Lesson 2 of Fundamentals: Registered Investment Advisors Flashcards
- If an advisor has assets <$100M under management, then the advisor must register with the?
- If an advisor has assets >$110M under management, then the advisor must register with the?
- If an advisor has assets between 100M and 110M under management, then the advisor must register with the?
- Mid-sized advisors are those with assets under management between?
Exam Tip: Topic Tested Frequently.
- State
- SEC
- The choice between state or SEC
- $25 Million and $100 Million
The SEC precludes an advisor from using what letters after his name, and what words only can they use?
CANNOT use letters RIA
CAN use “Registered Investment Advisor.”
Can advisory contracts be assigned to another advisor or firm?
No, they CANNOT, UNLESS the client has given consent.
Examples:
- John is selling his investment advisory business to Jennifer. John intends to retire, play golf, and no longer provide advisory services to his clients. John must receive consent from his clients to assign any advisory contracts to Jennifer.
Investment Advisor Definition
Defined for the purpose of the Investment Advisors Act of 1940 as someone who is:
- In the BUSINESS
- of providing ADVICE about securities
- for COMPENSATION
Exam Tip:
- An Investment Advisor knows his ABC
- Advice, Business, Compensation
- For an advisor to register with the SEC, they must file what form.
- To withdraw registration with the SEC, an advisor must file what form.
- RIA Must file?
- ADV
- ADV-W
- ADV Part 1 and Schedule 1 Annually.
Form ADV - Part 1
(Not part of client brochure)
This form contains the:
- investment business (firm name),
- ownership,
- clients,
- employees,
- business practices,
- affiliations, and
- disciplinary events of the adviser or its employees.
A Registered Investment Advisor (RIA) must electronically file ADV Part 1 and schedule it annually within 90 days of their fiscal year-end.
Background (executives)
U4 marks for the firm and stakeholders.
Form ADV - Part 2
This form contains the advisor’s:
- compensation,
- fees,
- education,
- investment objectives,
- conflicts of interest, and
- the background of advisory personnel.
- firm and advisor information.
ADV Part 2 was updated in July 2010 to correspond with new regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act to require that form ADV Part 2 and supplemental brochures must be written in plain English.
A RIA must promptly update the ADV Part 2 if any information materially incorrect. Otherwise, the changes may be made annually.
Exam Tip:
- On the exam if the question asks about how to satisfy the disclosure, the compensation dislcosure requirements or conflict of interest answer ADV Part2.
Form ADV - Part 3
Contains information from Form CRS (Customer Relationship Summary)
Provides a retail investor with succinct information about the relationship and service the firm offers, including:
- fees,
- costs,
- specified conflicts of interest,
- standard of conduct, and
- disciplinary history among other things.
Form supposed to help retail investors understand the differences between brokers and advisors.
Must be written in plain English, be concise, and provide certain meaningful and accurate information about the firm, financial professionals, and the services it offers it offers retail investors, clients, and customers.
Exceptions to Registrations with the SEC
Do not need to register under, and generally are not regulated by, the Advisors Act.
- Any broker/dealer whose advisory services are solely incidental to the conduct of business.
- Lawyers, accountants, teachers and engineers whose advice is solely incidental to their profession.
- Banks and bank holding companies that are not investment companies.
- Publisher of a bonafide newspaper, magazine, or periodically of regulation circulation.
- Advisors whose advice and services is related strictly to securities guaranteed by the United States.
- Such a person not within the intent of the law as the SEC may designate by rules, regulations, or order.
Most important rules are the first two.
- TABLES (Teachers, Accountants, Brokers, Lawyers, Engineers)
Exemptions from Registration
The following meet the definition of investment advisor but are not required to register. They are subject to the anti-fraud provisions of the Act.
- Advisors whose clients reside in their state of business and who do not provide advice, services, analysis, or reports regarding nationally listed securities.
- Advisors not providing advice about securities traded on a national exchange.
- Advisors whose only clients are insurance companies.
- Advisors solely to venture capital funds.
- Advisors solely to private funds less than $150 million.
- Foreign advisors without a place of business in the US.
Exam Tip:
- Remember that VIPs are SaFE from exemptions
- (Venture Capitalist, Insurance Companies, Private Funds) (home State, Foreign advisors, and securities not on a national Exchange)
Exam Tips about Exceptions & Exemptions
Always keep in mind, an exception or exemption does not exempt anyone from the anti-fraud provisions of the Uniform Securities Act of 1956.
Advisors to Private funds will have to provide:
Basic organizational and operational information about each fund they manage
General information about the size and ownership of the fund
General fund data
The advisor’s services to the fund
Identification of five categories of “gatekeepers” that perform critical roles for advisors and the private funds they manage
- Auditors, Prime Brokers, Custodians, Administrators, Marketers
All advisors will have to provide additional information.
- The types of clients they advise,
- their employees, and
- their advisory activities.
Their business practices that may present significant conflicts of interest.
Miscellaneous other rules under Dodd-Frank:
Under the new rules, exempt reporting advisors will nonetheless be required to file and periodically update reports with the commission, using the same registration form as registered advisors.
Mid-sized advisors are those with assets under management between $25 million and $100 million.
The pay-to-play rule is designed to prevent an adviser from seeking to influence government officials’ awards of advisory contracts through political contributions.
Brochure Rule
(8 Things)
The “Brochure Rule” requires written DISCLOSURES to every client of the following:
- Advisory services that are provided and the fees pertaining to those services.
- Types of securities that are part of investments.
- Education background of advisor.
- Participation/interest in securities of advisor.
- This information must be given to a client before or at the time of entering into a contract.
- Compliance with the brochure rule is accomplished by providing a written, plain English summary of ADV Part 2 A and B.
- A summary of material changes must be provided to clients annually, and either deliver the updated brochure or offer to deliver an updated copy.
Exam Tip: Tested Frequently.
