Unit 1 Flashcards
Investment Advisers Act of 1940 is on what level?
Federal
Uniform Securities Act is one what level?
State
NASAA is the
advisory body of state securities regulators responsible for the content of the exam.
Non-persons:
- A minor
- A deceased individual
- An individual declared mentally incompetent by the courts
3-Prong Test:
- Gives advice to others on securities
- Does so as part of a regular business activity
- Receives compensation for performing this activity
Added to the definition of investment advisor:
- financial planners
- pension consultants
- others who offer investment advice to the definition of investment advisor
such as Sports and Entertainment Representatives → a sports agent who advises his client, the football player, to invest his money in specific securities
Exclusions from the Uniform Securities Act
- Bank
- Lawyer, accountant, teacher, or engineer (LATE)
- Broker Dealer
- Publishers who meet certain criteria
- IAR
- Federal covered adviser
- any other person the Admin excludes
- Any person whose advice is only related to US government securities
“Bank” does not include
a savings and loan institution or foreign bank but does include a savings institution
Note: Exclusion is unavailable to credit unions and investment advisor subsidiaries
The exclusion for LATE is not available when:
any of the professionals have established a separate advisory business *charging a separate fee for advice)
The exclusion for BDs is not available to those offering
wrap fee programs
Publishers must meet the following criteria
- General and impersonal
- Bona fide as opposed to promotional material
- Regular circulation
If the issue is published from time to time, the exclusion is lost
What are the exemptions?
- intra state advisers
2. advisers to insurance companies
What is an intra state adviser?
a. Clients are residents of the state in which their principal office is located
b. Do not give advice with securities listed on any national exchange
c. Other than an investment advisor for any private fund
Those who have no place of business in the state but are registered in another state, provided their only clients in the state are:
- BDs registered under the act
- Other investment advisors
- Institutional investors
- Existing clients who are not residents but are temporarily in the state
- Limited 5 or fewer clients, other than those previously listed, resident in the state during the preceding 12 months (de minimis exception)
- Any others the Administrator exempts by rule or order
Institution
- Included in the term person
- Banks, trust companies, S & L associations, insurance companies, investment companies, employee benefit plans with assets of $1 mil+, and governmental agencies
Retail Clients need
far more protection than institutional ones
If the client should change legal residence to that state, the investment advisor has
30 days to register in that state or discontinue doing business with that client (unless qualifying for the de minimis exception)
An investment advisor or one of their reps who advertises to the public, in any way, the availability of meeting with prospective clients in any location (hotel, country club) in the state is considered to have a
place of business in that state
Exemptions for Private Fund Advisors under Federal Law
- Advisors solely to private funds with less than $150 mil AUM
- Certain non-U.S. advisors with no place of business in the US and minimal AUM (less than $25 mil)
- Advisors solely to venture capital funds (venture capital fund exception)
Private Fund
an issuer that would be an investment company, does not presently propose to make a public offering of its securities
- No more than 100 shareholders and no public offering
Exemptions for Private Fund Advisors under State Law
All investors must be “qualified investors” - $1 mil in assets managed by the investment adviser or a net worth (excluding primary residence) of $2.1 mil
Neither the private fund adviser nor any affiliates are subject to the “bad actor” provisions
Exemption for Foreign Private Advisers
- Has no place of business in the US
- Has less than 15 clients and investors in the US in private funds
- Has aggregate AUM of less than $25 million
- Does not hold itself out to the public in the US as an investment advisor or act as an investment advisor to an investment company registered under the Investment Company Act of 1940
Exemption for Investment Advisors to Venture Capital Funds
- Does not offer its investors redemption rights or other similar liquidity rights (except in certain circumstances)
- Represents itself as a venture capital fund to investors
- Is not registered under the Investment Company Act of 1940
A venture capital fund is a
polled investment where venture capitalists invest their money and pay an advisor to select opportunities meeting their objectives. If these conditions are met, that investment advisor is exempt from registration under federal (and state) law.
Requirements for Investment Advisers is done
on either a federal or state basis - NEVER BOTH
Federal Covered Investment Adviser (Covered Adviser)
- Registered with the SEC
- Under contract to manage an investment company registered under the Investment Company Act of 1940
- Not registered with the SEC because they are excluded from the definition of an investment adviser
Ex: the IA whose advice is limited solely to securities issued by the U.S. government or on of its agencies
Large Investment Advisers
At least $100 mil AUM are eligible for SEC registration
But once assets reach $110 mil, SEC registration is mandatory
Mid-Size Advisers
At least $25 mil but less than $100 mil
Must register with the state
Ways for a mid-size adviser qualify for SEC registration
- The adviser is not required to be registration with the Admin of the state in which it maintains its place of business
- Registered, the adviser would not be subject to examination as an investment adviser by the Admin
- The adviser is required to register in 15 or more states
- The adviser elects to take advantage of the buffer
Small Investment Advisers
- AUM less than $25 mil
- SEC registration is prohibited unless IA is an advisor to an investment company registered under the IC Act of 1940
- If the adviser would be required to register in 15 or more states, registration would be permitted instead
- Registration with the state is required unless exempted under state rules
The following are exempt from the prohibition on registration with the SEC (allowed to register with SEC)
- Pension consultants with at least $200 mil under control
- Mid-size advisers with at least $100 mil but less than $110 mil
- IA expecting to be eligible for SEC registration within 120 days of filing the application for registration on the Form ADV
- Internet advisers
Advisers to an investment company registered under the Investment Company Act of 1940
egister with the SEC regardless of their size.
$10 Million Buffer
At least $100 mil → may choose to remain state registered
When AUM reaches $110 mil → SEC registration is mandatory
$20 Million Buffers
Market conditions or obtaining/losing clients can cause AUM to fluctuate
Established to keep advisers from having to switch back and forth
Once recognized with the SEC, an adviser need not withdraw unless it has less than $90 mil AUM
An adviser can choose to stay at the state-level until they reach $110 mil
If withdrawing SEC registration and registering with the state, must do so within ____ days.
180
If registering with the SEC, must do so with ____ day.
90
When a state-registered IA reported AUM $110 mil or more on the annual updating amendment, they must
register with the SEC within 90 days
When a new IA files for registration and they believe that they will have at least $100 mil in AUM in the first 120 days, they can
register with the SEC
Common if expecting large amounts in a short time.
When an SEC-registered IA reported less than $90 mil AUM on the annual updating amendment, they must
register with the state(s) within 180 days
Filing Form ADV in almost all cases is done through
the Investment Adviser Registration Depository (IARD).
The IARD is an electronic filing system.
Part 1A of Form ADV
- Asks a number of questions about the investment adviser, its business practices, the persons who own and control the firm, and the persons who provide investment advice on behalf of the firm.
Must be completed
Part 1B of Form ADV
Asks additional questions required by state securities authorities
Do not have to complete if only registering with SEC
Part 2A of Form ADV
Requires advisers to create narrative brochures containing information about the advisory firm
Applies to all IA
A → Adviser
Part 2B of Form ADV
Requires advisers to create brochure supplements containing information about certain supervised persons
Applies to all IA
B → Bodies (people who work there)
A person is presumed to control an IA organized as a corporation if:
- the person directly or indirectly has the right to vote 25% or more of a class of the corporation’s voting securities
- Has the right to receive upon dissolution
- Has contributed 25% or more of the capital of the partnership
Control person is defined 3 different ways:
Securities Exchange Act → 10%
Investment Company Act → more than 25%
Advisers Act and the USA → 25% or more
State-registered advisers file
both Part 1 and Part 2 with the Admin of each state in which they are registering
There is a specific area in Part 2 where
where state-registered advisers must identify each of the principal executive officers and management persons and their formal education and business background
Form ADV
Must be updated each year within
90 days after the end of the adviser’s fiscal year
Fees associated with annual renewals
SEC - pays a fee
USA - does not pay a fee
Notice Filing
instead of registering with the state(s), covered advisers pay state filing fees and give notice to the Admin
Federal covered advisers must make a notice filing with the state if
they have a place of business in the state
or
have 6 or more clients in that state in a 12-month period, regardless of place of business
If a federal covered adviser only deals with institutions, other IAs, etc.,
notice filing is not required
Provide a Consent to Service of Process
appoints the Admin as the applicant’s attorney to receive and process noncriminal securities-related complaints against the applicant
Submitted with the initial application and remains in force permanently (does not need to be supplied with each renewal of a registration
Registration with the SEC takes effect on
the 45th day after filing of a complete application and, as with all securities professionals, at noon of the 30th day in the case of state-registered investment advisers
Renewal date for state registration of AI is
December 31.
Even if you register in November, your first year will be a short one.
USA defines an agent as
any individual who represents a BD or an issuer in effecting transactions in securities for their clients.
USA defines an agent as
any individual who represents a BD or an issuer in effecting transactions in securities for their clients.
Form ADV-W
If an adviser no longer desires to engage in the business, Form ADV-W must be filed to withdraw the registration voluntarily
Covered advisers → takes 60 days
State-registered advisers → 30 days
Admin retains jurisdiction over the former registrant for a period of 1 year
Exempt Reporting Advisers (ERAs)
A person exempt from registration is required to complete and electronically file reports using the IARD system on certain items set forth in Form ADV, which will be made publicly available on the SEC’s website.
File an abbreviated Form ADV Part 1 (they don’t answer all of the questions), but do not have to prepare a Form ADV Part 2.
Substantial Prepayment of Fees
Federally covered → prepayments of more than $1,200 per client, 6 months or more in advance
State → more than $500 per client, 6 months or more in advance
Net worth required of IA with discretionary authority is
$10,000
Net worth required of IA taking custody of client funds is
$35,000
If the IA is using a surety bond instead, the requirement in either case is
$35,000
Principal office
the executive office of the IA from which the managers of the IA direct, control, and coordinate the activities of the IA
A state-registered IA need only meet the financial requirements
of the state in which its principal office is located
Section 222 of the IA Act of 1940 states that when it comes to federal covered advisers, any financial or bonding requirements, as well as rules relating to recording keeping, are solely under
federal jurisdiction
When below min requirement, IA must
obtain a bond in an amount of the net worth deficient rounded up to the nearest $5,000
What is scalping?
the practice whereby an investment advisor, before the dissemination of a securities recommendation, trades on the anticipated short-run activity that may result from the recommendation
Time Period for Maintenance of Records
Must be readily accessible for 5 years. During first 2 years, must be maintained in the principal office
After, may be preserved in electronic or microfilm format or any other form in compliance.
As long as a state-registered IA meets the recording keeping requirements of their home state,
that was sufficient for any state in which they are registered
