Unit 1 Flashcards
Definition of a “Person”
Easier - What are the 3 non-persons?
Non-Persons:
- A minor
- A deceased individual
- An individual declared mentally incompetent by the courts
3 Prong Test for Investment Advisers
- Gives advice to others on securities (general newsletter and non-specific securities are excluded)
- Does so as part of a regular business activity; and
- Receives compensation for performing this activity
Investment Counsel Criteria (2)
- IA’s principal business must be giving investment advice. This basically excludes financial planners or tax ppl.
- Provide investment supervisory services.
IA-1092
Interprets the definition of an Investment Adviser to include:
- Financial planners (states there is no such thing as a comprehensive financial plan that does not involve securities).
- Pension consultants (consultants who advise employee benefit plans on how to fund their plans with securities; and any consultants who advise employee benefit plans on the selection performance and retention of investment managers), and
- Others who offer investment advice as part of their financial practice.
Definition of “Investment Adviser” Exclusions per the State (7)
- Any Bank or bank holding company, savings institution, or trust company. Generally limited to U.S. banks and bank holding companies. Exclusion is unavailable to credit unions and investment adviser subsidiaries of banks or bank holding companies.
- LATE - lawyer, accountant, teacher, engineer and advice is incidental.
- Any broker-dealer whose performance of such services is solely incidental to the conduct of business and receives no special compensation. Also applies to broker dealer representatives (agents)
- Publisher of any bona fide newspaper, magazeine or business or fin. publication of general and regular circulation. (*Must be on a regular basis and not in response to specific timed market events, impersonal in nature, bona fide or genuine. Offering 5 securities weekly may be ok)
- Certain individuals employed by Investment Advisers (Investment Adviser Representatives)
- Any person who is a federal covered adviser
- Any person whose advice, analysis, or reports are related only to securities that are direct obligations of the U.S. governemnt
- Any other person the Administrator specifies is excluded
Investment Adviser Exemptions (Federal Law only) (2) State Law is separate) (Exempt from registration) *
Federal Exemptions:
- Intrastate Advisers (excludes investment advisers to any private fund) (clients are residents of the state where adviser principal office (and only place of business) is located, and do not give advice on securities listed on an exchange.)
- *Advisers whose only clients are insurance companies are exempt.
Investment Adviser Exemptions (State Law Only) (…Federal Law is separate question) (Exempt from registration)
How long to register if violating the exemptions?
State Exemptions:
- IA’s who have no place of business in the state (a hotel could be considered a place of business if its a new client), but are registered in another state, provided their only clients in the state are:
- registered broker dealers,
- other IAs,
- banks and insurance companies
- large employee benefit plans
- Institutional investors,
- existing clients who are only temporarily in the state (snowbird)
- limited to 5 or fewer clients, other than those previously listed, resident in the state during the preceding 12 month period (de minimus exemption),
- any others the administrator exempts by rule or order
(if the rules are violated, IA must register within 30 days - like registering your car)
Investment Adviser Registration Exemption (Federal Law) (3) (Private Funds)
- (Private fund adviser exemption) An exemption for advisers soleyly to private funds with less than $150MM in AUM in the U.S.)
- (Foreign private adviser exemption) - Non-U.S. advisers with no place of business in the U.S. and minimal AUM (less than $25MM) attributable to U.S. clients and investors. Less than 15 U.S. clients.
- (Venture capital Fund exemption) - Advisers soleyly to venture capital funds (venture capital funds have limited leverage and do not offer redemption rights).
**Investment Adviser Registration Exemption (State Law differences from Federal Law exemptions) (2) (Private Funds)
- If qualifying as 3c1 (less than 100 investors), NASAA requires all investors be “qualified clients” (assets of $1mm+ with IA, or have $2.1MM+ net worth excluding primary residence.
- Neither the private fund, nor any of it’s advisors affiliates are subject to the “bad actor” provisions. Those provisions disqualify anyone who has certain criminal convictions (generally felonies), certain SEC disciplinary orders or suspension or expulsion from membership in an SRO such as FINRA.
Federal “Covered” Adviser characteristics (6))
Federal Covered Advisers:
- those registered with the SEC because they are eligible ($100MM AUM) or required ($110MM AUM)
- those under contract to manage an investment company (i.e. an mutual fund), registered under the Investment Company Act - regardless of AUM
- those not registered with the SEC because they are excluded from the definition of an IA. Most tested example is IA whose advice is limited to securities issued by the U.S. govt. or one of it’s agencies)
- Pension consultants with AT LEAST $200MM in AUM
- Internet Advisers
- Investment Advisers expecting to be eligibile for SEC registration within 120 days of filling the applicational
Small, Mid, Large Size Investment Advisers and Characteristics
Large Size IA timeline to register with SEC or State
- Small - Less than $25MM
- Mid - $25MM - $100MM
- Large - $100MM+ ($110 REQUIRES SEC Reg)
(Small and midsize advisors required to register in 15 or more states have the OPTION of registering with the SEC)
Investment Adviser Registration Process (Mostly Same for SEC and State)
Registration is accomplished using form ADV through the IARD
Registering with the State:
- Submit application
- provide consent to service of process
- pay filing fees
- post a bond (if required by Administrator); and
- take and pass an examination if required by the Administrator (could be oral, written or both)
Form ADV Organization
(other items on pg. 23)
When must it be updated?
- Regular Requirement?
- Material Change Requirement?
1A - All advisers registering with the SEC or any state must fill out this portion. (location of business, form of business (partnership, etc.) etc.)
- Asks info about direct owners and exec officers (control persons)
- DRPs (Disclosure Reporting Pages) are schedules that ask for details about disciplinary events involving the adviser or advisory affiliates
1B- Additional questions for State Registration Only
2A- Brochures - contain info on advisory firm (investment strategy, analysis, compensation, etc.) . Apply to all registering with state and SEC. Also asks for educational and business background of principal executive officers, management persons) There are no educational requirements.
2B- Brochure Supplements - Contain info on certain supervised persons. Apply to all registering with SEC or states.
- -Must be updated within 90 days after the end of the advisers fiscal year, with the Annual Updating Amendment.
- -Material changes must be updated promptly.
Control Person Definition(s):
- IA Control Person Definition
- Exchange Act of 1934 defintion
- Investment Company Act
- Investment Adviser Control Person - Owns 25% or more of a corporations voting securities; or has contributed 25%+ to a partnership
- Exchange Act Definition of Control Person - 10% of voting power
- Investment Company Act - more than 25%
**Form ADV Fees for filing (rules)
No Fee If:
- Changing form of business organization (partnership to a corporation). But will need a new ADV.
- Registering as a successor firm with the State.
Fee If:
-Registering as a successor firm with the SEC
Successor firms only pay a fee with the SEC.
