Unit 1 Flashcards
Investment Adviser
Any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in securities, or as part of a regular business, issues analyses or reports concerning securities. (financial planners, pension consultants and sports and entertainment reps.)
Exclusions from definition of investment adviser (federal)
- Banks
- Lawyers, accountants, teachers, engineers
- Publisher of any bona fide newspaper, news magazine, or other publication of general circulation
- Any person whose advice relates solely to securities issued or guaranteed by the U.S. government.
- any nationally recognized statistical rating organization (standard & poor’s.)
- any B/D who receives no special compensation
Exclusions from definition of investment adviser (state)
- Banks, savings institutions, trust companies
- Lawyers, accountants, teachers, engineers
- Publishers of any bona fide newspaper, news magazine, newsletter, or other publication that does not consist of the rendering of advice on the basis of the specific investment situation of each client
- Investment adviser representatives
- Federal covered adviser
- any person excluded by the investment advisers act of 1940
- any B/D who receives no special compensation
Exemptions under Federal law
- The private fund adviser exemption is available for advisers with less than $150 million in assets under management for private equity funds.
- The only clients are insurance companies
- Intrastate business only and does not furnish advice with respect to securities listed on any national securities exchange, and do not have any private funds as clients.
Exemptions under State law
- Private fund adviser exemption more restrictive than federal law
- Adviser has no place of business within that state and
- the only clients are institutions such as investment companies, banks and trust companies, insurance companies, broker dealers and other investment advisers, $1 million or larger employee benefit plans, governmental agency, or instrumentalities OR
- does not direct communications to more than 5 clients in the state during the previous 12 months
Registration under Federal law
File form ADV with the SEC & pay initial and renewal fees based on their fiscal year. Effective within 45 days. No net worth requirements. No surety bonds. Withdrawal of registration is on 60th day. Successor firm pays fee. No registration of investment adviser representatives.
Registration under State law
File form ADV with the Administrator and pay initial and renewal (12/31) fees. Effective at noon of the 30th day. There are net worth and/or surety bonds required (custody or discretion). Withdrawal of registration is on 30th day. Successor firm pays no fee until renewal. Registration automatically registers any adviser representative who is a partner, officer, director, or similar in status.
Record keeping under Federal law
Investment adviser records must be kept easily accessible for 5 years.
Record keeping under State law
Generally 3 years for b/d and 5 years for investment advisers.
Fines/penalties under Federal law
$10,000 and 5 years in jail
Fines/penalties under State law
$5,000 and 3 years in jail
Custody of customer funds/securities under Federal law
Kept by qualified custodian. It is custody if securities and/or checks are not returned or forwarded within 3 days. Third party checks are not custody. An audited balance sheet would be required if the adviser takes advance fees or more than $1,200, six months or more in advance, but not when the adviser maintains custody.
Custody of customer funds/securities under State law
If not prohibited, with written notice to the Administrator. Requires minimum net worth or surety bond of $35,000. It is custody if securities or checks are not returned and third-party checks forwarded within 3 business days. An audited balance sheet would be required if adviser takes fees of more than $500, six or more months in advance or the adviser maintains custody.
Performance fees under Federal law
Prohibited unless:
- contract with investment company
- certain clients with at least $1 mil under management or net worth in excess of $2.1 mil
Performance fees under State law
Prohibited unless:
- contract with investment company
- certain clients with at least $1 mil under management or net worth in excess of $2.1 mil
MUST MAKE RISK INCENTIVE STATEMENT AND OTHER DISCLOSURES
Statue of limitations for civil action under Federal law
Sooner of 3 years after the sale or 1 years after discovery.
Statue of limitations for civil action under State law
Sooner of 3 years after the sale or 2 years after the discovery.
A “Person” under Federal law
A natural person or company (includes a corporation, a partnership, an association, a joint stock company, a trust, or any organized group of persons, whether incorporated or not).
A “Person” under State law
An individual, a corporation, an association, a joint stock company, a trust where the interests of the beneficiaries are evidenced by a security, an unincorporated organization, a government, or a political subdivision of a government.
Filing of Advertisements under Federal law
No filing with the SEC ever.
Filing of Advertisements under State law
No filing for exempt securities or exempt transactions, otherwise filed with the Administrator.
Private placement exemption under Federal law
Sold up to 35 nonaccredited investors under Rule 506b. Exclusively accredited investors under Rule 506c.
Private placement exemption under State law
Up to 10 offers within the same state over a 12 month period. The term accredited investor is meaningless. Institutions are not counted nor restricted.
Advisory contract under Federal and State law
No assignment of the advisory contract may be made without the client’s consent.
Partnership under Federal and State law
The adviser, if a partnership, must notify the client of any change in the membership of the partnership within a reasonable period of time.
Brochure under Federal law
The brochure and brochure supplement rule- 120 day annual delivery
Brochure under State law
The brochure and brochure supplement rule- 120 day annual delivery
EXCEPT 48 hour in advance rule.
The term investment counsel may not be used unless (federal)
- principal business is investment advice
- substantial portion of his service is providing investment supervisory services (the giving of continuous advice on the investment of funds on the basis of the individual needs of each client.
An investment adviser representative is an associated person of any adviser firm (not clerical) who (state)
- makes recommendations or otherwise gives advice
- manages accounts of clients
- solicits or negotiates for the sale of advisory service
- supervises any of the above
RIA under Federal and State law
May not use initials RIA or IAR on business card or letterhead. Professional or educational designations are okay.
Insolvency
NOT a cause for revocation- Federal
IS a cause for revocation- State
Registration renewal under Federal law
IAs- within 90 days of fiscal year
Registration renewal under State law
Registration renewal for all securities professionals on Dec 31.
Registration of IAR- Federal
only if a place of business in the state; no de minimis
Register of IAR- State
Register in the state if retail clients resident in the state; subject to 5 or fewer de minimis
Employee benefit plans
$5 mil - institution (federal)
$1 mil - institution (state)
Not exempt from Federal registration under Securities Act of 1933
- foreign government securities
- insurance company securities
- federal covered securities
USA exempt transactions
- unsolicited brokerage transactions
- transactions between the issuer and underwriters
- transactions with financial instituitons
- private placements
- isolated nonissuer transaction
- transactions by an executor, administrator, sheriff, marshal, trustee in bankruptcy, guardian or conservator
- any sale or offer to a bank, savings institution, investment company or other financial institution
USA exempt securities
- U.S. & Canadian gov’t & Municipal securities
- Foreign gov’t securities
- Depository institutions
- Insurance company securities
- Public utility securities
- Federal covered securities (rights, warrants, preferred stock, any debt security).
- securities issued by nonprofit organizations
- securities issued by cooperatives
- securities of employee benefit plans
- certain money market instruments.
- investment contracts issued in connection with employee’s stock purchase, savings, pensions or profit sharing plans.
- commercial paper rated in the top 3 categories by the major rating agencies with denominations of $50,000 or more with maturities of 9 months or less.
Exempt transactions under the Securities Act of 1933
- transactions by any person other than the issuer, underwriter or dealer
- transactions by an issuer that do not involve a public offering (private placement under Reg D).
Securities exempt under the Securities Act of 1933
- any security issued or guaranteed by the U.S., any state or any political subdivision of a state
- any commercial paper with a maturity date of no more than 9 months (270 days)
- any security issued by a person organized & operated for religious, educational, benevolent, fraternal or charitable purposes & not for pecuniary profit
- any interest in a railroad equipment trust
- any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution.
SEC Release IA-1092
Identifies investment adviser as anyone who:
- provides investment advice, reports, or analyses with respect to securities
- is in the business of providing advice or analyses
- receives compensation, directly or indirectly, for those services.
Current Yield (stock)
Annual dividend/CMV Price
Current Yield (debt)
Annual interest/Current market price
Tax equivalent yield
Municipal rate/(100%-tax bracket)
Dollar cost average
Total dollars invested/# of shares purchased
Average market price
Share price total/# of investments
Shareholders equity total return
A-L + gain or loss/original investment
Inflation-adjusted (real) return
Total return - CPI
After tax return
Total return - marginal tax bracket
Range
in a group of #s, the difference between the highest and lowest one
Alpha (RF not given)
Actual return - (Beta X Market return)
Alpha (RF given)
(actual return - RF) - (beta * [market return - RF])
Sharpe ratio
(actual return - RF)/ Standard deviation
48 hours prior to contract
State IAs deliver initial brochure, or 5 day withdrawal without penalty
Entering advisory contract
latest time to deliver IA brochure
Next business day
notification to Administrator that IA’s net worth is insufficient (send details the following business day)
2 business days
maximum and minimum offering prices and underwriting discounts on file for coordination
3 business days
- securities or funds received by non-custody IA must be returned to client
- 3rd party checks received by non-custody IA must be forwarded to the 3rd party (USA only)
4 business days
to file form 8-k
5 business days
penalty free cancellation of an IA contract if brochure not delivered at least 48 hours in advance (USA only).
Money market funds
- No load
* Not insured or guaranteed by the FDIC or any other gov’t agency
Rights of accumulation
permits an investor to aggregate shares owned in related accounts in some or all funds in the fund family to receive a breakpoint discount.
Registration by coordination
jifewo
Registration by qualification
aefijoe
NOT Securities
- Interest in a retirement plan, such as IRA or Keogh plan
- Collectibles
- Commodities such as precious metals, grains and future contracts
- Condos used for personal residence
- Currency
- Insurance or endowment policy - fixed sum
Open end investment companies
- Unlimited, continuous offering of shares
- Issues common stock ONLY; no debt; permitted to borrow
- Full or fractional shares
- Offering & trading: sold & redeemed by fund only. continuous primary offering.
- MUST REDEEM SHARES
- Pricing: NAV + sales charge
- Shareholders rights: dividends (when declared), voting
Closed end investment companies
- Fixed; single offering of shares
- May issue: common stock, preferred stock, debt securities
- Full shares only
- IPO, secondary trading OTC or on an exchange
- DOES NOT REDEEM SHARES
- Pricing: CMV + commission
- Dividends (when declared), voting, preemptive
Class A shares
Front end loads (diff between POP & Net NAV)
Class B shares
Back end loads (contingent deferred sales loads)
Class C shares
Level load, no sales charge to purchase, generally a 1% CDSC for one year, with a continuous 12b-1 charge.
Best for short term
7 days
Time limit for an open end investment company (mutual fund) to redeem shares
10 days
- Schedule 13D filing
* SEC can summarily suspend trading in a security
10 days after the end of the quarter
Personal transactions of an IA or IAR must be recorded
10 business days after first trade
Investment advisers may use oral discretion
15 days after account approval
Client must return signed option account agreement
15 days after written request
Hearing may be granted - summary order
15 days after first sale
File form D (private placement rule 506)
18th birthday
Latest date for a Coverdell ESA contribution
20 days
Cooling off period under Securities Act of 1933. Also minimum time Administrator must have documents for coordination.
30th day
State registration or withdrawal of securities professionals effective
30 days
- Maximum residency under snowbird exemption
- Time limit within which rescission offer must be accepted or rejected
- Wash sale rule
- New issues eligible for margin once owned this long
35 days
Full purchase price received by underwriters for any IPO
40 days
Days after end of each quarter to file Form 10-Q
45th day
Federal registration of BDs and IAs effective
45 days
Days after end of each quarter to file Form 13F
60th day
Withdrawal of federal covered adviser on ADV-W
60 days
- Time limit to appeal an order under both state and federal law
- Maximum time for tax-free rollover
- Maximum termination clause with mutual fund adviser
- Minimum holding period for qualified dividend
90 days
- After end of fiscal year, IA must file annual updating amendment
- Minimum holding period for qualified dividend (preferred)
- State IA with AUM at $110 mil or above, must register with SEC
- Maturity of T-bill most commonly used as risk free rate
- Application for registered stock exchange effective or rejected
- Maximum time a letter of intent backdated
- SEC, with notice to US President, can suspend all trading on an exchange
120 days
- Annual delivery of adviser brochure to clients (if material changes)
- Time limit for an IA who expects to reach the required AUM to register with the SEC
180 days
- SEC IA with AUM below $90 mil must register with the states
- Mandatory waiting period to retest (3rd try)
6 months
Alternative valuation date for estate taxes
9 months (270 days)
Maximum maturity of exempt commercial paper
9 months after death
Payment of estate taxes is due
13 months
Maximum time to complete a letter of intent
397 days
Maximum maturity of any holding in money market mutual fund
2 years
Records must be kept easily accessible
3 years
Time period for most records kept by broker dealers
5 years
Time period for investment adviser recordkeeping
Crediting methods for Index Annuities
- Annual reset- index value at end of year
- High water mark- anniversary dates
- Point to point- end of contract
Charges deducted from the gross premium
- Sales load
- Admin fee
- State premium taxes
Nonpersons
- Minors
- Deceased individuals
- Individuals legally declared mentally incompetent
Rule 504
offer & sale of up to $5 mil in a 12 month period
No general solicitation or advertising
Termination procedures
Agent- all
State- IA notifies administrator
Federal- IAR notifies administrator
Rule 506b offerings
- may never be advertised
- limit of 35 nonaccredited investors
- no limit on accredited investors
Rule 506c offerings
- may be publicly advertised
* no limit on the # of accredited investors
Net worth requirement for investment advisers
Discretion only- $10k
Custody- $35k
Consent to service of process
- POA
- permanent part of record
- allows administrator to receive legal papers
Assumed interest rate
basis for determining distributions from a variable annuity
Soliciters
No registration of 3rd party solicitors required- Federal
USA requires solicitors to be registered as IARs
Bank
Does not include a savings & loan association or a foreign bank.
USA
fingerprints do not have to be submitted
Form ADV Part 2A
info regarding business activities & affiliations & an audited balance sheet & how fees are calculated
Criminal penalities
5 yr statue of limitations, $5k max fine
3 yr prison sentence
Cease and desist order
only applies to registered persons, NOT securities
Persons subject to state registration
B/D- generally legal persons, such as corporations or partnerships
Agent- always individuals (natural persons)
Investment advisers- generally legal persons, such as corporations or partnerships
Investment adviser representatives- always individuals (natural persons)
Persons NOT included in the definition of B/D
- Agents
- Issuers
- Banks, savings institutions, and trust companies (not engaged in B/D activities)
Under the USA, you are NOT a B/D if
- you have no place of business in the state AND
- your only clients are other B/Ds, institutions, issuers of the security involved in the transaction OR
- you are registered in a state where you do maintain a place of business and only do business in this state with existing clients who are snowbirds
Under the USA, you are a B/D if
- you have a place of business in the state regardless of the nature of your clients OR
- you have even 1 retail client in the state
NOT soft dollar compensation
*telephone lines, office furniture, travel expenses, rent, unrelated software, paying for training courses, internet service
Key statement from the USA
It is unlawful for ANY person to offer or sell any security in this state unless:
- it is registered under this act
- the security or transaction is exempted under this act
- it is a federal covered security
The administrator may, by rule or order. deny or revoke the registration exemption of
- any security issued by any person organized & operated NOT for profit motive but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association (nonprofit)
- any investment contract issued in connection with an employee’s stock purchase, savings, pension, profit sharing, or similar benefit plan
Federal covered securities
exempt from registration with the states but NOT the SEC
Federal covered security
A security that was exempt from registration on the STATE level
- open end or closed end investment company
- unit investment trust
- face amount certificate company
- securities listed on NYSE, Chicago stock exchange, NASDAQ, any senior security
- securities offered pursuant to the provisions of Rule 506b or 506c of Reg D under the securities act of 1933
- most securities exempt from registration under the securities act of 1933
Renewal applications for Canadian B/D
who file for LIMITED registration must be filed before Dec 1 each year
For a Canadian B/D to register
- file an application in the form required by the jurisdiction where it has its principal office in Canada
- file a consent to service of process
- provide evidence of good standing
- be a member of an SRO or stock exchange in Canada
USA no final order may be executed without
- appropriate prior notice to the interested parties
- opportunity for a hearing
- written findings of fact and conclusions of law
Exclusion from the definition of B/D
- agents
- issuers
- banks, savings institutions, trust companies
Agent - net worth
no requirements to register as an agent
3 nonpersons
- minors
- deceased
- mentally incompetent
B/D in Canada may effect transactions by
- any person from Canada who is temporarily a resident in this state who was already a client of the B/D
- a person from Canada who is a resident in this state, whose transaction is in a self directed, tax advantaged retirement plan in Canada of which the person is the holder or contributor (RRSP).
USA- free lunch seminars
prohibited
Not included in the fee disclosure document (USA)
- commissions
- markups or markdowns
- advisory fees
Matched orders
prearranged entries of equal but opposite buy and sell orders in the same security between different parties with the intention to distort the public impression of actual liquidity or prices
Arbitrage
Not a form of market manipulation
Assessable stock
a purported gift of assessable stock is considered to involve an offer and sale
Vacated
lifting of a stop order
Ratings
Ratings are not a requirement for a security to be registered
Howey decision
The Howey decision defined a security as (1) an investment of money (2) in a common enterprise (3) where there is an expectation of a profit (4) through the efforts of a third party and not the investor.
