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40 Cards in this Set
- Front
- Back
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What is the objective of the Investment Advisers Act (IAA) of 1940?
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to protect the public and investors against malpractice by persons paid for advising others about securities
to require disclosure, prohibit illegal profit sharing arrangements,etc. |
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Why is SEC Release IA-770 important to financial planners?
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It is the SEC’s interpretation of how the IAA relates to financial planners.
It indicates how the SEC will enforce the Act. Newline Most financial planners are investment advisers under the Act and must comply (unless they can rely on an exemption or exception). |
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What conclusions can you draw from the definition of “security” in the IAA?
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The definition of security is very broad.
It includes just about everything; few potential investments escape it. |
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Three tests are used to determine if an individual will be considered to be an investment adviser under the IAA:
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(1) providing advice
(2) the business standard (3) receiving compensation. |
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What is meant by “advice?”
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giving advice
issuing reports making recommendations |
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Does the advice have to be specific in nature?
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No, it need not be about a certain security
Merely suggesting a type of security (instead of an investment vehicle not considered a security) is considered advice. |
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List the three guidelines used to determine if an individual is in the business of providing investment advice within the context of the IAA.
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Is the investment advice solely incidental to a noninvestment advisory principal business of the person giving advice?
How specific is the advice? (The more specific, the more likely the person is in the business of giving investment advice.) Is special compensation received for providing investment advice? |
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In determining if an individual is to be classified as an investment adviser, does compensation have to be in the form of a separate fee charged for investment advisory activities for this test to be met?
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No, it can be a fee relating to total services, a commission, etc
The issue is one of receipt of economic benefit. |
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Name the six categories of exceptions under the definition of investment adviser.
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a BANK or BANK HOLDING COMPANY as defined by law
a LAWYER, ACCOUNTANT, ENGINEER, or TEACHER whose performance of advisory services is solely incidental to the practice of his or her profession a BROKER or DEALER whose performance of advisory services is solely incidental to his or her conduct as broker or dealer, and who receives no special compensation for the advice a PUBLISHER of a bona fide newspaper or financial publication of general and regular circulation a person whose advice is limited to securities issued and guaranteed by the U.S. GOVERNMENT OTHER PERSONS DESIGNATED BY THE SEC (no others are currently named) |
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There are three primary types of investment advisers who are exempted from registration even though they fall within the definition.
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an intrastate adviser in unlisted securities: adviser whose clients are all residents of a single state (that of adviser’s principal business office), and who does not furnish advice on securities listed on national exchanges
an adviser whose only clients are insurance companies a private adviser who 1. during the previous 12 months had fewer than 15 clients 2. does not hold himself or herself out generally to the public as an adviser AND 3. does not act as such for a registered investment company Additionally, certain charitable organizations may be exempt. |
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Briefly describe situations in which the broker-dealer exception is not available to a brokerage firm representative.
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The representative provides advice independent of his or her employer by establishing an independent planning service.
The representative provides advice without the knowledge and approval of his or her employer. |
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Under current rules, how does an investment adviser register with the SEC?
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by filing Form ADV with the SEC
after acceptance of initial registration, by filing Form ADV Part I and Form U–4 annually (if an investment adviser representative) |
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David Willamette states that he is a financial planner. A recent plan he prepared for a wealthy client included a summary of assets, an asset allocation plan, an estate plan, life insurance suggestions, and a recommendation that the client purchase stock in AMONK DIVERSIFIED. The report cost the client $2,800. Should David register as an investment adviser? Why or why not, and if so, where?
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David should register.
He advertises as a planner, holding himself out as an adviser. He gives advice, and he is paid for that advice. There is no indication that David manages the client’s funds, so he should register with his state. |
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Carol Basker, who has sold life insurance for years, has decided to tell clients that she now does comprehensive financial planning. Her compensation is based totally on commissions. Her work does result in plans for clients that cover many areas: insurance, estate planning, business planning, and investments. She makes specific recommendations in the areas of insurance and investments, where she earns her commissions. She has no desire to manage her client’s funds. Should Carol register as an investment adviser? Why or why not, and if so, where?
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Yes, she should register with her state
She holds herself out to be an adviser, she gives specific recommendations, and she is compensated for her work There is no requirement that compensation be in the form of fees. Additionally, she does not manage client funds. |
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Armando Cortez gives advice about mutual funds in addition to his full-time job in corporate computer sales. Last year he had eight clients, all of whom lived in his state. Should Armando register as an investment adviser? Why or why not, and if so, where?
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No, Armando does not have to register anywhere
However, he is still required to comply with the antifraud provisions of the law. |
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Coreen Markson has done very well in the stock market. In fact, she has done so well that she quit her job as an administrative assistant and began counseling others about their investments. Most of her 135 clients have her manage their investments. She currently manages $68 million for an average fee of one-half of 1% of the assets under management. Should Coreen register as an investment adviser? Why or why not, and if so, where?
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Yes, Coreen must register with the SEC.
She clearly holds herself out as an adviser, she manages well over $30 million of client investments, she gives advice through her actions, and she is compensated for her work. |
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What is accomplished by the Form ADV: Part I?
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What is accomplished by the Form ADV: Part II?
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Detailed information, such as:
specific types of services provided fee structure method of business operation business associates balance sheet used for initial registration |
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What is accomplished by the Form U–4?
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Must be submitted on behalf of every IAR seeking to be employed by the IA.
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What is accomplished by the Form ADV–W?
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Submitted when registered investment adviser ceases operations and withdraws his or her registration
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What is permitted, according to the SEC, concerning performance based fees?
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An adviser can charge a fee based on a share of capital gains or appreciation of client funds if the adviser is managing at least $750,000 of client’s assets or client has net worth over $1.5 million
fee must be an arm’s-length arrangement client must understand risks involved. Newline (An arm’s-length agreement is one that would be reached by unrelated parties each acting on his or her own behalf. It is considered reasonable and acceptable to everyone involved.) |
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What restriction or prohibition exists under the IAA of 1940 concerning Assignment of advisory contract?
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Cannot assign unless client expressly consents to the transfer.
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What restriction or prohibition exists under the IAA of 1940 concerning The term investment counsel?
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Unlawful for any person registered as an investment adviser to represent himself or herself as investment counsel or use that name to describe his or her business unless:
principal business consists of acting as investment adviser AND a substantial part of the business consists of rendering investment supervisory services |
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What restriction or prohibition exists under the IAA of 1940 concerning the acronym RIA?
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Cannot be used after the name of an individual or business
must use “registered investment adviser” |
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What is the general purpose of the brochure rule?
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To provide each and every client (both existing and prospective) with written disclosure.
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In what form may the disclosure statement be presented to the client?
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A narrative statement containing the information from all entries in ADV Part II.
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What timing restrictions apply to the delivery of the brochure to the client?
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not less than 48 hours prior to entering into investment advisory contract (or at the time the contract is entered into if client can terminate the contract within five days)
updated brochure delivered each year or an offer in writing to so deliver |
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Identify general categories of information that must be retained by a RIA.
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copies of client’s acknowledgement of brochure and statement from adviser about location of client funds
records of dates the adviser gave the client or prospective client all documents required by the brochure rules journals and ledgers reflecting asset, liability, reserve, capital, income, and expense accounts written communications to client regarding recommendations; advice; receipt, disbursement, or delivery of funds or securities, etc. memos or orders for purchase and/or sale of client securities all client’s instructions regarding purchase, etc., of securities written agreements with client |
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For how long must records be kept?
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for not less than five years from end of fiscal year of the last recorded entry
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What is the general intent of the antifraud portion of the IAA of 1940?
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to protect clients from potential conflict of interest situations
to hold advisers to a high standard of fiduciary responsibility to make it unlawful for adviser to engage in fraudulent conduct |
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Briefly describe the initial registration process with FINRA.
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the individual associates with a broker-dealer firm prior to registering as a representative
the individual registers with FINRA through broker/dealer on Form U–4 the individual takes and passes appropriate examinations (may need to take at least two) Central Registration Depository (CRD) System makes registration with FINRA uniform throughout the states |
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What products and/or subject matter does following the FINRA examinations cover? Series 6
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Investment company/Variable Contracts Limited Representative
mutual funds unit investment trusts variable life insurance annuities |
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What products and/or subject matter does following the FINRA examinations cover? Series 7
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General Securities Registered Representative
stocks bonds tax shelters government and municipal bonds REITs mutual funds variable contracts everything except commodities and certain options If Series 7 is passed, there is no need to take Series 6 and/or 22. |
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What products and/or subject matter does following the FINRA examinations cover? Series 22
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Direct Participation Programs Limited Representative
oil and gas syndications real estate syndications other tax shelter programs. |
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What products and/or subject matter does following the FINRA examinations cover? Series 62
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Allows a registered representative who did not take the full Series 7 evaluation to take a limited examination; covers most securities, except options.
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What products and/or subject matter does following the FINRA examinations cover?Series 63
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Uniform Securities Agent State Law Exam (USASLE)
meets requirements of most individual states adviser usually takes Series 7 (or Series 6 and 22) plus Series 63, if required by individual state (blue sky laws). |
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What products and/or subject matter does following the FINRA examinations cover? Series 65
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Tests knowledge of financial services professionals in the legal and regulatory context.
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What products and/or subject matter does following the FINRA examinations cover? Series 66
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combines the Series 63 and Series 65 exams.
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If an individual is otherwise required to register as an investment adviser, what guidelines would be used to determine whether state or SEC registration is appropriate?
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An adviser who has less than $25M under management would register with the state, unless
the adviser’s state does not have registration requirements. In that case, the adviser would register with the SEC Any adviser who manages $30 million or more for clients must register with the SEC. However, an adviser who has between $25 million and $30 million under management may have some discretion between registering with the SEC and his or her state This is to minimize the possibility of having to switch regulators frequently if assets fluctuate above and below $25 million over short periods of time Certain others are permitted to register with the SEC. |
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The SEC has proposed the following changes to the registration rules to take effect by July 21, 2011:
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An adviser who manages $150 million or more must register with the SEC.
Hedge fund managers with $150 million or more in assets under management (AUM) must register with the SEC. An adviser who manages between $100 million and $150 million may have some flexibility as to registration with the SEC or the state. Additionally, private hedge fund managers with less than $150 million AUM qualify for a filing exemption. If the adviser manages less than $100 million, then he or she must register with the state unless: The state has no registration process. The adviser falls under one of the exceptions. |
