Unit 10

Question 1

Investment Advisers Act of 1940

Answer 1

The federal legislation that defines the term investment adviser and requires person that fall within the definition to register with the SEC or with the states in which they do business
National Securities Markets Improvement Act of 1996 NSMIA), IARs registered with SEC or state

Question 2

2 primary purposes of Investor Act of 1940

Answer 2

Regulation of persons, both natural and legal, in the business of giving investment advice; and
Establishment of standards of ethical business conduct for the industry

Question 3

Broker

Answer 3

Any person engaged in the business of effecting transactions in securities for the account of others

Question 4

Dealer

Answer 4

Any person regularly engage in the business of buying and selling securities as principal for his own account, but does not include a bank, insurance company, or an investment company

Question 5

Fiduciary

Answer 5

A person legally appointed and authorized to hold assets in trust for another person

Question 6

Person associated with an investment adviser

Answer 6

Any partner, officer, or director of the IA indirectly controlling or controlled by the IA, including EEs of the IA
Clerical and administrative personnel are not included

Question 7

Supervised person

Answer 7

Any partner, officer, director, EE, etc. who provides investment advice on behalf of the IA and is subject to the supervision and control of the IA

Question 8

Difference between an associated person and a supervised person

Answer 8

Supervised person includes all EEs even those who perform clerical tasks and are not required to become registered
Associated persons do not include clerical and administrative persons

Question 9

Principal office and place of business

Answer 9

The executive office of the IA from which the officers, partners, or managers of the IA direct, control, and coordinate the activities of the IA

Question 10

Who is an IA?

Answer 10

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

Question 11

SEC Release IA-1092

Answer 11

An IA:
1. provides investment advice, reports, or analyses with respect to securities
2. Is in the business of providing advice or analyses
3. Receives compensation, directly or indirectly for these services
If a person engages in all 3 of these, he is an IA and must register with state or SEC

Question 12

Release IA-1092 includes:

Answer 12

Financial planners- they give advice and no comprehensive financial plan does not include securities
Pension consultants- advise EB plans on how to fund their plans with securities
Sports and Entertainment Representatives- provide financially related services to entertainers and athletes that include advice related to investments

Question 13

Exclusions from definition of IA under Federal law

Answer 13

Lawyer, teacher, accountant, engineer whose advice is solely incidental to the practice of his profession is excluded- The federal law only specifies 4 exclusions!!
Broker dealer whose performance of such services is solely incidental to the conduct of his business as a B/D
Authors, publishers, newspaper people, etc.
Persons whose advice relates solely to securities issued or guaranteed by the federal government are excluded

Question 14

Exclusions from IA definition under state law

Answer 14

Banks, savings institutions, and trust companies
Lawyer, accountant, teacher, engineer whose advice is incidental to the practice of his profession is excluded
Broker/dealers or its agents who performance of such services is incidental
IARs are excluded
Any person who is a federal covered adviser is excluded
Any person excluded by the Investment Advisers Act of 1940 is excluded
Any other person the Administrator specifies is excluded

Question 15

Differences between Federal and State

Answer 15

Publishers and authors are considered IA if their advice is specific to each and every subscriber
No stated exclusion under the USA for those giving advice solely on US government securities, but they are excluded because they are federal covered advisers

Question 16

The investment advisers act of 1940

Answer 16

The investment advisers act of 1940 mixed unlawful for nonregistered investment advisor to use the mail or any instrumentality of interstate commerce in connection with his business
unless an exemption is available, registration with the SEC or with the state is required

Question 17

The investment advisers act of 1948

Answer 17

The investment advisers act of 1948 exempts the following classes of investment advisers from the registration requirements:
• intrastate advisers
o advisers whose clients other than the investment advisor are residents of the state in which the advisor has its principal office in place of business and who do not give advice dealing with securities listed on any national exchange are exempt
• advisers to insurance companies – advisers whose only clients are insurance companies are exempt
• private fund advisors

Question 18

NSMIA

Answer 18

eliminated state registration requirements for federal covered advisers, largely based upon assets under management

Question 19

Large Investment Advisers

Answer 19

> $100 million in assets are eligible for SEC registration

>$100 million in AUM, SEC registration is mandatory unless covered by an exemption

Question 20

Small Investment Advisers

Answer 20

<$25 million state only unless there is a GOOD reason

Question 21

Mid-size Advisers

Answer 21

New category created by Dodd-Frank
Between $25 million and $100 million
Generally they are prohibited from SEC registration, but they can qualify if:
It is not required to register in the state where it maintains its principal office

Question 22

Exceptions under Dodd-Frank

Answer 22

Pension consultants with > $200 million under control
Mid-size advisers between $100 million and $110 million
Investment advisers affiliated with an adviser already registered with the SEC
Investment advisers expecting to be eligible for SEC registration with 120 days of filing Form ADV
Multistate advisers
Internet advisers

Question 23

$20 million buffer

Answer 23

Assets can drop from $110 million to $90 million and companies can still maintain SEC registration

Question 24

USA Exemptions from IA registration

Answer 24

IAs who have no place of business in the state, but are registered in another state, provided their only clients in the state are:
B/Ds registered under the Act
Other IAs
Institutional investors; including EB plans with assets of >$1 million
Existing clients who are not residents but a temporarily in the state
Limited to 5 or fewer clients, other than those listed above, resident in the state during the preceding 12 months (called the de minimus exemption)
Any other the Administrator exempts by rule or order

Question 25

USA definition of a single person

Answer 25

The following are deemed as a single client: 1. A natural person and a. Any minor child of a natural person b. Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence c. All accounts of the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries d. All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries

Question 26

State fees

Answer 26

IA exempt from state registration are not exempt from paying state filing fees and giving notice to the Administrator The procedure followed is called notice filing

Question 27

IA SEC registration

Answer 27

An IA registered under state law whose assets reach $100 million AUM has 90 days to register with the SEC An IA whose AUM fall below $90 million no longer qualifies for SEC registration and has 180 days to register with the state

Question 28

IAs use the Form ADV to:

Answer 28

Register with the SEC Register with one or more state securities authorities; or Amend those registrations Filing in almost all cases is down through the Investment Adviser Registration Depository (IARD)

Question 29

Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates:

Answer 29

Registration Regulatory review Public disclosure information FINRA is the developer and operator of IARD

Question 30

Form ADV

Answer 30

Has 4 parts • Schedule A (direct owners and executive officer • Schedule B (indirect owners) • Disc

Question 31

Control person

Answer 31

``` Directly or indirectly has the right to vote 25% or more of a class of stock of a corporation’s voting securities This is a different percentage from the definition of control under the Act of 1934 (which was 10%) ```

Question 32

Form ADV

Answer 32

1A- contains info about the IA 1B asks questions asked by state authorities Federal covered advisers do not complete 1B 2A is known as the investment adviser’s brochure and tends to focus on customer related information

Question 33

Form ADV

Answer 33

must be updated each year by filing an annual updating amendment within 90 days after the end of the adviser’s fiscal year of critical importance is the verification of AUM ensuring that the adviser is eligible to continue being registered with the SEC

Question 34

Form ADV Fees

Answer 34

There are fees for the initial filing Registration remains in effect until it is withdrawn If there is a change in the form of business organization, a new ADV is required, but no fee Form ADV-W becomes effective after 60 days of filing with state

Question 35

Investment counsel

Answer 35

2 criteria under the Investment Advisers Act of 1940 • The IA’s principal business must be giving investment advice- this basically excludes financial planners and others for whom investment advice is only a part of what they do • Provide investment supervisory services- discretionary authority and ongoing supervisory management services

Question 36

Prepayments

Answer 36

Under the USA, when an IA accepts prepayments of fees >$500 for a contract period of 6 months or more, it is known as a substantial prepayment Under the IA of 1940, the amount is $1,200

Question 37

Federal covered advisers

Answer 37

A covered IA who requires or solicits clients for substantial prepayment of fees must include a balance sheet with the adviser’s ADV Part 2A

Question 38

State covered advisers

Answer 38

A covered IA who requires or solicits clients for substantial prepayment of fees must include a balance sheet with the adviser’s ADV Part 2A

Question 39

IAs

Answer 39

IA that has discretionary authority or custody of client funds or securities or solicits substantial prepayment of fees must disclose any financial condition that is likely to impair their ability to meet contractual commitments (SEC)

Question 40

IAs

Answer 40

The Administrator may require an IA who has custody of client funds or has discretion over a client’s account to post a surety bond or maintain a minimum net worth The requirement is higher for custody than for discretion Typically the net worth requirement for discretionary authority is $10,000 Typically the net worth requirement for custody authority is $35,000

Question 41

IAs vs. B/Ds

Answer 41

For IAs, the financial requirement is net worth | For B/Ds, it is net capital

Question 42

IAs

Answer 42

Failure to maintain the minimum net worth Of an IA’s net worth falls below the minimum net worth, it must On the next business day, it must notify the Administrator that the net worth is less than the minimum required Then the IA must file a financial report with the Administrator on the next business day Then the IA must obtain a bond in the amount of the net worth deficiency rounded up to the nearest $5,000

Question 43

IA net worth

Answer 43

For NASAA purposes, the term net worth means an excess of assets over liabilities Does not include goodwill, patents, copyrights, all other intangibles

Question 44

USA minimum financial requirements of an IA

Answer 44

Advisers must maintain a minimum net worth of $35,000

Question 45

IAR termination procedures

Answer 45

If IAR terminates and the IA is federally covered, the IAR must notify the Administrator If IAR terminates and the IA is state covered, the IA must notify the Administrator

Question 46

Rule 204A-1 Investment Adviser Code of Ethics

Answer 46

A list of IA’s access persons | A record of all written acknowledgements

Question 47

Access person is any of the adviser’s personnel who:

Answer 47

Has access to nonpublic information regarding any client’s purchase or sale of securities Is involved in making securities recommendations to clients or who has access to recommendations that are nonpublic

Question 48

Investment Adviser Code of Ethics (204A-1) requires:

Answer 48

A record of each report made by an access person A record of the names of persons who are currently, or within the past 5 years wee access persons of the IA A record of any decision and the reasons supporting the decision to approve the acquisition of securities by access persons, for at least 5 years after the end of the fiscal year in which approval is granted

Question 49

Records must be kept for 5 years

Answer 49

Form ADV Part 2 us a disclosure document that, under state and federal laws is required to be given to clients 2A- Firm brochure 2A Appendix 1: Wrap Fee Program disclosure 2B of Form ADV: Brochure Supplement (describes certain supervised persons) Narrative Format If the IA is federal covered, it is not required to file the brochure supplements through the IARD. A copy of the supplements must be preserved andmade available to SEC staff upon request Only in the case of state registered IAs is it required to file the brochure supplemtns IARs are always registered on a state level only, not the SEC Under federal law, contracts may be oral or in writing In state law, it must be in writing

Question 50

Brochure

Answer 50

Within 120 days of the end of the fiscal year, a free, updated brochure must be delivered to each client that either includes a summary of material changes or is accompanied by a summary of materials changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure

Question 51

Brochure

Answer 51

If there are no material changes, then nothing – not the brochure nor the brochure supplement, nor the summary – is required to be sent