Unit 1: Regulation of Investment Advisers, Including State-Registered and Federal Covered Advisers
Large advisers, those advisers with at least $____________ million or more in assets under management, are eligible for SEC registration; once AUM reach $110 million, registration with the SEC is ______________. Unless covered by one of the exemptions mentioned previously, all large IAs must register with the SEC. State registration is not required because the federal law preempts state registration.
$100 million or more - mandatory
Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the ____________ million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.
$150 million threshold
What are some of the reasons for why an IA must amend the Form ADV by filing additional amendments promptly?
- Change of the registrant's name - Change in the principal business location - Change in the location of books and records, if they are kept somewhere other than at the principal location - Change to the contact person preparing the form - Change in organizational structure, such as from partnership to corporation and so on - Information provided in the brochure becomes materially inaccurate - Change to any of the questions regarding disciplinary actions - Change in policy regarding custody of the customer funds and/or securities All of these are considered material changes, and they most be reported promptly
Form ADV contains four parts: Part _______ asks additional questions required by state securities authorities. Investment advisers applying for registration or who are registered only with the SEC do not have to complete Part _______.
1B x2
A person is presumed to control an IA organized as a corporation if the person directly or indirectly has the right to vote _______% or more of a class of the corporation's voting securities; a person is presumed to control one that is a partnership if the person has the right to receive upon dissolution, or has contributed, _______% or more of the capital of the partnership
25% or more x2 Please note that this is a different percentage from the definition of control person under the Securities Exchange Act of 1934 (Unit 7), where having more than 10% of the voting power makes one a control person. Remember that control person is defined three different ways: the Exchange Act requires more than 10%, the Investment Company Act (Unit 14), requires more than 25%, and the Advisers Act and the USA require 25% or more
Form ADV contains four parts: Part _______ requires advisers to create narrative __________________ containing information about the advisory firm. The requirements in Part _______ apply to all investment advisers registered with or applying for registration with the SEC or the states.
2A - brochures - 2A It may help you remember that the A in Part 2A tells us that that part is for the Adviser and the B in Part 2 is about the Bodies (the people) who work there.
Form ADV contains four parts: Part _______ requires advisers to create __________________ containing information about certain supervised persons. The requirements in Part ________ apply to all investment advisers registered with or applying for registration with the SEC or the states.
2B - brochure supplements - 2B It may help you remember that the A in Part 2A tells us that that part is for the Adviser and the B in Part 2 is about the Bodies (the people) who work there.
The NASAA Model Rule also states that partnership articles and any amendments there to, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least __________ years after termination of the enterprise.
3 years after termination of the enterprise.
How long after a state registered adviser submits form ADV-W does it become effective.
30 days Fed = 60 Days State = 30 Days
One of the previous bullet points refers to an exemption to those investment advisers who have no place of business in the state, but are licensed in anotherstate where they have a place of business, and offer advice in the state only with persons in the state who are existing customers and who are not residents of the state but are just there temporarily. This is sometimes referred to as the snowbird exemption because it is frequently used to deal with existing clients who winter in warmer climates. The time limit defining temporary is not tested (some folks spend 3-4 months staying warm), but, if the client should change legal residence to that state, the investment adviser has _______ days to register in that state or _____________ doing business with that client (unless qualifying for the de minimis exemption).
30 days - or discontinue doing business
When talking about the registration of IAs, assuming there are no irregularities in the application, registration with the SEC takes effect on the ________ day after filing of a complete application and, as with all securities professionals, at noon of the ________ day in the case of state-registered investment advisers.
45th day after filing - at noon of the 30th day
How long after a covered adviser submits form ADV-W does it become effective.
60 days Fed = 60 Days State = 30 Days
state-registered advisers who exercise discretionary authority over client accounts but do not maintain custody must file with the Administrator within _______ days of the end of the adviser's fiscal year a balance sheet, but this one does not have to be audited.
90 days
What is this defined as: Any advisory program generally established by a broker-dealer, under which a specified fee or fees not based directly upon transactions in a client's account is charged for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and the execution of client transactions.
A Wrap Fee The exclusion from the definition of investment adviser available under both state and federal law to broker-dealers is not in effect for those offering wrap fee programs. The exam may ask about these programs this way: Which two of the following are services provided in a wrap fee program? The correct choice would be: Investment advisory and brokerage execution (transactions) for a single "wrapped" fee. Don't choose financial planning and recommendations. Special compensation for investment advice is compensation to the broker-dealer or salesperson in excess of that which he or she would be paid for providing a brokerage or dealer service alone. Consequently, special compensation exists where there is a clearly definable charge for investment advice.
The term "private fund", as defined under federal and state law, would not apply to A) a leveraged ETF. B) an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act. C) a hedge fund. D) a venture capital fund.
A) a leveraged ETF. ETFs are publicly traded. Hedge funds and venture capital funds meet the definition of a private fund which is, "an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act."
A foreign private adviser is defined in the Dodd-Frank Act as any investment adviser that I. has no place of business in the United States. II. has, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser. III. has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million. IV. holds itself out to the public in the United States as an investment adviser or acts as an investment adviser to an investment company registered under the Investment Company Act of 1940. A) I, II, and III B) I and IV C) IV only D) II and III
A) I, II, and III There are 4 requirements to be considered a foreign private adviser. Choices I, II, and III are all included, and, if choice IV said - does not hold..., it would have been the fourth requirement. By holding itself out to the public, it can't be a private adviser.
Form PF must be filed by A) SEC-registered advisers with at least $150 million in private fund assets under management B) SEC-registered advisers with no more than $150 million in private fund assets under management C) state-registered private fund managers, regardless of the amount of assets under management D) SEC-exempt reporting advisers
A) SEC-registered advisers with at least $150 million in private fund assets under management Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.
Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT A) SONG must have less than $150 million in assets in the fund B) SONG is not registered under the Investment Company Act of 1940 C) SONG's investment adviser is exempt from registration D) SONG only issues securities which are, except in extraordinary circumstances, non-redeemable
A) SONG must have less than $150 million in assets in the fund Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity.
When and on what form is AUM for IAs reported?
AUM reported on the IA's annual updating amendment
Who of the following would NOT qualify for an exemption from registration under the Investment Advisers Act of 1940? A. A person whose only advisory clients are insurance companies B. A person whose only offices are in a single state, whose only clients are residents of that state, and who does not render advice on securities traded on a national exchange C. A person who only gives advice to venture capital funds D. An accountant whose advice is incidental to her accounting business and for which no separate fee is charged
Answer: D. This is tricky (as is the exam). The accountant is excluded from the definition. Therefore, there is no reason for her to be exempt. The other three choices are investment advisers who qualify for one of the exemptions described previously.
Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act? A. The publisher of a weekly magazine, sold on newsstands, that contains at least 5 stock recommendations per issue B. A broker-dealer making a separate charge for investment advice C. A civil damages attorney who advertises that she is available to assist clients in suggesting appropriate investments for their successful claim D. A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price
Answer: A. Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser, especially because the entire publication is devoted to impersonal investment advice. An important key here is that it is published regularly, not upon market events. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds herself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice as would appear to be the case here. On this examination, the term comprehensive (or total) financial planning always includes securities advice
The Uniform Securities Act excludes certain persons from the definition of an investment adviser if their performance of advisory services is solely incidental to their professions. This exclusion would apply to all of the following EXCEPT A. an accountant B. an economist C. an electrical engineer D. a college professor teaching a course on economics
Answer: B. As long as the activity is incidental to the professional practice, and no separate fee for the advice is charged, the act specifically excludes accountants, lawyers, any professional engineer (aeronautical, civil, mechanical, or others), and teachers. Economists are not included in this listing (most economists are not teachers)
Which of the following would an Administrator consider to be a substantial prepayment of fees? A. $500 covering the next six months B. $800 covering the entire contract year C. $800 covering the next calendar quarter D. $5,000 covering the next month
Answer: B. NASAA (state law) defines a substantial prepayment of fees to be more than $500, 6 or more months in advance. While $800 and $5,000 are certainly more than $500, they cover a shorter period than 6 months
Under SEC Release IA-1092, which of the following is most likely to meet the definition of an investment adviser? A. A person who sells long-term care insurance B. A person who advises businesses on the best location for their stores C. A person who assists pension plans in the selection of portfolio managers D. A person who manages portfolios of investment grade coins
Answer: C. This is the role of a pension consultant. Unless the insurance has a securities aspect, selling it would not be considered investment advice. Real estate and coins are not securities
Which of the following investment advisers would be permitted to use the term investment counsel? A. A financial planner offering a wide range of services to his clients, including tax planning, estate planning, and insurance planning, as well as investment advice B. A professional providing a market timing service with an annual subscription fee of $495 (this service attempts to maximize profits by suggesting entry and exit points for over 100 listed stocks) C. A firm whose exclusive business is placing their client's assets into model portfolios that are monitored on a daily basis D. All of these
Answer: C. To use the term investment counsel, two criteria must be met—the principal business must be giving investment advice and the adviser must provide investment supervisory services. Running model portfolios for clients with daily monitoring would meet both requirements. The financial planner is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only one part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the market timing publisher's principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored
An investment adviser registered in State G is obligated to maintain certain books and records as specified by the Uniform Securities Act. Which of the following statements regarding adviser recordkeeping is NOT true? A. Records originally created on computer may be stored in electronic media. B. Records are subject to surprise audits by the State G Administrator. C. Written records may be reduced to microfilm. D. Records must be kept for six years
Answer: D. Records of an investment adviser must be maintained for five years. Records are subject to surprise audits by the state Administrator, written records may be reduced to microfilm, and records originally created on a company's computer may be stored in electronic media. You will need to remember that the record retention requirement for investment advisers is five years from the end of the year in which the record was originally generated.
Under the Investment Advisers Act of 1940, all of the following are true regarding adviser recordkeeping EXCEPT A. the IA must keep records of transactions made for its own account as well as the account of investment adviser representatives to lessen the likelihood of scalping B. computer-generated records may be stored in that format C. client account records must be maintained, including a list of recommendations made D. records must be maintained for a period of 2 years from the end of the fiscal year in which the last entry was made
Answer: D. This is the exception because the records must be kept for 5 years. Nothing in the question asked about the 2-year requirement in the office. The 5-year requirement is that records be easily accessible whether in the office or not You will need to remember that the record retention requirement for investment advisers is five years from the end of the year in which the record was originally generated.
Who of the following is not exempt from registration as an investment adviser under the Investment Advisers Act of 1940? A) An adviser whose only office is in State G who deals only with State G residents, none of whom is a private fund, and does not deal in securities listed on any national securities exchange B) An adviser, specializing in stocks listed on the New York Stock Exchange, whose only place of business is in State F and whose only clients are 110 State F resident individuals C) An adviser whose clientele consists solely of insurance companies D) An adviser to seven private funds with total assets under management in the U.S. of $125 million
B) An adviser, specializing in stocks listed on the New York Stock Exchange, whose only place of business is in State F and whose only clients are 110 State F resident individuals The intrastate exemption has no numerical limitation, only that all of the clients be residents of the state and none of the clients can be private funds. However, no advice may be given on securities traded on a national stock exchange which causes this State F adviser to lose the exemption. Under the federal law, an exemption from registration applies if the adviser's only clients are insurance companies. And, if an adviser's only clients are private funds (regardless of how many) and AUM in the United States is less than $150 million, that adviser is exempt as well.
Reticent Asset Management (RAM) is claiming an exemption from registration with the state because it is an adviser to private funds. One of the requirements to qualify for this exemption is A) private fund assets under management cannot exceed $110 million. B) all investors must be qualified clients. C) all investors must be accredited. D) there can be no more than 10 investors during any 12-month period.
B) all investors must be qualified clients. On the state level, the exemption requires that all investors meet the USA's definition of qualified client. That means the investor must have a net worth of at least $2.1 million dollars or at least $1 million in assets under management with the adviser. This is a more stringent test than that for accredited investors. In addition, accredited investor is a federal term, and this question is about state law. There is no limit placed on the number of investors (don't confuse this with the private placement exemption for registration of the security). The limit on AUM is $150 million (this is not to be confused with the AUM limits on becoming registered with the SEC).
Mammon Money Managers (MMM) has its principal office in State A and is also registered in States B, C, and D. MMM exercises discretion in client accounts. As a result, MMM would have to meet the net worth or bonding requirements of A. the SEC B. State A C. the state with the highest requirement D. each state
B. A state-registered investment adviser need only meet the financial requirements of the state in which its principal office is located. SEC requirements are meaningless here because this is a state-registered firm.
For purposes of the exclusion, under both state and federal law, the term ________ does not include a savings and loan association or a foreign bank, but does include a savings institution
Bank
In addition to the initial registration, there is a requirement for annual renewal. There are fees for the initial filing and renewals. If an investment adviser changes its form of business organization (e.g., from a sole proprietorship to a corporation), a new ADV, but would new fees be required?
No new fees if they are just changing the structure of the business
In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management? A) An investment adviser that acts as an adviser solely to one or more national banks B) An investment adviser that acts as an adviser solely to private funds and has assets under management in the United States of less than $150 million C) An investment adviser that acts as an adviser solely to one or more venture capital funds D) An investment adviser with assets under management of less than $25 million
C) An investment adviser that acts as an adviser solely to one or more venture capital funds It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM. Private fund advisers with AUM of $150 million or more must register, and "small" investment advisers, those with less than $25 million in AUM, are generally prohibited from SEC registration. If the investment adviser's only clients are insurance companies, the adviser is exempt from SEC registration even if the firm has billions in AUM, but that exemption does not apply when the only clients are banks.
Exempt Reporting Advisers (ERAs) File an _______________ Form ADV Part 1 (they don't answer all of the questions), but do not have to prepare a Form ADV Part ___________.
Exempt Reporting Advisers (ERAs) File an abbreviated Form ADV Part 1 Exempt Reporting Advisers (ERAs) do not have to prepare a Form ADV Part 2
Under the Investment Advisers Act of 1940, which of the following are exempt from the requirements for registration? I. Foreign investment advisers with fewer than 15 clients per year who do not hold themselves out as investment advisers to the public and have less than $25 million in AUM in the United States II. Investment advisers who conduct all of their business in 1 state and who do not provide advice on securities listed on an exchange and have no private funds as clients III. Investment advisers whose only clients are banks A) I, II, and III B) II only C) I and II D) I only
C) I and II Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the United States. There is no exclusion for advisers whose only clients are banks.
The Investment Advisers Act of 1940 would consider each of the following investment advisers to be exempt from registration EXCEPT A) an adviser who maintains an office in only one state, advises only residents of that state (none of whom is a private fund), and gives advice relating solely to securities not traded on any national exchange B) an adviser whose only clients are venture capital funds C) an adviser whose only clients are banks D) an adviser whose only clients are insurance companies
C) an adviser whose only clients are banks Advising banks only does not qualify one for the exemption. Advisers who only service insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities.
f a prospective client wanted to know what type of investment strategies are employed by an investment adviser, that information would be found in the adviser's A. Form ADV Part 1A B. Form ADV Part 1B C. Form ADV Part 2A D. Form ADV Part 2B
C. Form ADV Part 2A Answer: C. The Form ADV Part 2A contains information of most use to clients, such as the type of strategies employed by the adviser. Part 1A contains information needed by the regulators; Part 1B is only for state-registered IAs; Part 2B contains information dealing with those individuals in the firm who manage accounts.
TEST TOPIC ALERT ______________ means the power, directly or indirectly, to direct the management or policies of an investment adviser, whether through ownership of securities, by contract, or otherwise. Under the Investment Advisers Act of 1940 as well as NASAA's Model Rule, each of the firm's officers, partners, or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control the firm.
Control
If an adviser no longer desires to engage in the business, application to withdraw registration is accomplished by filing Form ADV-W. Form ADV-W must be filed to withdraw the registration voluntarily. As is typical, the timing is different under federal and state law. For covered advisers, the withdrawal takes _______ days. In the case of a state-registered adviser, it is ________ days after filing. A testable point is that the Administrator retains jurisdiction over the former registrant for a period of one year.
Fed = 60 Days State = 30 Days
Form _______________ is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.
PF
Both state and federal law offer extra protection to those clients of investment advisers who have made substantial advance payment of fees for services to be rendered in the future. The term used is substantial prepayment of fees. In the case of a federal covered adviser, it is considered substantial if the IA collects prepayments of more than $_______________ per client, six months or more in advance. Under the NASAA Model Rule, it is more than $_____________, and again, six months or more in advance.
Fed = more than $1,200 per client, six months or more in advance State = more than $500, and again, six months or more in advance
Which of the following would the SEC consider to be a substantial prepayment of fees? A. $500 covering the next six months B. $800 covering the entire contract year C. $800 covering the next calendar quarter D. $5,000 covering the next 7 months
D. $5,000 covering the next 7 months Fed = more than $1,200 per client, six months or more in advance State = more than $500, and again, six months or more in advance
One of the most common questions asked on the exam is the renewal date for the state registration of investment advisers (and the other securities professionals—investment adviser representatives [IAR], broker-dealers, and agents). That renewal date is _________________. One of the tricks the exam likes to play is asking about a person who registers in November. When does that registration come up for renewal?
December 31st Well, even if it is only a month or so later, every registration of a securities professional comes up for renewal on the next December 31, so your first year is always a short one
As described previously, there is an exemption from registration for certain private funds and venture capital funds. However, even though exempt from registration, if designated as ________________________, they are required to complete and electronically file reports using the IARD system on certain items set forth in Form ADV, which will be made publicly available on the SEC's website.
Exempt Reporting Advisers (ERAs) Exempt Reporting Advisers (ERAs) File an abbreviated Form ADV Part 1 (they don't answer all of the questions), but do not have to prepare a Form ADV Part 2.
Under what law is the following person exempt from registration as an IA? any person whose advice, analyses, or reports are related only to securities that are direct obligations of, or obligations guaranteed by, the United States
Federal law Not exempt under State
The Form ________ must be updated each year by filing an annual updating amendment within _____ days after the end of the adviser's fiscal year. This annual updating amendment is used to update the responses to all items on the ADV. Of critical importance is the verification of AUM ensuring that the adviser is eligible to continue being registered with the SEC. One of the requirements relating to the brochure described in Part _____ is that submission must be made of a summary of ___________ changes either in the brochure (cover page or the page immediately thereafter) or as an exhibit to the brochure.
Form ADV - 90 days after the end of the advisers fiscal year - Part 2 - material changes
Registration as an IA is accomplished using the Form _____________. This form consists of Part 1A and Part 1B, and Part 2A, and Part 2B. Investment advisers use Form ADV to: - register with the Securities and Exchange Commission; - register with one or more state securities authorities; or - or __________ those registrations.
Form ADV - or amend those registrations Filing in almost all cases is done through the Investment Adviser Registration Depository (IARD). The IARD is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms.
Although there are no minimum educational or experience requirements, there is a specific area on the Form ADV Part _______ where state-registered advisers must identify each of the principal executive officers and management persons, and describe their formal education and business background. If this information has been supplied ________________ in the Form ADV, it is not necessary to repeat it in response to this question.
Form ADV Part 2 - supplied elsewhere
If an adviser no longer desires to engage in the business, application to withdraw registration is accomplished by filing Form _______________.
Form ADV-W Form ADV-W must be filed to withdraw the registration voluntarily.
For NASAA purposes, the term net worth is the excess of assets over liabilities, (assets minus liabilities). However, NASAA does not permit the investment adviser to include the following as assets: - ______________ and all other assets of an intangible nature, home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual - Advances or ________ to stockholders and officers in the case of a corporation - Advances or loans to partners in the case of a partnership
Goodwill - Advances or loans However, furniture used in the office, such as a sofa in the reception room, or bookcases in the company research library, are considered assets for the purpose of the computation.
An investment newsletter is being published for a subscription fee. Rather than being published on a regular basis (weekly, monthly, quarterly, and so forth), issues are released in response to market events. How do the laws view this publisher?
If the publication is issued from time to time in response to episodic market events, the exclusion is lost.
What are the two exemptions from the definition of an Investment Advisor under Federal Law?
Intrastate Advisers (Only Within One State) Advisers to Insurance Companies Investment advisers, other than an investment adviser who acts as an investment adviser to any private fund (defined at LO4), whose clients, are residents of the state in which the adviser has its principal office and only place of business and who do not give advice dealing with securities listed on any national exchange (e.g., New York Stock Exchange), are exempt. For example, an adviser would be exempted under this provision if all of its clients were Georgia residents, its only places of business were in Georgia, and it did not give advice on securities listed on any national exchange. Advisers whose only clients are insurance companies are exempt. Please be careful on this last one—the exam frequently asks if the exemption applies when the only clients are banks. As we'll learn shortly, that exemption applies under state law, but not under federal law
What are the exemptions from the definition of an Investment Advisor under State Law?
Investment advisers exempt from registration with the state Administrator are those who have no place of business in the state but are registered in another state, provided their only clients in the state are: - broker-dealers registered under the act; - other investment advisers; - institutional investors; - existing clients who are not residents but are temporarily in the state; - limited to 5 or fewer clients, other than those previously listed, resident in the state during the preceding 12 months (called the de minimis exemption); or - any others the Administrator exempts by rule or order. This exemption applies to investment advisers who are registered in at least one state, but have clients in another state where the IA does not maintain a place of business
NASAA's Model Rule requires a copy of books and records when the material is distributed to ______ or more persons (other than persons connected with the investment adviser), not ______ or more, as is the case under federal law
NASAA's Model Rule requires a copy of books and records when the material is distributed to 2 or more persons (other than persons connected with the investment adviser), not 10 or more, as is the case under federal law
If a federal covered adviser only deals with institutions, other IAs, other BDs, and so forth, is notice filing required?
No
Under the Investment Advisers Act of 1940, are there specific financial requirements, such as a minimum net worth, spelled out?
No However, as we will see, there are financial disclosures that must be made to clients under certain conditions. Under the Uniform Securities Act, the Administrator may, by rule or order, establish minimum financial requirements for an investment adviser registered in the state. Under the Uniform Securities Act, the Administrator may, by rule or order, establish minimum financial requirements for an investment adviser registered in the state.
Form ADV: __________ contains information about the IA, including: - location of principal office; - location of books and records (if not at the principal office); - form of business organization (sole proprietorship, partnership, corporation, LLC, and so forth); - method of business; - other business activities [broker-dealer, registered representative (agent) of a BD]; - maintaining custody of customer assets or exercising discretion; - details relating to all control persons (officers, directors, partners, etc.); - disciplinary history; and - for state-registered IAs, states in which the IA intends to or is already registered.
Part 1 State-registered advisers file both Part 1 and Part 2 with the Administrator of each state in which they are registering.
Form ADV contains four parts: ____________ asks a number of questions about the investment adviser, its business practices, the persons who own and control the firm, and the persons who provide investment advice on behalf of the firm. All advisers registering with the SEC or any of the state securities authorities must complete ____________. also contains several supplemental schedules. These include: Schedule A, which asks for information about the direct owners and executive officers (control persons); and Disclosure Reporting Pages (or DRPs), which are schedules that ask for details about disciplinary events involving the adviser or advisory affiliates.
Part 1A
Form ADV: Part ______ asks additional questions required by state securities authorities.
Part 1B Federal covered advisers do not complete the Part 1B State-registered advisers file both Part 1 and Part 2 with the Administrator of each state in which they are registering.
Form ADV: Part ______ is known as the investment adviser's brochure and tends to focus on customer related information, such as: - compensation arrangements (fees, commissions, hourly charge); - types of clients (individuals, institutions, pension plans); - type of investments (equities, corporate debt, municipal securities, U.S. treasuries, investment companies); - types of strategies employed (buy and hold, value, growth); - methods of analysis used (technical, fundamental); - educational and business background of those who render advice; and - an audited balance sheet if a federal or state-registered adviser requires or solicits substantial prepayment of fees (defined shortly) or if a state-registered adviser maintains custody (discussed at Unit 7). The brochure is arranged in a narrative form using plain English.
Part 2AState-registered advisers file both Part 1 and Part 2 with the Administrator of each state in which they are registering.
Form ADV: Part _______ requires advisers to create brochure supplements containing information about certain supervised persons. State-registered advisers file both Part 1 and Part 2 with the Administrator of each state in which they are registering.
Part 2B Together, Part 2A and Part 2B are delivered to the client as described later in this unit.
Under both federal and state law, a successor firm registers by filing a new application and, in the case of the _____________, paying the appropriate fee and, under the __________, without additional fee. Please note the difference—one case involves a fee, the other does not.
SEC - USA
__________________ is the practice whereby an investment adviser, before the dissemination of a securities recommendation, trades on the anticipated short-run market activity that may result from the recommendation.
Scalping
Jeopardy Usually issued by an insurance company (the surety) who guarantees payment of a specified sum to an injured party (either the client or the Administrator) when the securities professional causes damages by his actions or fails to perform.
Surety Bond
The CCO's identity must be disclosed on the Form ________
The CCO's identity must be disclosed on the Form ADV
What defines investment counsel?
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. and Provide investment supervisory services. This one is a bit harder for most to understand so here are some details as issued by the SEC.
An investment adviser registered in State A, with no business locations in any other state, has, over the preceding 12 months, directed investment advice to five individual investors residing in State B. Is the investment adviser required to register in State B?
The answer is no! Registration is not required because the investment adviser does not have a place of business in State B and directs business to five or fewer individual residents of the state during the previous 12 months (de minimis exemption). If the firm had a place of business in State B, registration would be required in that state even if it had only one client. Also, registration would be required if business had been transacted with 6 or more individual residents (retail clients) of State B during the previous 12 months.
A state-registered investment adviser discovers on Monday that its net worth is below the minimum requirement. No later than the close of business on ____________, notice must be sent to the Administrator of the state in which the investment adviser has its principal office. Then, no later than the close of business on ______________, the investment adviser must file a detailed report with the Administrator of its financial condition. Included in the report must be a statement as to the number of client accounts.
Tuesday - Wednesday
Under the Uniform Securities Act, can the Administrator, by rule or order, establish minimum financial requirements for an investment adviser registered in the state?
Yes Under the Uniform Securities Act, the Administrator may, by rule or order, establish minimum financial requirements for an investment adviser registered in the state. Under the Investment Advisers Act of 1940, no specific financial requirements, such as a minimum net worth, are spelled out. However, as we will see, there are financial disclosures that must be made to clients under certain conditions.
When a state-registered investment adviser accepts prepayments of fees of more than $________ for a contract period of six months OR more, it is known as a substantial prepayment. However, under the Investment Advisers Act of 1940, it does not become a substantial prepayment until it exceeds $____________
When a state-registered investment adviser accepts prepayments of fees of more than $500 for a contract period of six months OR more, it is known as a substantial prepayment. However, under the Investment Advisers Act of 1940, it does not become a substantial prepayment until it exceeds $1,200
While registration as an IAR is pending, the individual may not take part in any activity that would require registration. Would clerical work (filing customer records) or assisting internally with research be permitted?
Yes
under the Investment Advisers Act of 1940 are financial planners, pension consultants, and others who offer investment advice as part of their financial practices considerd Investment Advisers?
Yes
Does an investment adviser or one of its representatives who advertises to the public, in any way, the availability of meeting with prospective clients in a hotel, country club, seminar, or any other location in the state considered to have a place of business in that state?
Yes However, an investment adviser or one of its representatives who contacts existing clients who happen to be in the state and notifies them that he will be passing through the state and will be available to meet with them in his hotel room is not considered to have a place of business in the state because the announcement is being made only to existing clients and not to the public
Federal covered advisers must make a notice filing with the state if they have a place of ________________ in the state or have _______ or more clients in that state in a 12-month period, regardless of place of business.
a place of business in the state or have 6 or more clients in that state in a 12-month period
Instead of registering with the state(s), covered advisers pay state filing fees and give notice to the Administrator. The procedure followed is called notice filing. As part of the notice filing, the Administrator can require a federal covered adviser to file a copy of whatever has been filed with the SEC, and, of course, pay a filing fee. Federal covered advisers must make a notice filing with the state if they have a place of ________________ in the state or have _______ or more clients in that state in a 12-month period, regardless of place of business.
a place of business in the state or have 6 or more clients in that state in a 12-month period
When referring to the L.A.T.E. exclusion, it is important to understand the meaning of incidental. A lawyer advising clients to carefully invest a settlement from a legal case is not giving investment _________ unless charging a separate fee for helping set up the portfolio. An accountant is not giving investment ___________ when suggesting to a wealthy client that investing in tax-exempt municipal bonds might be a wise idea, unless charging a separate fee to help select the bonds
advice x2
The USA defines an _________ as any individual who represents a broker-dealer (legal entity) or an issuer (legal entity) in effecting (or attempting to effect) transactions in securities for their clients
agent
Each registered investment adviser must adopt and implement written policies and procedures designed to prevent violation of the federal and state securities laws, review those policies and procedures ________________ for their adequacy and the effectiveness of their implementation, and designate a ____________________________ to be responsible for administering the policies and procedures.
annually - chief compliance officer (CCO)
An excluded person is not subject to any provisions of the Investment Advisers Act or the Uniform Securities Act (other than _____________ statutes)
antifraud
How does registration take place? With only a few differences, the procedures for registering as an investment adviser are the same, whether registering with the SEC or with the states. Those differences will be pointed out as we go along. To register with the state securities Administrator, a person must: - submit an __________; - provide a ___________ to service of process; - pay ________ fees; - post a bond (if required by the Administrator); and - take and pass an examination if required by the Administrator. The examination may be written,______________ , or both
application - consent to service of process - pay filing fees - oral
The SEC is permitted to grant exceptions to advisers from the prohibition on Commission registration, including small and mid-sized advisers, if the application of the prohibition from registration would be "unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes" of the Act. Under this authority, they have adopted several exemptions from the prohibition on registration with the SEC, including: - pension consultants, but only those with at least $_________ million under control—the SEC picked that number to ensure that, to register with the SEC, if desired, the consultant's activities are "significant enough to have an effect on national markets;" - those mid-size advisers with at least $100 million in AUM, but less than $110 million in AUM who elect to register with the SEC rather than the state(s) (this buffer will be described following); - investment advisers ______________ to be eligible for SEC registration within 120 days of filing the application for registration on the Form ADV; and - _____________ advisers
at least $200 million under control - expecting to be eligible - internet advisers
Mid-Size Advisers includes those with AUM of at least $______ million but not $_______ million. Generally, these advisers are prohibited from SEC registration and must register with the state. Just as with any other category, advisers to an investment company registered under the Investment Company Act of 1940 register with the ________. That is true regardless of their size. A mid-size firm can qualify for SEC registration several other ways. A mid-sized adviser is not prohibited from registering with the SEC: - if the adviser is not required to be registered as an investment adviser with the securities Administrator of the _______ in which it maintains its principal office and place of business; - if registered, the adviser would not be subject to examination as an investment adviser by that securities _____________; - if the adviser is required to register in 15 or more states; or - if the adviser elects to take advantage of the buffer (described following).
at least $25 million but not $100 million - SEC - state - Administrator If the State will not require anything, then the Government will!
NASAA's Model Rule specifies the action to be taken by a registered investment adviser whose net worth falls below the required minimum. By the close of _______________________, the adviser must notify the Administrator that the investment adviser's net worth is less than the minimum required. After sending that notice, the adviser must file a _________________ with the Administrator by the close of business on the next business day. One more item that must be included in the report is the number of _____________ accounts. When the adviser's net worth is below the minimum requirement, the adviser must obtain a bond in an amount of the net worth deficiency rounded up to the nearest $__________
business on the next business day - file a financial report - number of client accounts - nearest $5,000
Although successful completion of the Series 66 examination may satisfy a portion of the requirements of a particular state, it does not convey the right to transact business before being granted a license or registration by that ___________.
by that state
The SEC holds that there is no such thing as a ___________________ investment plan that does not include securities advice.
comprehensive
The ____________________________ appoints the Administrator as the applicant's attorney to receive and process noncriminal securities-related complaints against the applicant.
consent to service of process The consent to service of process is submitted with the initial application and remains in force permanently. It does not need to be supplied with each renewal of a registration
Federal Covered Investment Adviser, sometimes just referred to as a ________________ adviser on the exam
covered adviser
Any investment adviser that has _________________ authority or __________________ of client funds or securities, or requires or solicits substantial _________________________, must disclose any financial condition that is reasonably likely to impair its ability to meet contractual commitments to its ______________. As an example, the SEC has indicated that disclosure may be required of any arbitration award "sufficiently large that payment of it would create such a financial condition."
discretionary authority or custody - prepayment of fees - impair its ability to meet contractual commitments to its clients
An _______________ is granted to any bank and bank holding company, savings institution, or trust company. This exclusion is generally limited to U.S. banks and bank holding companies. The exclusion is unavailable to credit unions and investment adviser subsidiaries of banks or bank holding companies
exclusion
Please note that these exemptions are granted on the basis of who you advise, not on what types of securities are the subject of your advice. Note also that _____________ means exclusion from a definition, whereas ________________ means not subject to registration. All of the exemptions mentioned here involve investment advisers; it's just that they qualify for an exemption from registration under federal law.
exclusion - exemption
Any ____________________ investment adviser whose agreement requires substantial prepayment of fees (as previously defined) from clients, must include a __________________ with the adviser's ADV Part 2A for the adviser's most recent fiscal year. The ______________________ must be prepared and audited by an __________________ public accountant.
federal covered - balance sheet x2 - independent public accountant.
Both state and federal law offer extra protection to those clients of investment advisers who have made substantial advance payment of fees for services to be rendered in the future. The term used is substantial prepayment of fees. In the case of a __________________________, it is considered substantial if the IA collects prepayments of more than $1,200 per client, six months or more in advance. Under the _______________________, it is more than $500, and again, six months or more in advance.
federal covered adviser - NASAA Model Rule (State) Fed = more than $1,200 per client, six months or more in advance State = more than $500, and again, six months or more in advance
One of the effects of the NSMIA is to limit the powers of an Administrator over a federal covered adviser. Section 222 of the Investment Advisers Act of 1940 states that when it comes to federal covered advisers, any financial or bonding requirements, as well as rules relating to recordkeeping, are solely under _________ jurisdiction
federal jurisdiction
A foreign private adviser is defined in the Dodd-Frank Act as any investment adviser that: - has no place of business in the United States; - has, in total, fewer than _______ clients and investors in the United States in private funds advised by the adviser; - has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $_____ million; and - does not hold itself out to the public in the United States as an investment adviser or act as an investment adviser to an investment company registered under the Investment Company Act of 1940.
fewer than 15 clients and investors in the United - less than $25 million
The consent to service of process is submitted with the initial _________________ and remains in force __________________. It does not need to be supplied with each renewal of a registration
initial application - permanently
An investment adviser who maintains custody of customer funds and securities discovers that its net worth is only $23,000. Even though the adviser only needs a net worth of $35,000, this would require __________________ surety bonding in the amount of $____________ because it must be rounded up to the nearest $5,000
immediate - $15,000
The term ____________ would include banks, trust companies, savings and loan associations, insurance companies, investment companies, (e.g., mutual funds), employee benefit plans with assets of not less than $1,000,000, and governmental agencies or instrumentalities. Institutions are included in the term person, defined previously.
institution
Consultants who advise employee benefit plans on how to fund their plans with securities are also considered ________________________ by the SEC. In addition, the SEC considers pension consultants who advise employee benefit plans on the selection, performance, and retention of investment managers to be ____________________________.
investment advisers x2
(Federal Law) Title IV of the Dodd-Frank Act of 2010, known as the Private Fund Investment Advisers Registration Act of 2010, contains a comprehensive overhaul of the registration process for investment advisers. The bill provided for the following new exemptions from registration under the Advisers Act: An exemption for advisers solely to private funds with less than __________ million in assets under management (AUM) in the United States, without regard to the number or type of private funds (the private fund adviser exemption) An exemption for certain non-U.S. advisers with no place of business in the United States and minimal AUM (less than ________ million) attributable to U.S. clients and investors (the foreign private adviser exemption) An exemption for advisers solely to __________ capital funds (the venture capital fund exemption)
less than $150 million - less than $25 million - venture capital funds
Small Investment Advisers includes advisers with AUM of less than $_________ million. Unless the investment adviser is an adviser to an ______________________ registered under the Investment Company Act of 1940, registration with the SEC is prohibited and, unless exempted under state rules, registration with the state is required. However, if the adviser would be required to register in _______ or more states, the prohibition is lifted, and registration with the SEC would be permitted instead.
less than $25 million - investment company - 15 or more states
Exemption for Investment Advisers to Venture Capital Funds The rules define a venture capital fund as a private fund that: - has limited __________; - does not, except in certain limited circumstances, offer its investors ______________ rights or other similar liquidity rights; - ______________ itself as a venture capital fund to investors; and - is not registered under the Investment Company Act of 1940.
limited leverage - does not offer its investors redemption rights - represents itself as a venture capital fund
A holding company is organized to invest in and manage other corporations. Control can occur through the ownership of more than ________% of the voting rights or through the exercise of a dominant influence. It is sometimes referred to as the parent organization. A bank ____________ company is a company whose primary asset is a commercial bank. Most of the large U.S. banks today are owned by holding companies.
more than 50% - bank holding company Excluded from the definition of an IA!!
The proper term to use when referring to the financial requirements of an investment adviser is ____________, while for broker-dealers it is ________________.
net worth - net capital However, we have heard from a number of students that NASAA might be using net capital where they should be using net worth in questions about IAs. So, if you want to get the question right, answer it the way they give it to you. You will see several examples of this in our practice questions.
NASAA's Model Rule for the Registration Exemption for Investment Advisers to Private Funds is almost identical to the federal exemption described previously. Here are the two differences that might be testable. If qualifying for the exemption as a 3(c)(1) issuer, (no more than ______ investors), NASAA's Model Rule requires that all investors be " ____________ clients." That is, they must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, of at least $2.1 million. The phrase "value of primary residence" means the fair market value of a person's primary residence, minus the amount of debt secured by the property up to its fair market value (net equity). Note that "qualified" for NASAA is significantly less than "qualified" under federal law. Neither the private fund adviser nor any of its advisory 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 a self-regulatory organization such as FINRA.
no more than 100 investors - must be "qualified clients"
Any broker-dealer whose performance of such services is solely incidental to the conduct of its business as a broker-dealer and who receives no special ________________ (such as when offering wrap fee programs) is excluded from the definition of an IA.
no special compensation
Instead of registering with the state(s), covered advisers pay state filing fees and give notice to the Administrator. The procedure followed is called _______________.
notice filing As part of the notice filing, the Administrator can require a federal covered adviser to file a copy of whatever has been filed with the SEC, and, of course, pay a filing fee.
An adviser who does not exercise discretion and does not maintain custody, but does accept prepayment of fees of more than $500, six or more months in advance, must maintain a ___________ net worth at all times.
positive net worth
The Administrator may require an adviser who has custody of client funds or securities or has discretion over a client's account to post a ___________ bond or maintain a minimum _____________. Usually, the requirement is higher for custody than for discretion. Typically, the net worth required of investment advisers with discretionary authority is $_____________ and that for those taking custody is $____________. If the adviser is using a surety bond instead, the requirement in either case is $_____________. An adviser who does not exercise discretion and does not maintain custody, but does accept prepayment of fees of more than $500, six or more months in advance, must maintain a positive net worth at all times.
post a surety bond or maintain a minimum net worth - 10k - 35k - 35k
Although registration normally takes 30 days, the Administrator has the _______________- that period, in effect permitting a ___________ order
power to shorten - rush order
A few pages ago, we gave you a Test Topic Alert that emphasized that as long as state-registered investment advisers met the net worth or surety bond requirements of their home state, that was sufficient for any state in which they are registered. The same is true regarding recordkeeping requirements and the proof is in the following statement copied from the Form ADV: 2. State-Registered Investment Adviser Affidavit If you are subject to state regulation, by signing this Form ADV, you represent that, you are in compliance with the registration requirements of the state in which you maintain your _____________ place of business and are in compliance with the bonding, capital, and recordkeeping requirements of that state
principal place of business
regardless of how it's defined, if one is an adviser solely to ____________ funds, it is possible to qualify for an exemption from registration with the SEC. (Federal Law)
private funds
qualified clients under State Law is defined as must have either at least $______ million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, of at least $______ million
qualified clients under State Law is defined as must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, of at least $2.1 million
Unless an exemption is available, federal and state law make it unlawful for a person defined as an investment adviser to engage in advisory activity without ___________________.
registration
As you know, terminology is very important on this exam. A few questions use the term _________ client instead of noninstitutional client. Look for it and remember that retail clients need far more protection than institutional ones. If the question refers to an individual, that will always be a retail client.
retail client
An audited balance sheet must be included with the ADV Part 2A for any __________________________ investment adviser whose agreement requires substantial prepayment of fees (as defined previously) from clients. In addition, even without the fees, those who maintain _____________ of client funds and/or securities (covered at Unit 7), must include an audited balance sheet with their ADV Part 2A for their most recent fiscal year with the same requirements. The audited balance sheet is also required when the custodian is a related (affiliated) broker-dealer. Furthermore, state-registered advisers who exercise discretionary authority over client accounts but do not maintain custody must file with the Administrator within _______ days of the end of the adviser's fiscal year a balance sheet, but this one does not have to be audited.
state-registered - maintain custody - 90 days
Because the USA is only a template, some states have higher net worth or bonding requirements. The exam may want you to know that if an IA meets the net worth or surety bonding requirements of the state where its principal office is located?
that is sufficient in any other state in which it may be registered.
What makes someone a federal covered investment adviser? In most cases, they are the larger firms and are registered with the SEC. The three most tested categories are: - those registered with the SEC because they are eligible ($100 million in assets under management) or required to register with the SEC because they meet the minimum threshold of assets under management (currently $110 million); - those under contract to manage an investment company registered under _________________________________ , e.g., a mutual fund, regardless of the amount of assets under management; and - those not registered with the SEC because they are excluded from the definition of an investment adviser by the Investment Advisers Act of 1940. (The most tested example of this case is the investment adviser whose advice is limited solely to securities issued by the ____________________________ or one of its agencies.)
the Investment Company Act of 1940 - U.S. government
An investment adviser registered in State A, with no business locations in any other state, gave investment advice to six banks, six insurance companies, and six other investment advisers instead of the individuals? Would they need to register in that state?
the answer would be no registration. As long as the investment adviser has no place of business in the state and limits its clientele to institutions, broker-dealers, large employee benefit plans, or other investment advisers, it qualifies for an exemption