State 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 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: 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
A surety bond may be required if an investment adviser has _____________ or __________ of client assets.
A surety bond may be required if an investment adviser has discretion or custody of client assets.
In place of a surety bond, the Administrator will accept a deposit of _______ or _____________.
In place of a surety bond, the Administrator will accept a deposit of cash or securities.
True or False: A successor advisory firm must pay a new filing fee, but need not file a new application.
False. The successor firm must update its application, but not pay a new filing fee.
The application for registration of an agent or IAR becomes effective in _____ days.
The application for registration of an agent or IAR becomes effective in 30 days.
The application for withdrawal of registration of an agent or IAR becomes effective in _____ days.
The application for withdrawal of registration of an agent or IAR becomes effective in 30 days.
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.
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.
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.
As it applies to a BD or IA, what does the term “exclusion” mean in the USA?
Exclusion signifies that a person does not meet the definition of a BD or IA in the state.
Who manages accounts, solicits services, or makes recommendations on behalf of a registered investment adviser?
An investment adviser representative (IAR)
What may an investment adviser do with full discretion, but not with limited discretion?
Withdraw money from the account
An ___________________________________ is to an investment adviser what an ________ is to a BD.
An investment adviser representative (IAR) is to an investment adviser what an agent is to a BD.
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.
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.
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.
For how long does the registration of a state-registered adviser remain in effect?
Until December 31, unless renewed by the adviser
IAs file their applications electronically through the ___________________________________.
IAs file their applications electronically through the Investment Adviser Registration Depository (IARD).
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.
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 an IA contract stipulates cancellation penalties, a brochure must be provided ____ hours before the contract signing.
If an IA contract stipulates cancellation penalties, a brochure must be provided 48 hours before the contract signing.
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.
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.
Identify some non-material (routine) changes to Form ADV.
- A change in the number of discretionary accounts or 2. a change in the dollar amount under management by the adviser
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.
Who operates the IARD?
FINRA
When should routine changes to an adviser’s ADV be filed?
Within 90 days of the end of the adviser’s fiscal year
When should significant changes to an adviser’s ADV be filed?
Promptly (within 30 days)
When must a federal adviser file an updating amendment to determine continued eligibility for SEC registration?
Within 90 days of the end of the adviser’s fiscal year.
True or False: An IA must physically deliver its brochure to clients at least annually.
False. At a minimum, the IA must (in writing) offer to deliver its brochure annually.
Identify the acronym: IAR
Investment Adviser Representative
What is Form ADV?
The form filed by investment advisers for registration
Identify the acronym: IARD
Investment Adviser Registration Depository
What is Form ADV-W?
The form filed by investment advisers to withdraw registration
What is Form ADV-E?
Form filed by an independent public accountant after auditing the records of an IA maintaining custody of client assets
What’s notice filing?
The process in which information that is filed with the SEC is also filed or shared with the Administrator.
What form do IAs file to register?
Form ADV
Where do IAs send their registration forms?
The Investment Adviser Registration Depository (IARD)
What is updated at the annual renewal of an IA’s registration? 5
- Assets under management,
- the number of accounts,
- the number of clients,
- the number of employees, and
- the number of IA representatives
Is an accountant defined as an IA?
No. Accountants are excluded from the IA definition if their advice is incidental to their business.
Identify the acronym: LATE
Lawyers, Accountants, Teachers and Engineers—these are the professionals excluded from the IA definition.
If a BD is promoting wrap accounts, does it need to register as an IA?
Yes. Selling wrap accounts is considered advisory service which requires registration.
Give some examples of institutional investors. 6
- Banks,
- S&Ls,
- insurance companies
- investment companies,
- investment advisers, or
- entities with at least $50 million in assets
List some of the records that must be retained by an IA for five years. 5
- Journals,
- blotters,
- ledgers,
- position records, and
- trade confirmations
True or False: If a new IA’s registration became effective on April 1, it must renew on April 1 of the following year.
False. State registrations expire annually on December 31 and then must be renewed.
True or False: An IA is required to disclose the educational background of all of its IARs to its clients.
False
If an IA’s office is in State A, but its only clients are insurance companies, with whom must it register?
With the Administrator in State A. IAs whose only clients are insurance companies are exempt from SEC registration.
True or False: A person being compensated for providing clients with advice about securities is a broker-dealer.
False. This person is considered an investment adviser.
What record must an investment adviser maintain regarding its IARs?
The initial application for each IAR
True or False: An Administrator will inspect all advisers’ books and records on an annual basis.
False. Administrators lack the resources to inspect all IAs’ books and records annually.
All investment advisory contracts must be in writing and include the ______________ for which services are contracted.
All investment advisory contracts must be in writing and include the length of time for which services are contracted.
The publisher of a financial publication that provides personalized advice is considered a(n) __________________.
The publisher of a financial publication that provides personalized advice is considered a(n) investment adviser.
When may an investment adviser charge fees that are different from other advisers?
When the fees are disclosed and are determined to be reasonable
True or False: An IA that maintains custody of customer assets must submit to an unannounced annual audit by a CPA.
True. At the completion of the audit, the CPA must file Form ADV-E with the SEC.
Is an adviser required to register in a state in which it has no office, but has accredited investors who reside there?
Yes. Since the USA does not recognize accredited investors as institutional investors, IA registration is required.
Does an IA that only accepts clients with at least $1 million under management need to register?
Yes. There is no exemption on the state or federal level if all of an IA’s clients have $1 milllion under management.
If an IA is no longer eligible for SEC registration, it has ____ days to file ADV-W and register at the state level.
If an IA is no longer eligible for SEC registration, it has 180 days to file ADV-W and register at the state level.
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.
Part 2 of Form ADV may be used as the disclosure document that is provided to the IA’s ________.
Part 2 of Form ADV may be used as the disclosure document that is provided to the IA’s clients.
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)
In lieu of an IA-prepared brochure, what document may be delivered to IA clients?
Part 2 of Form ADV
True or False: An adviser is required to deliver only ADV Part 2 when entering into a wrap fee program with a client.
False. For wrap accounts, the SEC requires IAs to provide clients with a special disclosure (ADV Part 2A-Appendix 1).
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.
When an IA initially registers, who is automatically considered registered?
The officers and directors of the advisory firm
What is required of an IA if there has been a minority change in firm ownership?
Provide written notification to clients and the Administrator
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 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.
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.
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.
The electronic system used to register investment advisers is the __________ _______ ____________ ________________.
The electronic system used to register investment advisers is the Investment Adviser Registration Depository (IARD).
IA records must be kept for at least ____ years.
IA records must be kept for at least five years.
If a BD’s net capital falls below the required minimum, it must notify the Administrator within ___ business day(s).
If a BD’s net capital falls below the required minimum, it must notify the Administrator within one business day.
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?
Change in fees, custody, and the name or location of adviser
True or False: An IA firm that is acquired by a competitor must pay a new filing fee.
False. The purchasing firm must update its application, but paying a new filing fee is not required.
What is the minimum educational requirements for any person who renders investment advice?
There is no minimum; however, the SEC and Administrator may require disclosure of educational backgrounds.
What is Form ADV-NR?
Form required for IAs with general partners who are non-U.S. residents; gives the SEC the right to receive legal papers
For how long must an IA maintain records?
FIve years
An IAR with no place of business in a state must register in the state if he has more than ____ retail clients there.
An IAR with no place of business in a state must register in the state if he has more than five retail clients there.
Investment advisers typically charge fees that are based on the _______ _____ over a specified period.
Investment advisers typically charge fees based on the average value over a specified period.
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.
When does an Administrator require an adviser to include its balance sheet in its ADV Part 2?
If the firm has custody of a client’s funds or collects prepaid fees of $500 or more, six months or more in advance
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 is not disclosed in the investment policy statement?
The advisor’s compensation. The statement does include the goals, objectives, and responsibilities of the advisor.
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.
Under the Investment Advisers Act of 1940, when must an IA renew its registration?
Within 90 days from the IA’s fiscal year-end
Give some examples of qualified custodians.
- Broker-dealers,
- banks and
- trust companies.
- IAs may also be custodians, but usually are not.
Under the IA Act of 1940, when must a balance sheet be provided to a client?
A balance sheet must be provided if the IA collects prepaid fees of $1,200 or more, six months or more in advance.
When does the SEC require an adviser to include its balance sheet in its ADV Part 2?
If the firm has custody of a client’s funds or collects prepaid fees of $1,200 or more, six months or more in advance
An annual updating admendment of Form ADV is filed with the SEC within __ days of the adviser’s fiscal year end.
An annual updating admendment of Form ADV is filed with the SEC within 90 days of the adviser’s fiscal year end.
Describe a wrap account.
An account that charges the client a single fee that covers transaction execution and account management
When and by whom is Form ADV-E filed?
It is filed within 120 days from the completion of an audit of the IA’s books; filed by the auditor.
How are advisory fees most commonly charged?
As a percentage of assets under management over a specific period
An IA is required to deliver the brochure to its clients by no later than the __________ of the contract.
An IA is required to deliver the brochure to its clients by no later than the signing of the contract.
If an IA delivers a brochure at the time of contract signing, clients must be given ____ days to cancel without penalty.
If an IA delivers a brochure at the time of contract signing, clients must be given five days to cancel without penalty.
What is a client’s right if an IA does not deliver the required brochure 48 hours prior to the signing of the contract?
The client may terminate the contract without penalty within five business days from the signing of the contract.
