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5
Q

Definition of Supervised Person

A

Any partner, officer, director or employee of an IA or other person who provides investment advice on behalf of the investment advisor and is subject to the supervision and control of the investment advisor.

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6
Q

Definition of Client

A

1) A natural person, and; i) any minor child of the natural person; ii) any relative, spouse or relative of the spouse of the natural person who reside in the same residence; iii) all accounts of which the natural person is the only primary beneficiary, and iv) all trusts of which the natural person is the only primary beneficiary.
2) corporation, general partnership, LP, LLC, trust or other legal organization that receives investment advice based on its investment objectives rather than individual objectives of shareholders, partners, etc. ii) 2 or more legal organizations that have identical owners.

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7
Q

SEC v. Capital Gains Research Bureau (1963)

A

An investment advisor owes its clients an affirmative duty of utmost good faith to act solely in the client’s best interests. The Court noted that Congress intended to “eliminate, or at least expose, all conflicts of interest which might incline an investment advisor - consciously or unconsciously - to render advice which was not disinterested.”

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8
Q

What constitutes as eligibility to register with the SEC?

A
  1. Large Advisory Firms (100MM+)
  2. Mid-Sized Advisory Firms (25-100MM)
  3. Principle office and place of business outside US
  4. Investment Advisor to RIC or a BDC
  5. Pension Consultant
  6. Related Advisor
  7. Newly Formed Advisor
  8. Multi-State Advisor
  9. Internet Advisor
  10. SEC order exempting you from registration threshold.
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9
Q

EXEMPTIONS from SEC Registration

A
  1. Intra-state Advisor
  2. Clients are Insurance Companies
  3. Foreign Private Advisor
  4. Advisors to certain Charitable Organizations
  5. Advisors to Church Plans
  6. Certain Registered Commodity Trading Advisors
  7. Advisors to certain small business investment companies
  8. Small Private Fund Advisors
  9. Venture Capital Advisors
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10
Q

Private Fund Advisor Exemption Requirements

A

1) Has 1 or more clients that are not private funds
2) Aggregate assets in private funds advised exceed $150MM/annually
3) Non-US Advisors can rely on this exemption as long as the avisors’ US Clients are qualifying private funds
4) “private funds” are generally 3(c)(1) and 3(c)7 funds

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11
Q

Venture Capital Advisor Exemption Requirements

A

1) invests primarily in direct equity investments in qualifying portfolio companies
2) holds no more than 20% of its committed capital in a basket of “non-qualifying” investments exclusive of short term obligations
3) limits borrowings to short term borrowings (15% of committed capital to no more than 120 days)
4) does not offer its investors redemptions or other liquidity rights
5) represents itself to its investors and prospects as pursuing a venture capital strategy
6) is not registered under the Investment Company Act and has not elected to be treaded as a BDC.

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12
Q

Foreign Private Advisors Exemption Requirements

A

1) An advisor with no place of business in the US
2) with, in total, fewer than 15 clients and investors in the US + private fund investors in the US
3) aggregate AUM attributable to clients in US of less than $25MM
4) does not hold itself out to the public in the US as an investment advisor

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13
Q

Form PF

A

An investment advisor must file if and when;

i) it advises one or more “private funds”; and
ii) had at least $150MM in regulatory AUM attributable to such private funds at the end of last fiscal year.

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14
Q

Exempt Reporting Requirements

A

Form ADV serves as both a registration and a reporting form for registered advisors and a reporting form for exempt reporting advisors. Reporting requirements:

1) Exempt Advisors under Private Fund and Venture Capital must file reports with SEC
2) Exempt Private Fund Advisors must maintain records and provide SEC with reports as deemed necessary
3) Exempt reporting advisors must file an updated amendment to their Form ADV at least:
- annually, within 90 days of advisors fiscal year end
- promptly if Item 1, 3 or 11 become inaccurate
- Non-US advisors relying on the foreign private advisor exemption are not required to file.

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15
Q

Duty to Supervise

A

SEC enforcement actions highlight the importance of:

  • Senior management’s role in assuring tat adequate compliance procedures are in place and also that sufficient resources are devoted to implementing those procedures.
  • Reassessing all supervisory responsibilities on a regular basis.
  • Special supervision of those individuals with regulatory history.
  • Adequate delineation of systems and supervisory responsibilities for follow up and review.
  • Thorough investigation of all customer complaints.
  • Investing in adequate systems, personnel and other resources.
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16
Q

Section 203A Of The Advisors Act

A

Prohibits an IA regulated by the state in which it maintains its principal office and place of business from registering with the SEC unless the advisor has at least $25MM in AUM.

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17
Q

An IA’s RAUM are to be calculated on a gross basis, are to be valued at market value, or fair value if market value is unavailable and are required to include:

A
  • the value of any securities or private fund for which the advisor provides continuous and regular supervisory or mgmt services
  • the advisor’s proprietary assets, including any in which no compensation is received
  • the amount of uncalled capital commitments made to a private fund.
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18
Q

Investment Advisor Respresentative Licensing Requirements

A
  1. Investment Advisor Representative of an IA means a supervised person of the investment advisor.
  2. Has more than 5 clients who are natural persons.
  3. More than 10% of whose clients are natural persons.
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19
Q

Exceptions to Investment Rep Licensing Requirements

A
  1. Qualified Client - a natural person or a company who - that immediately entering in contract has at least $1MM in AUM or a net worth of $2.1MM.
  2. Irregular communication
  3. Impersonal Advisory Service
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20
Q

Section 207: Material Misstatements

A

It is unlawful for any person to make any untrue statements of material fact or to willfully omit any material fact which is required to be stated in any registration application or report filed with the SEC.

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21
Q

What is the purpose of the ADV?

A
  1. To Register Investment Advisors
  2. Provide current and prospective clients with information about their advisor.
  3. Amend registrations
  4. Provide an important risk assessment tool used by regulators to manage their examination programs.
  5. Umbrella registration of filing advisor and relying advisors.
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22
Q

Rule 206(4) - 1

A

Governs Advertising by Investment Advisors

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23
Q

Form ADV Part 1A will be amended as follows with regard to advertising:

A
  1. Item 5.L(1) will require an advisor to state whether any of its advertisements include performance results, a reference to specific investment advice, testimonials, endorsements, or 3rd party ratings.
  2. Advisors will be required to state whether the advisor pays or otherwise provides cash or non-cash compensation, directly or indirectly in connection with the use of testimonials, endorsements or 3rd party ratings.
  3. Items will be added requiring an advisor to state whether any of its advertisements include hypothetical performance and predecessor performance.
  4. Will be required in annual updating amendment after 18-month transition period.
24
Q

Rule 203A-1

A

Designed to prevent an advisor from having to switch frequently between state and SEC registration as a result of changes in AUM or the departure of one or more clients.

Provides a buffer for mid sized advisors that increases the threshold at which mid sized advisors generally must register with the SEC to $110MM, although advisors are permitted to register at $100MM. Once registered with SEC, advisors generally need not withdraw its registration until it has less than $90MM.

25
Q

Exempt Reporting Advisors

A
  • Advisors solely to venture capital funds or advisors solely to private funds and have RAUM under $150MM.
  • Must complete 7 items in Part 1A.
  • Instructions on switching to/from exempt reporting advisor status.
  • Advisors relying on the Foreign Private Advisor Exemption are not required to file with the SEC.
26
Q

Other than Annual ADV Amendment, must update promptly IF:

A
  1. You are adding or removing a relying advisor as part of your umbrella registration.
  2. Your firm begins offering a new service
  3. Your firm changes its fees or fee structure
  4. Your firm gains a new affiliate
  5. You firm identifies a conflict
  6. Your firm begins buying new types of investments that have different risks
  7. Your firm takes on custody that it did not have before.
  8. Your firm’s employees begin receiving indirect compensation from your firm’s investments.
27
Q

Annual Updating Amendments

A

You must amend your firm ADV each year by filing an annual updating amendment within 90 days after the end of your fiscal year.

28
Q

Definition of Advisory Affiliate

A

(1) All of your officers, partners or directors (2) all persons directly or indirectly controlling or controlled by you and (3) all of your current employees (other than employees performing only clerical, administrative, support or similar functions.

29
Q

Definition of Related Person

A

Any advisory affiliate and any person that is under common control with your firm.

30
Q

Definition of Control Person

A

Control means the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise. Typically, 25% ownership.

31
Q

Definition of Secured Borrowings

A

Secured borrowings are obligations for borrowed money in respect of which the borrower has posted collateral or other credit support should include any reversed repos (ie sale of securities coupled with an agreement to repurchase the same securities at a later date at an agreed price).

32
Q

Definition of Unsecured Borrowings

A

Obligations for borrowed money in respect in which the borrower has not posted collateral or other credit support. For example, total return swaps and selling securities short.

33
Q

Definition of Client on ADV

A

Any and all of your firm’s advisory clients, including those that do not pay fees, such as family members.

34
Q

Definition of Custody on ADV

A

Your firm has custody if it directly or indirectly holds client funds or securities, has authority to obtain possession of them. Your firm has custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services the firm provides to clients. Ex. General POA over client’s account or signatory power over checking account.

35
Q

What is SEC umbrella registration?

A

A single registration by a filing advisor and one or more relying advisors who advise only private funds and certain separately managed account clients that are qualified clients and collectively conduct a single advisory business.

36
Q

Schedule R

A

Umbrella Registration:

  1. Filing advisor and relying advisor advise only private funds and clients in SMAs that are qualified clients eligible to invest in the private funds
  2. Accounts must be substantially similar investment objectives
  3. Must have principle office/place of business in US
  4. Relying advisor subject to filing advisor’s supervision and control and subject to Advisors Act and exams
  5. Operate with single COE, compliance programs and CCO.
37
Q

Types of Conflicts of Interest

A
  • Compensation arrangements with particular focus on the direct or indirect comp arrangement and their effect on recommendations made to clients
  • Recommending affiliated service providers without disclosing affiliation or receipt of direct or indirect compensation
  • The allocation of investment opportunities and expenses.
  • Provide fund advisor’s conflicts as well as actions that appear to benefit the advisor at the expense of a fund or its investors.
  • Mutual fund s and ETF sales practices, suitability, and disclosures. (Must be in the least expensive share class)
  • Robo advisors that primarily interact with clients online and firms that utilize automation as a component of their services while also offering clients access to financial professionals.
  • Higher risk products or strategies targeted to retail investors (especially retired or elderly)
  • Wrap account suitability, effectiveness of disclosures, conflicts of interest, and brokerage practices.
38
Q

ADV’s “Plain English” Rule

A

If an advisor has a conflict or engages in preferential treatment among different types of classes of clients, advice or transactions, it must indicate as such and not merely disclose that it “may” have the conflict.

  • Use language the clients are likely to understand.
  • Be concise and direct.
  • Give examples to illustrate your policies or practices.
39
Q

Three categories that bring enforcement action against CCOs.

A

1) CCO has affirmatively participated in misconduct.
2) CCO has helped mislead regulators; and/or
3) CCO had clear responsibility to implement compliance program and policies and wholly failed to carry out that responsibility.

40
Q

No person shall be deemed to have failed reasonably to supervise any person, if —-

A

1) There have been established procedures, and a system for applying such procedures, which would be reasonably expected to prevent and detect AND
2) Such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system are not being complied with.

41
Q

Definition of “Assignment”

A

Includes any indirect/direct transfer of an investment advisory contract by an adviser or any transfer of a controlling block of an adviser’s outstanding voting securities.

42
Q

Interstate Commerce

A

means trade, commerce, transportation, or communication among the several States, or between any foreign country and any State

43
Q

Who must register under the Investment Advisors Act of 1940?

A
  1. Foreign Advisors
  2. Investment Advisors for Regulated Investment
    Company and/or BDs
  3. Pension Consultant
  4. Related Advisor
  5. Newly Formed Advisor
  6. Multi-State Advisor (15+)
  7. Internet Advisor
44
Q

Calculating Values of Securities Portfolios

A
  • Gross Basis
  • Market Value (or Fair Value if market is not available)
  • Required to include;
    a) the value of any securities portfolios
    b) advisors proprietary assets
    c) uncalled capital commitments
45
Q

Securities vs. Non-Securities

A

Securities include stocks, bonds, mutual funds, LPs, commodity pools.
Non-Securities include real estate, coins, precious metals or commodities.

46
Q

What the SEC deems as advice on securities

A
  • Market Trends
  • Selection/Retention of other Advisors
  • Advantages of investing in securities
  • Providing a selective list of securities
  • Asset allocation advice
47
Q

Dodd-Frank Mandated Change in AUM Threshold

A

Raised threshold for advisors to register from $100MM to $110MM.

48
Q

Repeal of Private Advisor Exemption

A

Section 403 of Dodd-Frank repealed the private advisor exemption and replaced with the foreign private advisor exemption.

49
Q

Section 202(a)(30) defines Foreign Private Advisor to include:

A

1) An advisor with no place of business in the US
2) Fewer than 15 clients in the US
3) aggregate assets under management attributable to
clients in the US of less than $25MM
4) does not hold itself out to the public in the US as an
investment advisor

50
Q

Exempt Reporting Advisors

A

1) Venture Capital Advisors
2) Private Fund Advisors
3) Foreign Advisors

51
Q

Venture Capital Advisors

A

-represents to its investors its venture capital strategy
-does not provide redemption rights
-holds no more than 20% of the funds assets in non-
qualifying investments

52
Q

Private Fund Advisors

A
  • Has less than $150MM in AUM
  • does not publicly offer its securities and has 100 or less beneficial owners
  • limits its investors to qualified purchasers
53
Q

Registration Requirements

A

A. IARD Account = all applicants must submit electronically through the IARD (Investment Advisor Registration Depository)
B. All registrations expire December 31 of each calendar year
C. All IAs must amend form ADV each year by filing an annual updating amendment within 90 days of fiscal year end.

54
Q

Triggers for Notice Filing

A

1) Physical presence in that state
2) More than 5 clients in that state (Exemptions are LA, NE, NH and TX)
3) Actively soliciting that state

55
Q

National DeMinimis Exemption

A

Does not have place of business within that state AND during previous 12 months period, had fewer than 6 clients who are residents of the state.

56
Q

NSMIA (National Securities Markets Improvement Act )

A

Passed in 1996, the act sought to simplify securities regulation.
-It was an amendment to the Investment Company Act of 1940.
-Gave the SEC exclusive jurisdiction to regulate securities firms.
-

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