Unit 14: Ethical Practices and Obligations Flashcards
Fiduciary responsibility
IA/IARs have the responsibility to put their client’s interest ahead of their own.
-must disclose all COI, including “time away from market”
hedge/exculpatory clause
waivers are never permitted.
-IA cannot ask client to waive IA’s fiduciary obligation
UPIA (Uniform Prudent Investor Act)
-prudence is applied to portfolio, not just isolated investments
-primary concern: tradeoff of risk and return
-no categorical restrictions
-diversification
-trustee can delegate investment function (care, skill, caution)
Recommending Alt Investments
-must meet clients IO
-disclose any COI
-perform due diligence on investment, including any experienced investment teams
Compensation Diclosure
-method of computing
-refunding prepaid fees
-type of comp
-any other incentives
Performance Based Compensation Exception
if the client is QUALIFIED; $1.1M AUM, or LNW $2.2M, or officer/director/IAR.
State-registered IA share of capital gains
must disclose:
-could cause speculation
-unrealized vs realized
-periods used for calc
-what is the benchmark used?
fulcrum fee
most common type of performance fee.
-an agreed upon benchmark, averaged over at least a year, with proportionate crediting for over performance (or decrease in fee for underperformance).
soft dollar comp exception
-research provided to IA when they direct business to certain B/Ds.
-benefit provided must be related to security analysis.
-must be disclosed to client.
-also included in item 12 of Part 2A of Form ADV
referral compensation
IA must disclose to client if they are compensating B/D for their referral or directing business to them
Custody
IA typically does not take custody of funds- the B/D does as a qualified custodian.
-IA will also not have net worth/bonding requirements
Custody via pooled investment
must keep record:
-the date of audit
-copy of audited financial statements
-evidence of mailing audited statements to all interested parties within 120 days of fiscal YE
Considered custody
-possession of client funds/securities or ability to obtain possession.
-inadvertent possession is not considered custody if sent back within three days.
custody due to direct fee deduction
-needs written authorization
-notice each time deducted
-tell Administrator about the above safeguards
IA will not have financial req’s waived, and no obligation to file audited balance sheet
Form ADV-E
-only required when IA has custody rather than qualified custodian
-surprise annual exam, form contains info about exam conducted.
discretion
-which security
-number of shares
-whether to buy or sell
time and price
order will not be considered discretionary if client provides security, share amount, and buy/sell, but tells rep to determine time and price (through the EOD)
discretion written authorization
-must have written authorization
-exception for first ten business days, so IA can invest account.
-after ten days cannot trade w/ out written agreement, no matter the consequences.
Third-party Trading
Can only be done if written third-party authorization is on file.
If spouse, accountant, lawyer calls to place trade, can only do so if they’re on file.
Hypothecation
Must have written consent on file to hypothecate client securities.
CTR
-FinCEN Form 112 for every cash transaction over $15,000 within 15 days
-also any wires over $3,000.
-any designed money movements to avoid detection is prohibited.
Account statements
required to be sent at least quarterly. doesnt matter if maintained by IA or a qualified custodian.
Blanket Recomendations
Always unsuitable
Using third-party reports
Must be disclosed to client, so the client does not have over confidence in advisor
Borrowing from clients
You cannot borrow from any client unless they are a lending institution.
(This is more strict than FINRA rule)
Client Confidentiality
-IA responsible to ensure all client info is kept secure.
-exception is when client or the law authorizes release of info.
Section 13f
If discretion over $100AUM in T12, must file within 45 days each quarter.
Access Persons holdings
Must be submitted to CCO within 10 days of becoming an access person, and then quarterly thereafter, within 30 days of quarter.
Code of Ethics
IA must keep one, and it managed by CCO
Access Person
any of the adviser’s supervised persons who:
-have access to nonpublic info of client securities/holdings.
-involved in making securities recommendations to clients.
Pre-clearance Access Person
-prior approval for placing trades
-list of recommended securities and AP trades
-reminder that clients should be able to act on opportunities prior to employees.
Pay to Play Rule
Prohibits investment advisors from receiving compensation for advisory services to government entity for two years after political contribution is made.
Pay to Play de minimis
covered associates can make contributions of $350 for elections they can vote in, and $150 for others.
Covered associates
-GP, Executive Officer, Managing Director
-Employee who solicits government entity and those who supervise such employees.
-PAC controlled by IA
Returned Contribution Exception
Contribution can be returned if:
-its within 4 months since contribution
-$350 or less
-obtain return within 60 days
Compliance Procedures
IA is required to have written policies and procedures reviewed annually by CCO.
CCO should have sufficient authority to compel adherence.
Delivery Delay
Unethical for the firm to delay delivery of securities/money to client.
Making Recommendation to clients
If the client does not provide enough info, you cannot make a recommendation. Orders must be unsolicited.
Free Lunch Seminar
Must clearly present the firm sponsoring and individuals involved with delivery.
Unfair pricing
A transaction where price is not reasonably related to current market price, or, charging an unreasonable commission/profit.
Withholding Public Offering shares
If firm is participating in IPO and is given shares to sell, they must make them available. Cannot keep them in their own account.
Client complaints
-are written, not oral
-must be responded to
-must be reported
Complaint records kept on file
-3 years for B/D
-5 years for IA
Borrowing
Not permitted aside from B/D offering margin accounts.
Fictitious Accounts
-Prohibited and unethical.
Sharing in accounts
-Permitted for agents. Allowed to commingle, have JT accounts, and disproportionate interest.
-Not permitted for broker/dealers, IA’s, or IAR’s
Splitting commissions
OK if it does not increase transaction cost (no disclosure needed), and if with agent for same B/D.
Selling away
Cannot effect securities transactions away from B/D that agent represents unless transaction has been authorized in writing.
Agent account at another B/D
Prohibited unless B/D gives prior written consent to do so.
Sale of Securities at Financial Institution
-B/D services must take place in a setting different than where retail deposits occur
-disclose not FDIC, not obligation of the institution, subject to risks, and receive written acknowledgement from customer (not-not-may)
-OK to not include disclosures if radio commercial, billboards, and location indicators.
Inside Info
-MNPI must be reported to compliance/risk officer immediately.
-Becomes a violation when info is acted upon.
Insider/Control Person
-Officer, Director, Owns 10% of stock, or immediate family of any of the above.
-Anyone who comes into possession of MNPI becomes an insider.
Inside info treble damages
Offender can be guilty for treble damages, up to three times gains/losses avoided.
Market Manipulation
Matched Orders/Wash Trades- trades done for the purpose of increasing activity & market price (painting the tape).
Arbitrage
is NOT considered a form of market manipulation, as it lowers spreads across markets.
Identity theft
-attempted or committed fraud using identifying information of another without their authority.
-red flags indicate the possibility of identity theft
Backing up client data should be
encrypted
Regulation S-P
Firms must have adequate safeguards in place to protect nonpublic personal information.
Must present privacy notice to clients at account opening, and give them 30 days to opt out
consumer/customer
consumer- transaction
customer-on-going relationship
BCP
-protection of books and records
-alternate means of communication
-office relocation plan
-reassignment of duties
-other service disruption minimizations
-succession plans
Balance Sheet to accompany adviser’s brochure when…
the advisor maintains custody of client assets OR accepts substantial prepayment of fees
Designated Regulatory contact person
All IA’s must have one.
Form ADV-E completion/submission
Form is completed by IA and submitted by independent examiner within 120 days of exam
IA lending money to client
-is unethical;
-client can only receive loan from affiliated B/D or bank
