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Fundamentals of CFP > SEC Reqs, Regulation, etc > Flashcards

SEC Reqs, Regulation, etc Flashcards

SEC Reqs, Regulation, etc.

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CFP® flashcards
1
Q

Define “Fiduciary”

A

A person in a position of trust and confidence who is required to act for the benefit and best interests of another person.

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2
Q

Is a CFP allowed to accept gifts, gratuity, entertainment, non-cash compensation, etc?

A

No. These things could potentially affect CFP objectivity.

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3
Q

What is a “Performance Based Fee?”

A

An investment advisory fee based on a share of the capital gains on, or capital appreciation of a client’s assets.

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4
Q

Clients who are qualified to be charged performance based fees (2 things)

A
  • Client with a minimum net worth of 2.2 million
  • Client with assets under management of 1.1 million
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5
Q

What is “Fee-Based Compensation?”

A

Includes both fees and sales-related compensation

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6
Q

What is “Fee-only Compensation?”

A
  • No sales related compensation for CFP/firm
  • No sales related compensation for related parties (e.g. Your husband is Elon Musk, and you buy TESLA stock)
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7
Q

What are “Surety Bonds?”

A

They are issued by the advisor on behalf of the client, guaranteeing that any obligations to 3rd parties will be met.

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8
Q

Disclosure of confidential and private client information without client’s permission is only allowed if CFP is compelled by (4 things)…

A

-CFP Board
-Law
-Judicial proceeding
-CFP’s legal defense

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9
Q

3 types of legal liability involved in lawsuits against Financial Planners

A
  • Contractual Liability
  • Tort Liability
  • Vicarious Liability
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10
Q

What is “Contractual Liability?”

A

Contractual Liability results from failure to abide by valid contractual agreements

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11
Q

What is “Tort Liability?”

A

A civil wrongdoing (other than breach of contract) for which the court will provide a remedy (usually due to negligence)

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12
Q

What is “Vicarious Liability?”

A

Generally rises out of an employer’s liability for the actions of his/her employees

(e.g. If an employee commits a negligent act, then the employer is held liable)

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13
Q

What is Mediation?

A

Client and Planner agree to have a 3rd party meet with them (and attorneys) to reach settlement.

Still could go to court if mediation fails

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14
Q

What is Arbitration?

A

Client and Planner contractually agree to present any dispute to impartial 3rd party

Arbitration’s decision is final

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15
Q

List 6 wise measures to take to prevent litigation/protect oneself in the event of litigation

A
  1. Have client accept your assumptions of market
  2. Include assumptions, alternative solutions, discussion notes, risks in financial plan
  3. Manage client expectations
  4. Turn away prospective clients that give off bad vibes
  5. Incorporate planners business
  6. Errors & Omissions insurance
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16
Q

Investment Advisors Act of 1940 Standards of Ethical Conduct (5 things)

A
  1. Fiduciary Responsibility
  2. Avoid Conflicts of Interest
  3. Don’t make misleading statements
  4. Make suitable recommendations only
  5. Avoid Market Manipulations
17
Q

What is an Investment Advisor?

A

Advises others about securities for compensation basically

18
Q

An Investment Advisor meets these 3 requirements

A
  1. Provides Investment advice and analysis
  2. Is in the business of providing such advice (think presentation)
  3. Receives Compensation
19
Q

What are Registered Investment Advisors?

A

Investment Advisors registered with the SEC

(Investment Advisors Act of 1940 requires this)

20
Q

SEC Requirements for Investment Advisors (6 main things)

A
  1. File form ADV
  2. SEC Brochure Rule
  3. Record Keeping
  4. Prohibition against performance fees
  5. IA can’t reassign client’s account
  6. Cannot use initials “RIA” as designation
21
Q

What’s the deal with the SEC barring Investment Advisors from using “RIA?”

A

Advisors can call themselves registered investment advisors or even use RIA. They just can’t imply that it’s a certification like CFA or CFP.

22
Q

5 common state requirements for Investment Advisors

A
  1. Minimum capitalization requirements
  2. Posting of a surety bond
  3. File audited financial statements
  4. File copies of literature before provided to client
  5. Keep copy of all literature provided
23
Q

When should the Investment Advisor register with the SEC? When should the IA register with the state?

A

SEC - $110 mil or more in AUM

State - Less than $110 mil in AUM

24
Q

When discussing registering with SEC, what’s the difference between exempt and excluded?

A

Exempt - still subject to law but exempt from complying with SEC requirements

Excluded - Perform activities outside of Investment Advisor

25
Q

Entities exempt from registering with the SEC (4 things)

A
  1. Investment Advisors with intrastate clients providing no advice
  2. IAs for insurance companies, venture capital funds, or private capital funds
  3. Advisor with less than 15 clients and doesn’t advertise as IA
  4. Foreign advisor w/ no US office
26
Q

Entities excluded from registering with the SEC (4 things)

A
  1. Banks
  2. Attorneys, accountants, engineers, teachers…
  3. Publishers
  4. Advisor of US government securities
27
Q

What is an Advisor Representative?

A

When a firm registers as an investment advisor, individuals who work for them are advisor representatives

28
Q

4 Components of SEC’s Regulation Best Interest

A
  1. Disclosure (fees, services, etc.)
  2. Standard of Care (give a sh**)
  3. Conflict of Interest
  4. Document Compliance
29
Q

Who is subject to SEC’s Regulation Best Interest?

A

Broker/Dealers and other individuals or firms who make recommendations to retail customers

30
Q

What is the SEC Brochure Rule? (kind of 2 things)

A

Advisor must deliver copy of disclosure brochure to client:

-At least 48 hours before signing contract
or
-At time of signing with 5 business days to rescind the contract

31
Q

What are the exceptions to the SEC Brochure Rule?

A

There are none lol

32
Q

True or False

FINRA is a federal regulatory organization

A

False; FINRA is a self-regulatory organization

Fundamentals of CFP (8 decks)

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