LO 5.1.1: Discuss the regulation of financial planners.

Question 1

Investment Advisers Act of 1940

Answer 1

• 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.

Question 2

What are the types of investment advisers subject to SEC registration requirements

Answer 2

• either an independent Registered Investment Adviser (RIA) or
• as an Investment Adviser Representative (IAR) with a securities broker-dealer who files as the RIA.

Question 3

What did the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) do

Answer 3

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)

Question 4

Dodd-Frank modification to Investment Advisers Act of 1940 | What is a small adviser and their registration requirements

Answer 4

• less than $25MM AUM

* regulated by the state unless the state doesn’t have a statute regulating advisers.

Question 5

Dodd-Frank modification to Investment Advisers Act of 1940 | What is a midsized adviser and their registration requirements

Answer 5

• adviser with $25MM to $100MM AUM

* regulated by state and subject to examination by state authority.

Question 6

Dodd-Frank modification to Investment Advisers Act of 1940 | What is a large adviser and their are the registration requirements

Answer 6

• 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.

Question 7

Dodd-Frank modification to Investment Advisers Act of 1940 | What are the Transition Rules that apply around the $100MM AUM mark

Answer 7

• 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.

Question 8

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

Answer 8

90 days. / SEC is nine-ty.

Question 9

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)

Answer 9

180 days / Fed to State goes 1-8-0.

Question 10

Investment Advisers Act of 1940 | What are the 3 criteria for an investment adviser to register with the SEC

Answer 10

• 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.

Question 11

Investment Advisers Act of 1940 | Advice test (criteria for adviser registration)

Answer 11

• “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

Question 12

Investment Advisers Act of 1940 | Doing business test (criteria for adviser registration)

Answer 12

• 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.

Question 13

Investment Advisers Act of 1940 | Compensation (criteria for adviser registration)

Answer 13

• If a separate fee (including annual fee or regular retainer) is charged for investment advisory services
• Commissions received from sales of products

Question 14

Investment Advisers Act of 1940 | Do all individuals that meet these criteria have to register under the Advisers Act

Answer 14

• 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

Question 15

Investment Advisers Act of 1940 | Excluded from definition of an investment adviser

Answer 15

1. LATE- Lawyer, accountant, teacher, engineer
   
   • whose performance of advisory services is solely incidental to practice of profession
2. 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
3. bank or bank holding company, as defined by IA Act of 1940
4. publisher of a bona fide newspaper or financial publication of general or regular publication
5. person whose advice is limited to securities issued and guaranteed by US gov’t

Question 16

Investment Advisers Act of 1940 | Exempt from the requirement to register as an investment adviser

Answer 16

1. An intrastate adviser (single-state adviser) for unlisted securities
2. An adviser whose only clients are insurance companies
3. Foreign private advisers
4. Charitable organizations and plans
5. Commodity trading advisers
6. Private fund advisers
7. Venture capital advisers
8. Advisers to Small Business Investment Companies (SBICs)

Question 17

B-D Exclusion, Investment Advisers Act of 1940 | What is the Broker-Dealer exclusion from the definition of investment adviser

Answer 17

• 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.

Question 18

B-D Exclusion, Investment Advisers Act of 1940 | What are the components of the B-D exclusion from the definition of Investment Adviser

Answer 18

1. Solely incidental
2. Special compensation
   
   • Bundled fees
   • Separate or identifiable charge

Question 19

B-D Exclusion, Investment Advisers Act of 1940 | Solely incidental

Answer 19

the investment advice is incidental to the brokerage services provided

Question 20

B-D Exclusion, Investment Advisers Act of 1940 | Special compensation

Answer 20

• the B-D receives only commissions, markups, and markdowns.
• bundled fees
• separate or identifiable charge

Question 21

B-D Exclusion, Investment Advisers Act of 1940 | Bundled fees

Answer 21

• 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.

Question 22

B-D Exclusion, Investment Advisers Act of 1940 | Separate or identifiable charge

Answer 22

• 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.

Question 23

Investment Adviser Registration | Investment adviser SEC registration process

Answer 23

1. Applications must be submitted to Investment Adviser Registration Depository (IARD)
2. Within 45 days, SEC must grant registration or institute an administrative proceeding to determine if the registration should be denied
3. Adviser pays a filing fee.

Question 24

Investment Adviser Registration | What does the adviser have to do after registration as a Registered Investment Adviser

Answer 24

• 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.

Question 25

Investment Adviser Registration | How does an investment adviser terminate registration with the SEC

Answer 25

File a Form ADV-W as soon as possible after ceasing to practice as an investment adviser.

Question 26

Disclosure Requirements Under the Investment Advisers Act of 1940 | What does the Investment Advisers Act of 1940 generally require investment advisers entering into an advisory contract with a client to do

Answer 26

Deliver a written disclosure statement detailing the investment adviser’s background and business practices — Part 2A of Form ADV

Question 27

Disclosure Requirements Under the Investment Advisers Act of 1940 | Part 2A of Form ADV

Answer 27

• Referred to as the adviser’s brochure
• Spells out the details of advisory relationship and other business interests of the adviser
• Used by client or potential client to compare advisory firms for cost of services and compatibility of needs

Question 28

Disclosure Requirements Under the Investment Advisers Act of 1940 | When must Part 2A of Form ADV or the brochure be given to customers

Answer 28

• In advance or no later than entering into a contract -OR-

* if rescission is permitted within a specifically allotted time

Question 29

Disclosure Requirements Under the Investment Advisers Act of 1940 | When must an investment adviser must deliver the statement brochure if in advance of entering into a written or oral investment advisory contract

Answer 29

not less than 48 hours prior to entering into any written or oral investment advisory contract

Question 30

Disclosure Requirements Under the Investment Advisers Act of 1940 | What does “if rescission is permitted within a specifically allotted time” mean

Answer 30

• the statement/brochure must be delivered in advance (not less than 48 hours) of entering into the contract, -OR-
• at the time of entering into any such contract IF the client has a right to terminate the contract without penalty within 5 days after entering into the contract.