Regulation of Investment Advisers and Their Reps under the USA Flashcards
What two criteria must be met for someone to be “investment
counsel”?
a. Their principal business must be giving investment advice (excludes financial planners)
b. Provide investment supervisory services: “Continuous and Regular Supervisory or Management Services”
- discretionary authority over & provide ongoing supervisory services to the account
- ongoing responsibility to select or make recommendations based on client needs and arranging purchase or sale
What do you have to do to “provide continuous and regular
supervisory or management services re: an account”?
a. Discretionary authority over and provide ongoing
supervisory/mgmt services
b. You don’t have discretionary authority, but you have ongoing responsibility to select or make recommendations re: securities, based on needs of client
Are you providing continuous/regular supervisory/management services if you provide advice on intermittent or periodic basis (e.g. client request re: a market event) or on a specific date (e.g. account is reviewed and adjusted quarterly)?
NOPE!
Would an agent who secures a favorable contract for a football
player and receives 10% of the player’s salary be an investment
adviser?
No–only if they also advise the player to invest the money in
specific securities.
Difference between exclusion from a definition and exemption from a provision.
Exclusion = excluded from a definition
Exempt = person meets definition, but is not subject to
provision
How many exclusions are there from the definition of an
investment adviser under USA?
7
What are the 7 exclusions from the definition of an investment
adviser under USA (State)?
- Any bank or
- bank holding company,
- savings institution, or
-trust company.
(does NOT include savings and loan associations or foreign banks)
- Any lawyer, accountant, teacher, or engineer
whose advice is solely incidental to the practice of his profession (LATE)
- Any Broker-Dealer
includes those whose advisory services are incidental to business and doesn’t get special compensation (e.g. wrap fee) - Publishers meeting certain criteria
(general and impersonal, not adapted to specific customer needs)
These are only for USA (state)
- Investment adviser representatives
- Federal covered advisers
- Any other person the Administrator specifies as excluded
What are the 5 exclusions from the definition of an investment
adviser under Investment Advisers Act of 1940?
Same first 4 as USA
- Any bank or
- bank holding company,
- savings institution, or
-trust company.
(does NOT include savings and loan associations or foreign banks) - Any lawyer, accountant, teacher, or engineer
whose advice is solely incidental to the practice of his profession (LATE) - Any Broker-Dealer
includes those whose advisory services are incidental to the business and doesn’t get special compensation (e.g. wrap fee) - Publishers meeting certain criteria
(general and impersonal, not adapted to specific customer needs) - any person who advise, analyses, or reports are related only to securities direct obligation of / obligations guaranteed by US Gov
What is a “wrap fee” program i.e. which services are provided?
- Advisory program where specified fee(s) are not based on # of transactions but rather for investment advisory services and the execution of the transactions to fulfill that advice.
- NOT financial planning or recommendations
Who are the 2 exemptions from registration as an investment
adviser (firm) under the federal Investment Advisors Act of
1940?
a. Intrastate advisers (only within 1 state) - clients and place of
business and not national exchange securities advice.
b. Advisers who ONLY work with insurance companies
Who is defined as an intrastate adviser?
- Someone whose clients are residents of the state in which the
adviser has principal office and only place of business - Someone who doesn’t give any advice dealing with securities listed on a national exchange (e.g. NYSE)
Are advisers to ONLY banks exempt from federal registration or
state registration?
only state registration
Who are the 6 exemptions as an investment adviser (firm) from
state registration under the USA?
Those who have no place of business in the state but are registered in another state AND
only clients in the state are:
1. Broker-Dealers registered under the USA
2. Other investment advisers
3. Institutional investors
4. Existing clients who are not residents but are temporarily in the state
5. de minimus exemption (5 or fewer, less than 6), or
6. any others the Administrator exempts by rule or order
If a question refers to an “individual,” do they mean
institutional or retail client?
Retail
What is a federal covered adviser?
Well, they:
- They must be SEC-registered as an investment adviser and work with assets under management of $110 million (the current threshold).
- SEC registration is necessary as they are part of a contract under the Investment Company Act (1940) to manage an investment company.
According to the NSMIA, federal covered advisors do not need to register with the state based on the assets they manage.
There are various thresholds that cover this, created by Dodd-Frank.
They are for large, mid-sized, and small advisers.
- Large investment advisers with assets of over $110 million under their control, must be SEC-registered.
If they manage between $100 and $110 million in assets, it isn’t mandatory to register, but they can if they’d like and they think they will move past the threshold soon.
- Medium-size advisers
This group of advisers deals with assets between $25 million and $100 million.
They are not permitted to register with the SEC, so they register with the state where they operate.
- Small investment advisers
These investment advisers handle assets of $25 million or less.
SEC registration is only a necessity for advising investment companies registered under the Investment Company Act of 1940.
In the case of others that do not, SEC registration is not allowed; instead, they need to be registered in the state in which they operate unless state rules say something different.
One other scenario requires SEC registration.
Investment advisers operating in 15 or more states are subject to SEC regulation registration.
Here are some Dodd-Frank classifications exceptions:
- Pension consultants who manage more than $200 million
- Investing advisers with assets between $100 and $110 that are registered with the SEC
- Within 120 days of filing a Form ADV, those advisers anticipate being registered with the SEC
While states can’t mandate additional registration requirements for federal covered securities, they can ask for copies of any documents filed with the SEC related to the security in the form of a ?
Notice filing
They may request that future documentation that is sent to the SEC be sent to them as well.
There’s a filing fee that will need to be paid by the adviser as well.
If they have a state-based office or if they have six or more retail clients over the period of a year from the state, they will need to file notice as well.
No notice filing for federal covered investment advisors is necessary if their base of operations is not located in the state and if their only state clients are:
- Investment companies
- nvestment advisers
- Broker-dealers
- Banks
- Insurance companies
- Trust companies
- Employee benefit ($1 million or more asset)
- Savings institutions
- Government agencies
Some investment advisers won’t have to register in the state in which they operate, even when they fall under the definition of an investment adviser.
No place of business in this state is the first exemption to look at.
This is possible when an adviser has state registration elsewhere, has no office in another state but does have certain clients there.
In order for that to be the case, certain conditions regarding clients need to be met.
These can only be:
- Any broker-dealer registered under the Uniform Securities Act
- Investment advisers
- Employee benefit plans or other institutional investors (they must have assets of $1 million or more)
- Clients that are in the state temporarily (in other words, they are state residents)
- Other parties that are ruled exempted by rules or orders passed by the state administrator
There is also a de minimis exemption here.
If they do not have a physical location in the state and have fewer than five state-based retail clients within a 12-month period, they are not required to register.
While investment advisors can provide advice to more than one qualified private fund, they are the only ones who can do so.
What are private funds?
The Investment Company Act says it is an “issuer that would be an investment company”.
So, therefore, only 100 persons or less beneficially own the issuer’s outstanding securities.
At the moment, the issuer has no plans to make a public offering of its securities in the future.
There are additional requirements for these private funds:
- Investments in them must be made by qualified investors (as per the definition).
- The SEC mandates that exempt reporting adviser reports (ERA reports) be filed with the state for public interest and to protect investors.
- Neither private fund advisers’ representatives nor the adviser themselves should have participated in any activity that would disqualify them as described in Regulation D Rule 506 (d)(1).
Form ADV part 1.
It includes these details from Part 1A.
- Where their principal office is located
- If not found at their office, where their books and records are stored
- Business structure (a sole proprietorship, for example)
- The advisory services they provide (for example, individual portfolio management)
- Do they offer other business activities (for example, broker-dealer services)?
- Are they maintaining customer assets?
- Are customer accounts subject to discretionary control?
- Details of all officers, directors, partners, or other relevant control persons
- Disciplinary history
- States where the investment adviser is currently registered/where they will be registered
known as the investment adviser’s brochure.
The emphasis is primarily on customer-related information, including:
- Fees and commissions, hourly charges, and all other forms of compensation
- Client types
- Investment types the adviser recommends
- Investment strategies used
- Analysis methods
- Service of process consent
- Education and business background of the staff providing advice as well having discretionary control
- An audited balance sheet must be presented when the investment adviser retains custody or requests prepayment of fees
Form ADV part 2A
The investment adviser will need to create various supplements to the brochure for part 2b, with a particular focus on the supervised persons.
