Chap 3 - Series 66 (Sept 2011) - Fed And State Regulation Of Ia's & Their Reps

Front 1

Investment Advisors Act of 1940

Back 1

This act defines IA. All covered by it must register with SEC or State. 2 main purposes of the Act are to provide; regulation of persons,(natural and legal), in the business of giving investment advice; & the est of standards of ethical business conduct for the industry.

Front 2

Definition of 'Dealer' as per IAAct of 1940

Back 2

A dealer is any person regularly engaged in the biz of buying and selling secs as principal for his own account, but does not include a bank, Ins Co, or an Inv Coy.

Front 3

Definition of 'Person Associated with an Investment Adviser' as per IAAct of 1940

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Any partner, D/O of the Inv adviser (or any person performing similar functions) or any person directly or indirectly controlling or controlled by the IA, incl any emps of the IA, except that as far as reg reqts are concerned, persons associated with IA's whose functions are clerical or admin aren't incl.

Front 4

Definition of 'Supervised Person' as per IAAct of 1940

Back 4

Any partner, D/O or emp of an IA, or other person who provides investment advice on behalf of the IA & is subject to the supervision and control of the IA. Supervised person incl all emps, even those who perform clerical functions and are not reqd to become reg.

Front 5

Definition of 'Investment Advisor' as per IAAct of 1940

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Any person who, for comp, engages in the biz 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.

Front 6

SEC Release IA-1092

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Interprets the defn of IA under the IAAct of 1940 to incl financial planners, pension consultants, & Sports and Entertainment Reps who offer IA as part of their financial practices. Release IA-1092, ID's as an IA anyone who: provides IA, reports, or analyses with respect to Secs; is in the biz of providing advice or analyses; & receives comp, directly or indirectly, for these services.

Front 7

Definition of 'In the business of providing Investment Advice'

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1) Gives advice on a regular basis such that it constitutes a biz activity conducted with some regularity (providing advice does not have to be the person’s principal activity); & ad's IA services and presents himself to the public as an IA or as one who provides IA.

Front 8

Definition of 'Compensation'

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Comp incl advisory fees, commissions, or other types of fees relating to the service rendered. A separate fee for the advice need not be charged; the fee can be paid by a 3rd party on behalf of the beneficiary of the advice. No matter what the source, all comp must always be disclosed to the client.

Front 9

Exclusions from Def'n of Investment Advisor under Federal Law
(1 of 2)

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Primary exclusions incl: Any bank or bank holding Co., as defined in the BHCA of '56, is excl; Any lawyer, accountant, teacher, or engineer whose advice is solely incidental to the practice of his prof is excluded

Front 10

Exclusions from Def'n of Investment Advisor under Federal Law
(2 of 2)

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Any BD/RR whose perf of such services is solely incidental to the conduct of his biz as a BD/RR & who receives no special comp (e.g. wrap fee programs) is excl; also excluded is any bona fide newspaper, news mag, or biz or financial publication of general and regular circulation.

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Exclusions from Def'n of Investment Advisor under State Law

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1) Banks, S&L's, & Trust Co's; 2) lawyer, accountant, teacher or engineer whose advice is solely incidental to their job; 3) BD or its agents whose performance of such services is solely incidental; 4) Any author/journo not rendering advice on the basis of the specific situation of a client; 5) IAR's 6) Any person who is a covered by/sells; federal covered secs, IA of '40, Any other person the Admin ID's as excl.

Front 12

Reg Reqt's Under IA of '40 >> Exemptions from the Federal Registration Reqt's Under Federal Law

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IA of 40 Exempts; Intrastate advisors, Advisors to Ins Co's, Private Fund Advisors ( a) US domiciled with ≤ $150M AUM, b) Non-US domiciled advisors with no physical US loc, <15 clients & with ≤$25M AUM, c) or VC funds)

Front 13

Reg Reqt's Under IA of '40 >> Federal Covered Advisors (FCA)

Back 13

The NSMIA divided reg responsibilities between the SEC & the states’ secs dept's. Advisors who register with the SEC are known as 'Fed Covered Inv Advisors.' FCIA's incl; ≥ $100M AUM, excl from def'n of IAA of '40, under contract to manage an Inv Co. reg under the ICA '40, regardless of AUM.

Front 14

Federal Covered Advisors >> Dodd Frank (DF) & AUM and Exceptions Under Dodd-Frank

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DF created 3 tiers of firms; Large, Mid & Small. Large ≥ $100M AUM, Mid ≥$25 but ≤$100M, Small ≤ $25M. SEC grants exceptions to pension consultants (with >$200M AUM), IA's affiliated with an adviser already reg with the SEC, IA's expecting to be reg in ≤ 120 days, multi-state IA's (>30 states), Internet advisors

Front 15

Exemptions from Registration For Investment Advisors Under the USA

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No place of biz in the state but reg in another state, & only clients in the state are: 1) BD's reg under the act; 2) Other IA's; 3) II's, incl Emp benefit plans with AUM <$1M; 4) Existing clients who aren't residents but temp in the state; 5) Ltd to ≤5 clients, other than those listed above, resident in the state during
<12 months (aka 'de minimis exemption'); 6) or any others the Admin exempts by rule or order.

Front 16

Registration Procedures Under Federal Law for an Investment Advisor

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Part 1 and 2 of Form ADV. Part 2 now a narrative. IA's use form ADV to: 1) Register with the SEC; 2) Register ≤1 state securities authorities; or 3) Amend those registrations.

Filing in almost all cases is done through the IA Registration Depository.

Front 17

How is Form ADV Organized?
(1 of 2)

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Part 1A asks about the IA, his biz practices, the persons who own and control the firm, & the persons who provide inv advice on behalf of the firm. Schedule A - Control persons. Schedule B - info on indirect owners. Disclosure Reporting Pages (on disciplinary events). Part 1B asks additional questions req'd by state sec authorities.

Front 18

How is Form ADV Organized?
(2 of 2)

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Part 1b asks additional Q's req'd by state sec authorities. Part 2A requires advisers to create narrative brochures containing info about the advisory firm (relevant to State & SEC). Part 2B requires advisers to create brochure supplements containing information about certain supervised persons.

Front 19

Updating Form ADV

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Updated annually by filing amendment within 90 days of fiscal yr end. AUM updating is very important. Updates must also be provided for changes in; registrants name, principal biz loc, loc of books and records, contact person, Org structure, Info provided in brochure becomes materially inaccurate, disciplinary action, policy regarding custody of funds.

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Investment Counsel >> Two criteria specified in the IIA of 1940 that must be met in order to use the term "Investment Counsel" to describe the nature of the IA’s business.

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1) The IA’s principal business must be giving investment advice (basically excl financial planners and others for whom IA is only a part of what they do). 2) Provide continuous & regular supervisory or management services. Paid by AUM, ≠ hourly/retainer. Not supervisory if you provide market timing advice, impersonal IA (i.e. newsletters), only do initial asset allocation or periodic/on request advice.

Front 21

Financial Reqt's for Reg as a Financial Advisor
(1 of 3)

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No min net worth but financial disclosures that must be made to clients under certain conditions. Any state covered IA who requires or solicits clients for substantial prepayment of fees (as defined above) or who maintains custody of client funds and/or securities must include a GAAP/audited B/S with their ADV Part 2A for their most recent fiscal year.

Front 22

Financial Reqt's for Reg as a Financial Advisor
(2 of 3)

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Disclosure of financial impairment > Any IA that has discretion, custody of secs, or has received substantial prepayment of fees, must disclose any financial condition reasonably likely to impair their ability to meet contractual commitments.

Front 23

Financial Reqt's for Reg as a Financial Advisor
(3 of 3)

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1) Specific Financial reqt's for State Covered Advisors > may req surety bond or maintain a min net worth - typically $10K for discretion & $35K for custody. 2) An adviser without discretion or custody, but does accept prepayment of fees of more than $500, ≥6 months in advance, must maintain a + net worth at all times.

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Failure to meet min net worth

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By COB the next biz day, the adviser must notify the Admin that the IA's net worth is < than the min req'd. After sending that notice, the adviser must file a financial report with the Admin by the COB on the next biz day. When the adviser’s net worth is < the min req't, the IA must obtain a bond in an amount of the net worth deficiency rounded up to the nearest $5K.

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Investment Advisor Representative
(1 of 2)

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An IAR is any indiv who represents a State/Fed IA when; making inv recom; managing accts or client portfolios; determining which recomm or advice regarding sec should be given; soliciting IA services incl wrap fee accts; or supervising employees who perform any of these duties. Reg as an IAR is done solely on a State basis (through NASAA).

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Investment Advisor Representative
(2of 2)

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An indiv isn’t an IAR if they don’t on a reg basis solicit, meet with, or otherwise comm with clients of the IA or provides only “impersonal” (means written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts). inv advice.

Front 27

IAR Termination Procedures

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If the IA is a state-reg adviser, the firm must notify the Admin. If the IA is a federal covered adviser, the IAR must notify the Admin. Different from an Agent’s termination where all of the parties involved notify the Admin.

Front 28

Investment Advisor Code of Ethics
(1 of 2)

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Rule 204A-1, Code of Ethics (CoE) requires; - a copy of the IA’s CoE (adopted & implemented pursuant to IAA of 1940); - a record of any violation of the CoE & of any action taken as a result; - a record of all written ack’s, as req’d by the CoE rule, for each person who is currently, or within the past 5 yrs was, a supervised person of the IA

Front 29

Investment Advisor Code of Ethics
(2 of 2)

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Each adviser’s CoE to require an adviser’s access persons (defined below) to periodically report their personal sec trans & holdings to the adviser’s CCO. The CoE must also require the adviser to review those reports. Reviewing these reports will allow advisers as well as the SEC’s examiners to ID improper trades or patterns of trading by access persons.

Front 30

Personal Trading Procedures

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Advisory firms should incl the following elements, or address the following issues, when crafting their procedures for emp's personal sec trading: (see attached)

Front 31

3 Exceptions Personal Trading Procedures

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1) Trans effected pursuant to an auto investment plan in accordance with a predetermined schedule and allocation; 2) with respect to secs held in accounts over which the access person had no direct or indirect influence or control; 3) in the case of an advisory firm that has only 1 access person, so long as the firm maintains records of the holdings and trans that the rule would otherwise require to be reported.

Front 32

5 Types of Exempted Securities for Reporting of Personal Trading

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1) US Govt Secs; 2) Money market instr (BA's, CD, CP etc) 3) Shares of MM funds 4) Trans & holdings in shares of other types of MFs, unless the adviser or a control affiliate acts as the IA or principal underwriter for the fund; 5) Trans in units of a UIT if the UIT is invested exclusively in unaffiliated MF's

Front 33

Definition of an Access Person (AP)

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An AP is any of the adviser’s supervised persons who (1) has access to nonpublic info regarding any clients’ purchase or sale of secs, or nonpublic info regarding the portfolio holdings of any reportable fund, or (2) is involved in making secs recomm to clients, or who has access to such recomm that are nonpublic. If providing IA is the adviser’s primary business, all of the firm’s D/O's are presumed to be AP's.

Front 34

Wrap Fee Programs

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Any RIA comp'd under a wrap-fee program (sponsoring, organizing, or administering the program, or for selecting, or providing advice to clients regarding the selection of, other investment advisers) doesn't use the normal brochure or Part 2A of the ADV. Instead, that adviser furnishes clients and prospective clients Part 2A, Appendix 1.

Front 35

Brochure Delivery Requirements - Delivery Requirements for SEC Registered Advisers

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Initially and annually, the IA must deliver a brochure to each client (@ or b4 the time an advisory agreement is entered into. ≤120 days of fiscal yr end, a free, updated brochure must be delivered to each client that either includes a summary of material changes. Only time that an interim amendment must be delivered to clients is when there is a disciplinary action.

Front 36

Delivery Requirements for State Covered Advisers

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Advisers are req'd to deliver brochure to client ≤48 hrs b4 entering into an advisory contract or at the time of entering into an advisory contract. Fed covered advisors must provide brochure, state only need to offer it on an annual basis.

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Who/What are the three parties/times where you don't need to deliver the brochure?

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1) Clients to whom the IA is not required to deliver a firm brochure (Part 2A) or a wrap fee program brochure (Appendix 1 to Part 2A); 2) Clients who receive only impersonal investment advice; 3) Emp's of the IA (other than administrative staff) who participate in the inv activities of your firm & have been performing such functions or duties for at least 12 months.

Front 38

Rules of Custody of Funds and Securities

Back 38

Safekeeping required; as a Reg IA, you must; have a qualified custodian, give notice to your clients - you must notify the client in writing of the qualified custodian’s name & address & the manner in which the funds or secs are maintained, promptly when the account is opened & following any changes to this info.

Front 39

Delivery of Account Statements

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Either by; a) qualified custodian (at least quarterly); b) by advisor (need random annual CPA audit to verify funds) c) Client designates an independent rep to receive statements

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Delivery of Account Statements

Back 40

Either by; a) qualified custodian (at least quarterly); b) by advisor (need random annual CPA audit to verify funds) c) Client designates an independent rep to receive statements

Front 41

3 Exceptions to the Rule of Notifying Client of Custody

Back 41

a) Shares of mutual funds b) Certain privately offered securities (if sec didn't involve involve IPO, uncertificated or transferable only with prior consent of the issuer) c) registered investment companies

Front 42

3 Exceptions to the Rule of Notifying Client of Custody

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a) Shares of mutual funds b) Certain privately offered securities (if sec didn't involve involve IPO, uncertificated or transferable only with prior consent of the issuer) c) registered investment companies

Front 43

What is a qualified custodian?

Back 43

A bank or savings assoc that has deposits insured by the FDIC under the Federal Deposit Insurance Act. A BD holding the client assets in customer accounts, & a foreign financial instit that holds financial assets for its customers,

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What is a qualified custodian?

Back 44

A bank or savings assoc that has deposits insured by the FDIC under the Federal Deposit Insurance Act. A BD holding the client assets in customer accounts, & a foreign financial instit that holds financial assets for its customers,

Front 45

NASAA model rule for dealing with direct fee deductions

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Must have: written auth from each client, Notice of fee deduction (each time deducted, i) advisor must send the custodian notice of the amount of fee, ii) send the client an invoice itemizing the fee), notice of safeguards. If all 3 conditions satisfied, & IA only has 'custody' through fee-deduction, IA is exempted from financial and bonding req'ts.

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NASAA model rule for dealing with direct fee deductions

Back 46

Must have: written auth from each client, Notice of fee deduction (each time deducted, i) advisor must send the custodian notice of the amount of fee, ii) send the client an invoice itemizing the fee), notice of safeguards. If all 3 conditions satisfied, & IA only has 'custody' through fee-deduction, IA is exempted from financial and bonding req'ts.

Front 47

Expanded Definition of Custody

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An adviser has custody if it acts in any capacity that gives the adviser legal ownership of, or access to, the client funds or securities. An adviser has custody if it has the authority to withdraw funds or securities from a client’s account. An adviser with POA to sign checks, to withdraw funds or secs from a client’s account, or to dispose of client funds or securities for any purpose other than authorized trading has access to the client’s assets.

Front 48

Expanded Definition of Custody

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An adviser has custody if it acts in any capacity that gives the adviser legal ownership of, or access to, the client funds or securities. An adviser has custody if it has the authority to withdraw funds or securities from a client’s account. An adviser with POA to sign checks, to withdraw funds or secs from a client’s account, or to dispose of client funds or securities for any purpose other than authorized trading has access to the client’s assets.

Front 49

Form ADV-E

Back 49

Amendments to custody rule of IIA of 40 in 2009 mean that certain RIA's must undergo an annual surprise examination by a CPA to verify funds. form AdV-e contains both information about the adviser and the surprise exam conducted.

Front 50

Fiduciary Responsibilities of IA >> dISCloSURe And ConSenT

Back 50

The disclosure statement should incl the nature & extent of any adverse interest of the adviser, incl the amount of comp he would receive in connection with the acc. This is particularly important if the IA will be receiving comp from sources other than the agreed-upon advisory fee or that recommendations are limited to the firm’s proprietary products.

Front 51

Fiduciary Responsibilities of IA's >> Disclosure and Consent

Back 51

SEC or Admin seeking accurate, timely, and disclosures that don't omit material info.
Req'd for material disciplinary action - def'd as any actions taken against the firm or mgmt by a court or regulators ≤ 10 yrs.

Front 52

Fiduciary Responsibilities of IA's >> Disclosure and Consent

Back 52

SEC or Admin seeking accurate, timely, and disclosures that don't omit material info.
Req'd for material disciplinary action - def'd as any actions taken against the firm or mgmt by a court or regulators ≤ 10 yrs.

Front 53

Fiduciary Responsibilities of IA's >> Disclosure and Consent - Examples of Failure to Disclose Material Info

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1) An adviser fails to disclose all fees (incl how charged & whether negotiable); 2) Failure to disclose affiliation with BD; 3) For discretionary/custody IA, failure to disclose financial impairment; 4) Failure to use avg price in block trades; 5) 48hr rule - must disclose to client ≤48hrs of contract commencement (or NLT at commencement) of any material legal action against the IA in past 10yrs.

Front 54

Fiduciary Responsibilities of IA's >> Disclosure and Consent - Examples of Failure to Disclose Material Info

Back 54

1) An adviser fails to disclose all fees (incl how charged & whether negotiable); 2) Failure to disclose affiliation with BD; 3) For discretionary/custody IA, failure to disclose financial impairment; 4) Failure to use avg price in block trades; 5) 48hr rule - must disclose to client ≤48hrs of contract commencement (or NLT at commencement) of any material legal action against the IA in past 10yrs.

Front 55

Principal or Agency Transactions

Back 55

Under both state and federal law, it is unlawful for any IA, to transact a brokerage sale without disclosing in writing before the completion of such transaction the capacity in which he is acting & obtaining the consent of the client to such transaction. "Blanket” approval is not permitted.

Front 56

Principal or Agency Transactions

Back 56

Under both state and federal law, it is unlawful for any IA, to transact a brokerage sale without disclosing in writing before the completion of such transaction the capacity in which he is acting & obtaining the consent of the client to such transaction. "Blanket” approval is not permitted.

Front 57

Investment Advisory Contracts

Back 57

2 major differences between federal and state law. 1) USA prohibits entering into, extending, or renewing any advisory services, unless the contract is in writing, while fed law permits the contract to be written or oral. 2) USA requires that fees be competitive while federal law only requires that they be reasonable in view of the services rendered.

Front 58

Under both Acts >> IA Contracts must disclose
(1 of 2)

Back 58

1) Services to be provided, incl custody if appropriate; 2) Term of the contract;3) The amount of the advisory fee or the formula for computing the fee; 4) the amount or manner of calc of the amount of any prepaid fee to be returned in the event of contract termination; 5) whether the contract grants Inv discretion

Front 59

Under both Acts >> IA Contracts must disclose
(2 of 2)

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6) No assignment of contract by the adviser without the consent of the other party to the contract. 7) If IA organized as partnership, any change to a minority interest in the firm will be communicated to advisory clients within a reasonable period of time

Front 60

Performance Fee Rules and Exceptions

Back 60

Both acts prohibit performance fee arrangements contingent on capital gains or waiving fees in the event of losses. Exception for contracts with a 1) Qualified client defined as >$1M (formerly 750K) AUM invested with IA; 2) Indiv or Co. that the IA has reason to believe has net worth > $2M (formerly 1.5M); 3) D/O of IA or IAR with ≥ 12 months in biz.

Front 61

Agency Cross Transactions
(1 of 2)

Back 61

When acts as agent for both its advisory client and the party on the other side of the trade (2 different clients of same advisor). Permitted by both acts. Prior written consent req'd from client disclosing; advisor will receive comm from both sides of transaction. potential conflict of interest due to division of loyalties, on annual basis, advisor must disclose total # of these transactions & remuneration received. clause that the arrangement may be terminated at any time.

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Agency Cross Transactions
(2 of 2)

Back 62

Prohibition against recommending purchase/sale to both sides of transaction.
Prior to completion of each trade, client must be sent a written trade confirmation which includes: a statement of the nature of the transaction; the date, and if requested, the time of the transaction; and
the source and amount of any remuneration to be received by the IA (or IAr) in connection with the transaction.

Front 63

Cash Referral Fees
(1 of 3)

Back 63

II Act of 40 prohibits payment of cash referral fees to solicitors unless 4 conditions are met. The first 3 conditions apply to all cash referral fee payments. 1) Must be reg under II Act. 2) Prohibition against payment of cash referral fees to a solicitor who is subject to a statutory disqualification 3) Cash referral fees to be paid pursuant to a written agreement to which the investment adviser is a party.

Front 64

Cash Referral Fees >> The three circumstances under which payment of cash referral fees are permitted
(2 of 3)

Back 64

4) Cash referral fees are prohibited in all but the following 3 circumstances; i) Payments are for the provision of impersonal advisory services. ii) adviser pays a referral fee to a person affiliated with the adviser (e.g. D/O, employee etc) iii) third-party solicitors who are not persons affiliated with the adviser.

Front 65

Cash Referral Fees >> Disclosures made to third party solicitors not affiliated with advisor
(3 of 3)

Back 65

When cash payments made to third-party solicitors not affiliated with the adviser, following disclosures must be made; i) Unless for impersonal advisory services, the fact that it is a third party must be disclosed ii) Any script or sales approach used by the third party is the responsibility of the adviser. Amount of referral fee & the basis on which it is paid should be disclosed, together with the fact that the finder is being compensated specifically for referring clients to the adviser.

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Fraudalent and Prohibited practices when Providing Investment Advice (1 of 3)

Back 66

1) Disclosing the ID or investments of a client without consent of the client, unless required by law. OK if it is a joint account, permission from one owner, such as a spouse, suffices for both. 2) Using third-party prepared materials without proper attribution (statistics reports are excl).

Front 67

Fraudulent and Prohibited Practices when Providing IA >> All following are e.g's of prohibited practices when providing IA
(2 of 5)

Back 67

3) Use of an ad that uses any testimonial - esp for ads that promote use of a charting system or formula. Must disclose the limitations and difficulties of using the system. 4) Calculating advisory fees using a different method than agreed to in the contracts; 5) failing to comply with clients’ wishes concerning directed brokerage arrangements

Front 68

Fraudulent and Prohibited Practices when Providing IA >> All following are e.g's of prohibited practices when providing IA
(3 of 5)

Back 68

5) Causing clients to invest in secs above their risk tolerance; 6) Allocating client brokerage to a broker in exchange for client referrals or research/other products (& not fully disclosing costs/quality of exc); 7) Front-running 8) Directing clients to trade in secs in which the adviser has an undisclosed interest

Front 69

Fraudulent and Prohibited Practices when Providing IA >> All following are e.g's of prohibited practices when providing IA
(4 of 5)

Back 69

9) Indicating in an advisory contract, any condition etc binding any person to waive compliance with any provision of the USA or IIAct of 40; 10) Unfairly criticizing another professional's work (CPA, Attorney etc); 11) Recommending the same security to clients without regard to individual suitability

Front 70

Fraudulent and Prohibited Practices when Providing IA >> All following are e.g's of prohibited practices when providing IA
(5 of 5)

Back 70

12) (For state covered IAs), relying on oral discretionary authority for transactions in a customer’s account beyond the first 10 biz days > date of the initial transaction.

Front 71

Fraudulent and Prohibited Practices when Providing IA Under IIAct of '40 >>

Back 71

1) Adopt & implement written policies and procedures reasonably designed to prevent violation, by you & your supervised persons, of the act and the rules that the SEC has adopted under the Act; 2) Review the adequancy & test effectiveness of implementation of these policies at least annually;

Front 72

Fraudulent and Prohibited Practices when Providing IA Under IIAct of '40 >>

Back 72

3) Designate an individual (must be a supervised person) responsible for administering the policies and procedures that you adopt, as noted above.

Front 73

Section 28(e) Safe Harbor >> Soft dollars and Directed transactions
(1 of 2)

Back 73

Sec 28(e) held that if amount of the commission is reasonable in relation to the value of the brokerage & research services provided, advisor not liable for breach of fiduciary duty. Sec 28(e) gave SEC ability to require of advisers the need to disclose policies and procedures of soft-dollar arrangements to their clients.

Front 74

Section 28(e) Safe Harbor >> Soft dollars and Directed transactions
(2 of 2)

Back 74

Sec28 (e) only excuses paying more than the lowest available commission. Doesn't excludes fraud, churning, failing to obtain the best price or best execution, or failing to make required disclosure. Also, IA's are required to disclose, among other things, the products and services received through soft-dollar arrangements, regardless of whether the safe harbor applies.

Front 75

Other Brokerage Practice Disclosures >> Referrals

Back 75

IA's must describe the factors that they consider in selecting or recomm BD's for client transactions & determining the reasonableness of the BD's comp. IA's must disclose the nature of referral arrangements where BD directs them clients;

Front 76

Other Brokerage Practice Disclosures >> Directed Brokerage

Back 76

When IA suggests the client use a specific BD, disclosure of any possible CoI's must be made. If the adviser permits the client to direct the brokerage firm to use, certain other disclosures are required. for example, the IA must explain that he may be unable to achieve most favorable execution of client transactions or that directing brokerage may cost clients more money.

Front 77

Other Brokerage Practice Disclosures >> Trade Aggregation and Allocation (Block Trades) & Voting Client Securities

Back 77

For block-trades, use average price if order can't be entirely filled at 1 price. Part 2A of the form ADV, must be info about the adviser’s policy on voting client secs. This summary must describe whether (and, if so, how) clients can direct the IA’s vote in a particular solicitation; How the IA addresses CoI's between himself & his clients with respect to voting their securities; How clients may obtain info from the IA about how he voted their securities; & how clients may obtain a copy of the firm’s proxy voting policies and procedures upon request.

Front 78

Compliance Programs >> Overview

Back 78

IIAct of '40 req's SEC reg'd IA's to adopt and implement written policies & procedures designed to prevent violation of the federal securities laws, review those policies and procedures annually for their adequacy & the effectiveness of their implementation. IA firm must also designate a Chief Compliance Officer.

Front 79

Compliance Programs >> Rule 206(4)-7

Back 79

Under rule 206(4)-7, it is unlawful for an IA reg'd with the Commission to provide IA unless the adviser has adopted & implemented written policies & procedures reasonably designed to prevent violation of the IIAct by the adviser or any of its supervised persons.

Front 80

Compliance Programs >> Customization of Policies and Procedures Depending on Specific Nature of Advisor's Biz

Back 80

Each adviser, in designing its policies & procedures, should first ID conflicts and other compliance factors creating risk exposure for the firm and its clients in light of the firm’s particular operations, & then design policies & procedures that address those risks.

Front 81

Compliance Programs >> SEC Req'd Minimal Compliance Disclosures (to the extent that they are relevant to that adviser) (1 of 2)

Back 81

1) Portfolio mgmt processes (incl allocation of investment opportunities among clients & consistency of portfolios with clients’ investment objectives, disclosures by the adviser, & applicable regulatory restrictions); 2) Trading practices (incl procedures by which the adviser satisfies its best execution obligation, soft-dollar arrangements, & allocates aggregated trades among clients)

Front 82

Compliance Programs >> SEC Req'd Minimal Compliance Disclosures (to the extent that they are relevant to that adviser) (2 of 3)

Back 82

Proprietary trading of the adviser & personal trading activities of supervised persons; The accuracy of disclosures made to investors, clients, & regulators, including account statements & ads; Safeguarding of client assets from conversion or inappropriate use by advisory personnel

Front 83

Compliance Programs >> SEC Req'd Minimal Compliance Disclosures (to the extent that they are relevant to that adviser) (3 of 3)

Back 83

Accurate creation of req'd records & their maintenance in a manner that secures them from unauthorized alteration or use & protects them from untimely destruction; marketing advisory services, (incl the use of solicitors); Processes to value client holdings & assess fees based on those valuations; Safeguards for the privacy protection of client records & info; business continuity plans

Front 84

Enforcement of Rules >> SEC Enforcement
(1 of 2)

Back 84

Enforcement of IIAct of '40 is the responsibility of the SEC; If the SEC suspects a violation of the law or its rules, it may; Subpoena witnesses; Acquire evidence; Subpoena books & records' Administer oaths; Go to a competent court of jurisdiction to obtain an injunction enjoining a person from continued activity until the results of a hearing; Refer to the appropriate court for criminal prosecution

Front 85

Enforcement of Rules >> SEC Enforcement
(2 of 2)

Back 85

If the violation is one in which the SEC seeks criminal penalties, the Act provides for a fine < $10K, imprisonment for no more than 5 years, or both.

Front 86

Enforcement of Rules >> USA Enforcement
(1 of 2)

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Enforcement & administration of the USA is the responsibility of each individual State Admin. Nothing in USA about max suspension Max penalties for a criminal infraction are a fine of up to $5K, or a prison sentence <3 yrs, or both.

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Enforcement of Rules >> USA Enforcement
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Under the USA, the maximum penalties for a criminal infraction are a fine of up to $5,000, or a prison sentence not to exceed three years, or both.

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3 Secs that are exempt under the USA not exempt under the Sec Act of 1933.

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Stocks & bonds issued by insurance companies, secs issued by foreign governments, & securities listed on certain exchanges are not exempt under the SA of 1933.