State and Federal Regulations Governing Investment Advisers and IA Representatives Flashcards
Is a certified public accountant who provides tax advice considered an IA under the USA?
No, CPAs are excluded from the IA definition.
True or False: A publisher of a financial magazine is considered an IA under the USA.
False. Publishers of newspapers/magazines are excluded from the IA definition.
Is an organization that provides ratings of securities and is nationally known considered an IA under the USA?
No
Is an attorney who exclusively provides estate planning services considered an IA under the USA?
No. Provided the attorney’s advice is incidental to his profession, he is excluded from the IA definition.
True or False: A BD making recommendations about investing in various securities is an IA under the USA.
False. Since the BD is not charging a fee for the advice, it is excluded from the IA definition.
True or False: According to the USA, a BD providing asset allocation plans to its clients for a fee is an IA.
True. Since the BD is receiving specific compensation for its advice, it is considered an IA.
True or False: The USA defines a bank providing investment recommendations to its clients as an IA.
False. Banks are excluded from the IA definition.
True or False: A firm producing investment research for BDs to deliver to clients is considered an IA under the USA.
True. Since advice is being provided, as a business, and compensation is received, the ABC test is met.
True or False: The USA classifies an agent of a BD who also manages wrap accounts as an IA.
No. IAs are firms, not individuals.
Is an adviser to a mutual fund considered an IA under the USA?
No, mutual funds advisers are federally covered and are excluded from the IA definition at the state level.
Is an employee of a securities firm who manages accounts for a fee considered an IAR?
Yes
Individuals employed by an IA who only perform ____________________ duties are excluded from registration under the USA.
Individuals employed by an IA who only perform clerical/ministerial duties are excluded from registration under the USA.
Is an employee of an IA who answers the telephone and does clerical work considered an IAR?
No
What form is used to notify Administrators that an IA is maintaining custody of client assets?
Form ADV
Investment advisers with custody must have an annual audit done by a(n) ____________________.
Investment advisers with custody must have an annual audit done by a(n) independent CPA.
An IAR has an office in State A and has 4 clients who reside in the state. Is the IAR required to register in State A?
Yes, since the IAR has an office in State A. The client number is not relevant because of the office location.
An IAR of a federal covered adviser has an office in State B with 4 clients who live in State B. Where must he register?
He must register in State B since he has an office in the state. The number of clients is not relevant.
True or False: According to the USA, investment advisers may generally charge performance-based fees.
False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.
True or False: An IA that has full discretion over a client’s account at a separate BD is considered to have custody.
True
An IA directs transactions to a BD who rebates 15% of the commissions to the IA for the business. Is this acceptable?
Yes, provided the IA provides written disclosure (often in Form ADV) to clients.
What type of advice may lawyers, accountants, teachers and engineers provide and not be considered an IA?
Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost.
May the Administrator set minimum net worth requirements for IAs?
Yes, but no state may impose a requirement that exceeds the requirement of the IA’s home state.
According to the USA, all investment advisory contracts must be in __________ form.
According to the USA, all investment advisory contracts must be in written form.
If an adviser has check-writing privileges in a client’s account, does this constitute custody?
Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.
If an IA maintains custody of a client’s funds or securities, how often must account statements be provided to clients?
Statements must be sent quarterly.
If an IA maintains custody of client funds, are unannounced audits required?
Yes. IAs must arrange for unannounced audits on an annual basis.
True or False: An IA maintaining custody of client assets need not notify the Administrator.
False. The Administrator must be notified in writing using Form ADV.
When an IA has custody, with whom are the assets held?
Assets are held by a qualified custodian. Clients must be notified of custodian’s name, address, and manner of holding.
Define “assignment” as it relates to IA contracts.
The transfer of ownership of a client’s account from one advisory firm to another. Client consent is required.
What may an investment adviser do with full discretion, but not with limited discretion?
Withdraw money from the account
Does the de minimis exemption apply to investment adviser representatives?
Yes
Does the de minimis exemption apply to BDs that have no place of business in a state?
No. The de minimis exemption only applies to IAs and IARs.
IAs with no place of business in a state, and whose clients are ____________ are not required to register in that state.
IAs with no place of business in a state, and whose clients are institutions are not required to register in that state.
List some of the different types of institutional clients. 8
- IAs,
- BDs,
- investment,
- insurance, or
- trust companies,
- banks,
- savings and loan associations, and
- pension plans
What requirements may states impose on IAs that are registered with the SEC? 3
- File with the state any documents that were filed with SEC,
- File Consent to Service of Process,
- Pay state fees
If an IA is registered with the SEC, is registration required in any state in which it intends to do business?
No. The National Securities Markets Improvement Act (NSMIA) exempts federal covered advisers from state registration.
Regardless of assets under management, IAs must register with the SEC if any client is a ______________________________.
Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.
Under the USA, all IA contracts must be __________ and must disclose __________ provided and related ______.
Under the USA, all IA contracts must be in writing and must disclose services provided and related fees.
What is required of an IA if the firm goes through a majority change in ownership?
The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided.
An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?
No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.
Under the USA, are banks and bank holding companies excluded from the IA definition?
No. Banks, savings institutions and trust companies are excluded, but bank holding companies are not.
For how long does the registration of a state-registered adviser remain in effect?
Until December 31, unless renewed by the adviser
Is there a limit to the amount of net worth the Administrator may require of an IA?
Yes. The Administrator may not set a requirement that exceeds the IA’s home state.
Is an IAR who is employed by a federal covered adviser required to register in the state?
Yes. IARs of federal covered advisers must register in any state in which they have a place of business.
What type of advice may lawyers, accountants, teachers, and engineers provide and not be considered an IA?
Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost.
If employed by a federal covered IA, is an IAR required to register in all states in which she is conducting business?
No. If the IAR has no place of business in the state, no state registration is required.
In general, does the USA allow an adviser to charge performance-based fees?
No. However, such fee arrangements may be permitted by rule or order of the Administrator.
If an adviser exercises full discretionary control over a client’s account, does this constitute custody?
Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.
An IA has custody if it inadvertently receives client securities and hasn’t returned them within ____ business days.
An IA has custody if it inadvertently receives client securities and hasn’t returned them within 3 business days.
What type of information will be found in an investment adviser’s ADV Part I? 5
- Firm name,
- # of employees,
- nature of business,
- history of officers/directors,
- legal/disciplinary action in past 10 years
Any material changes to Form ADV must be filed ___________.
Any material changes to Form ADV must be filed promptly (within 30 days).
When are non-material (routine) changes to Form ADV required to be filed?
Routine items require an amendment within 90 days after the end of the IA’s fiscal year.
When is Form ADV-W filed?
When an adviser withdraws its registration
With what system do IAs file their registration applications?
The Investment Adviser Registration Depository (IARD)
ADV Part I is a disclosure document for use by the _____ and the ________________.
ADV Part I is a disclosure document for use by the SEC and the Administrator.
Identify the acronym: POA
Power of Attorney
What form do IAs file to register?
Form ADV
If ABC Advisers has $112 million under management, it must register with ________.
If ABC Advisers has $112 million under management, it must register with the SEC.
An IA’s brochure must have the same information that appears in what part of Form ADV?
Part 2 of Form ADV
True or False: If an IA’s clients are institutions (e.g., banks and BDs), it is exempt from registration under the USA.
True. However, this is provided that it has no place of business in the state.
What is Part 2 of Form ADV?
The portion of an IA’s application that may be used to satisfy the Brochure Rule (disclosure requirement)
True or False: The manager of an IA’s human resources department is considered an IAR.
False. The manager’s responsibilities do not include providing advice about securities or managing accounts.
What is required of an IA if there has been a minority change in firm ownership?
Provide written notification to clients and the Administrator
An investment adviser with more than $___________ under management must register with the SEC.
An investment adviser with more than $110 million under management must register with the SEC.
What is the purpose of an annual updating amendment.
To determine if an IA is eligible for continued SEC registration; it is filed within 90 days of its fiscal year end
Is registration with the SEC required of an adviser that manages $87 million of assets?
No. An established FCA must register with the state Administrator if the AUM falls below $90 million.
Is an employee of a BD who solicits new customers for an IA considered an IAR?
Yes. According to the USA, any person who solicits investment advisory service is considered an IAR.
Is the publisher of a newspaper required to register as an investment adviser?
No. Publishers are excluded from the IA definition if the newspaper has general circulation and gives impersonal advice.
An IA must register in any state in which its AUM are less than $___________.
An IA must register in any state in which its AUM are less than $100 million.
True or False: A federal covered adviser is excluded from the definition of an IA under the USA.
True
According to NASAA, an IA that has custody of client assets is required to maintain a net worth of $______.
According to NASAA, an IA that has custody of client assets is required to maintain a net worth of $35,000.
According to NASAA, an IA that only has discretionary authorization is required to maintain a net worth of $______.
According to NASAA, an IA that only has discretionary authorization is required to maintain a net worth of $10,000.
An IA’s brochure is not required to be provided when a contract is entered into with what type of client?
A registered investment company
True or False: An IA must provide clients with a brochure at least 48 hours prior to the signing of the contract.
True. If it is provided at least 48 hours before the contract is signed, it cannot cancelled without a penalty.
Is an IA always required to include a balance sheet in Part 2 of its Form ADV?
No. A balance sheet is required if the IA collects prepaid fees or has discretion.
If an IA is in possession of checks drawn by its client and made payable to third parties, how may custody be avoided?
By ensuring that it forwards the check within three business days
List the four categories of professionals who are excluded from the IA definition.
- Lawyers,
- accountants,
- teachers, and
- engineers
(remember L, A, T, E)
True or False: An adviser to a mutual fund must register in the state in which the fund is domiciled.
False. A federal covered adviser must be registered with the SEC, not a state.
True or False: The CEO of an advisory firm who establishes investment policy for the firm must register as an IA.
False. The CEO is considered an IAR, not an IA.
True or False: An agent of a BD who solicits client trades is not considered an IAR under the USA.
True. There is no indication that the agent is managing accounts and charging a fee.
An individual employed by an IA to manage the research department is required to register as an ____ under the USA.
An individual employed by an IA to manage the research department is required to register as an IAR under the USA.
IA records must be kept for at least ____ years.
IA records must be kept for at least five years.
An IAR has no place of business in State A, but has six or more individual clients in State A. Where must she register?
She must register in any state in which she has six or more individual clients (even if she has no office in the state).
An IAR of a federal covered adviser has no office in NY, but has six clients who live in NY. Must he register in NY?
No. IARs of federal covered advisers are only required to register in states in which they have an office.
An IAR of a state-registered IA has no office in NJ, but has six clients who live in NJ. Must she register in NJ?
Yes. IARs of state-regulated IAs register where they have an office and where they have six or more individual clients.
When does the de minimis exemption from registration apply for an IA that has no place of business in a state?
When an IA has no more than five non-institutional clients who are residents of the state (measured over 12 months)
Under the USA, the de minimis exemption limits an IA to no more than ____ clients within the previous ___ months.
Under the USA, the de minimis exemption limits an IA to no more than five clients within the previous 12 months.
If an IA meets the IA definition in a state, when is it exempt from registration under the USA?
If it has no office in the state and it has institutional clients only OR five or fewer retail clients in the last 12 months
Is there a registration exemption for IARs doing business in a state if employed by an IA registered in another state?
Yes, if the IAR has no office in the state and has five or fewer retail clients in the state in the past 12 months.
An IA must maintain its books and records for a minimum of ____ years.
An IA must maintain its books and records for a minimum of five years.
True or False: An IA with fewer than 15 retail clients in the past 12 months is exempt from registering under the USA.
False. The USA de minimis exemption for advisers is five or fewer individual clients.
What types of changes are considered material changes that require prompt amendment of an adviser’s Form ADV?
Significant items, such as a name or location change
What types of changes are considered significant changes for an adviser’s Form ADV? 4
- Change in fees,
2 custody, and
3.the name or - location of adviser
For how long must an IA maintain records?
FIve years
Under the USA, when must an IA provide a balance sheet to a client?
A balance sheet must be provided if the IA collects prepaid fees of $500 or more, six months or more in advance.
True or False: An IA with five or fewer retail clients in the state in the past 12 months must register under the USA.
False. No registration is required as long as the IA has no place of business in the state.
True or False: A BD that promotes wrap accounts to its clients must register as an IA under the USA.
True. Since the wrap account involves a fee for advice, the BD must register as an IA.
What document will an IA regularly provide to clients to notify them of the location of their securities?
The client’s account statement
If an IA has custody or discretion, it must include a ________ ______ with its Form ADV and brochure.
If an IA has custody or discretion, it must include a balance sheet with its Form ADV and brochure.
Before an IA may assign a client’s contract to another advisory firm, it must obtain the ________ ________.
Before an IA may assign a client’s contract to another advisory firm, it must obtain the client’s consent.
An IA inadvertently receives client funds/securities and doesn’t return them within three business days. Is this custody?
Yes
Define the term custody.
The legal responsibility for, or control over, another person’s assets
An IAR may exercise discretion over a client’s account based on the client’s oral authorization for up to ___ days.
An IAR may exercise discretion over a client’s account based on the client’s oral authorization for up to 10 days.
The rule governing the disclosure requirement of an IA to its clients is referred to as the __________ Rule.
The rule governing the disclosure requirement of an IA to its clients is referred to as the Brochure Rule.
How are advisory fees most commonly charged?
As a percentage of assets under management over a specific period
What must be stated in an investment advisory contract? 3
- The adviser will not be compensated on the basis of a share of the capital appreciation of the account.
- The adviser may not assign client contracts without the consent of the client.
- If the adviser is a partnership, clients will be notified of changes in the partnership within a reasonable period of time.
According to the Uniform Securities Act Rule 203, an investment adviser must give a client or prospective client a disclosure document (usually Form ADV Part 2) either 48 hours before or at the time of opening the account. Exceptions to this rule include what? 2
- An adviser whose clients are only investment companies or
- where the contract is for impersonal services for which the client pays a fee of less than $500.
In order for an IA to maintain custody of funds and securities, what is required in regards to the Administrator?
The IA must notify the Administrator and there must be no rule against custody.
