LO 5.1.1: Discuss the regulation of financial planners. Flashcards
Investment Advisers Act of 1940
- established fiduciary standard for Registered Investment Advisers (RIAs),
- consequence of 1929 stock crash
- defines investment adviser (distinction between selling products vs. providing advice),
- requires investment advisers to register in states they do business.
What are the types of investment advisers subject to SEC registration requirements
- either an independent Registered Investment Adviser (RIA) or
- as an Investment Adviser Representative (IAR) with a securities broker-dealer who files as the RIA.
What did the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) do
made key adjustments to where the investment adviser has to seek registration; defined 3 types of adviser categories:
- small advisers (AUM $25MM or below)
- midsized advisers (AUM $25MM - $100AUM)
- large advisers (AUM $100MM or above)
Dodd-Frank modification to Investment Advisers Act of 1940 | What is a small adviser and their registration requirements
- less than $25MM AUM
* regulated by the state unless the state doesn’t have a statute regulating advisers.
Dodd-Frank modification to Investment Advisers Act of 1940 | What is a midsized adviser and their registration requirements
- adviser with $25MM to $100MM AUM
* regulated by state and subject to examination by state authority.
Dodd-Frank modification to Investment Advisers Act of 1940 | What is a large adviser and their are the registration requirements
- adviser with greater than $100MM AUM
- must register with SEC unless exception exists
- SEC laws supersede state adviser laws for these advisers (“federal covered”)
- Transition rules apply to advisers with AUM who fluctuate between $90-110MM.
Dodd-Frank modification to Investment Advisers Act of 1940 | What are the Transition Rules that apply around the $100MM AUM mark
- If you initially reg at state level/you were a midsized adviser, you can continue being defined as a midsized adviser until AUM $110MM, which is when you reg w/SEC.
- If you initially reg as a federally covered SEC reg large adviser, e.g. $150MM, you will be considered large adviser until AUM below $90MM; then you have to reg at the state level.
Dodd-Frank modification to Investment Advisers Act of 1940 | How many days does an IA registered under state law w/ AUM > $110MM to register w/the SEC
90 days. / SEC is nine-ty.
Dodd-Frank modification to Investment Advisers Act of 1940 | How many days does a federal covered IA whose AUM falls below $90MM have to register with the state(s)
180 days / Fed to State goes 1-8-0.
Investment Advisers Act of 1940 | What are the 3 criteria for an investment adviser to register with the SEC
- Remember ABC — p. 171-172:
- Providing advice or issuing reports or analysis regarding securities
- Being in the business of providing such services
- Being compensated for such services
- Unless there is an exclusion or exemption to registration.
Investment Advisers Act of 1940 | Advice test (criteria for adviser registration)
- “Regarding securities” includes all items listed as securities under 1933 and 1934 securities acts
- if an individual gives advice, issues reports, or recommends to a client that they acquire a specific security
- A financial planner who assembles a plan that includes a general recommendation that the client invest in securities (as opposed to some other form of investment)
- has given advice even if no specific advice w/regard to individual securities was offered
- when an individual advises an administrator of an employee benefit plan that the plan be funded by investing in securities
- the selection or retention of an investment manager
Investment Advisers Act of 1940 | Doing business test (criteria for adviser registration)
- any individual who provides financial planning services
- investment advisory services for compensation
- unless advice is incidental to a non-investment-advisory business of the individual, and the individual receives no compensation for their services
- if you refer to yourself as an investment adviser
- just a simple advertisement can trigger the need to be registered under the Investment Advisers Act of 1940.
Investment Advisers Act of 1940 | Compensation (criteria for adviser registration)
- If a separate fee (including annual fee or regular retainer) is charged for investment advisory services
- Commissions received from sales of products
Investment Advisers Act of 1940 | Do all individuals that meet these criteria have to register under the Advisers Act
- No; act provides exclusions from the definition of investment adviser and
- exemptions from the requirement of registering
- An individual who meets either the exclusion or exemption provisions does not have to register as an investment adviser
Investment Advisers Act of 1940 | Excluded from definition of an investment adviser
- LATE- Lawyer, accountant, teacher, engineer
- whose performance of advisory services is solely incidental to practice of profession
- broker or dealer whose performance of such services is solely incidental to conduct of business as a B/D and who receives no special comp
- bank or bank holding company, as defined by IA Act of 1940
- publisher of a bona fide newspaper or financial publication of general or regular publication
- person whose advice is limited to securities issued and guaranteed by US gov’t
Investment Advisers Act of 1940 | Exempt from the requirement to register as an 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)
B-D Exclusion, Investment Advisers Act of 1940 | What is the Broker-Dealer exclusion from the definition of investment adviser
- If B-D registered under the Exchange Act is solely incidental to conduct of its business as a B-D and does not receive any special compensation for providing investment advice.
- Analysis is done separately for each account.
B-D Exclusion, Investment Advisers Act of 1940 | What are the components of the B-D exclusion from the definition of Investment Adviser
- Solely incidental
- Special compensation
- Bundled fees
- Separate or identifiable charge
B-D Exclusion, Investment Advisers Act of 1940 | Solely incidental
the investment advice is incidental to the brokerage services provided
B-D Exclusion, Investment Advisers Act of 1940 | Special compensation
- the B-D receives only commissions, markups, and markdowns.
- bundled fees
- separate or identifiable charge
B-D Exclusion, Investment Advisers Act of 1940 | Bundled fees
- Part of the special compensation exclusion B-Ds
* the B-D receives a fee based on a percentage of assets that compensates for both advisory and brokerage services.
B-D Exclusion, Investment Advisers Act of 1940 | Separate or identifiable charge
- Part of the special compensation exclusion for B-Ds
- when the B-D charges its customers a separate fee for investment advice or
- when it charges its customers different commission rates, one with advice and one without.
Investment Adviser Registration | Investment adviser SEC registration process
- Applications must be submitted to Investment Adviser Registration Depository (IARD)
- Within 45 days, SEC must grant registration or institute an administrative proceeding to determine if the registration should be denied
- Adviser pays a filing fee.
Investment Adviser Registration | What does the adviser have to do after registration as a Registered Investment Adviser
- Submit a Form ADV Part I schedule annually, keeping SEC informed fo any investment advising activities
- Cannot use initials RIA after name, but must spell out term on business cards or other advertising literature
- Must keep 5 years of financial records.
