Unit 7
Unless an exemption applies, under the Investment Advisers Act of 1940, an investment adviser is required to A) provide each advisory client with a brochure or a summary of material changes within 120 days of the end of its fiscal year B) maintain a bond for an amount based on the assets under management C) furnish a statement of the total dollar amounts of securities bought and sold each year to customers D) furnish an audited balance sheet each year to customers for whom the advisor maintains custody
A. Unless an exemption applies (the client is an investment company or the adviser is providing impersonal advisory services costing less than $500 per year), SEC rules require that a brochure containing summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. The summary itself may be sent with instructions as to how to receive the entire brochure if the client desires. If there are no material changes, a brochure does not have to be sent. Under federal law, the balance sheet is only required when the IA requires or charges a substantial prepayment of fees (it is only state registered advisers who must supply balances sheets when maintaining custody). Bonding requirements apply only to state registered investment advisers. U7LO6
An IAR concludes a successful meeting with a client by receiving oral authority to begin exercising discretion in the client's account. The IAR leaves the appropriate paperwork with the client and urges him to return it in the postage paid envelope as soon as possible. After returning to the office, the IAR enters the first discretionary order for this account, a purchase of $10,000 of CANCO common stock. Six days later, CANCO reports that it is going to miss its earnings estimates and the stock begins to fall. The IAR realizes that the best thing to do for the client is take the loss and get out before it gets worse, but the client has not yet returned the signed paperwork. In this case, A) the IAR has acted improperly from the outset by making the purchase prior to receiving the signed paperwork B) the IAR may exercise his discretion as authorized and sell the CANCO C) the investment adviser firm should apply to the Administrator for an extension of time D) the IAR must wait for the signed paperwork to be received
B. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, oral discretionary authority is permitted to be used in a customer's account for the first 10 business days after the date of the first transaction. Following that 10 days, the rule requires written authorization to be on hand for any future discretionary trading. U7LO2
A federal covered investment adviser would like to charge a client a performance fee based on a selected benchmark. The client has $400,000 invested with the adviser but has a net worth of $2,150,000, of which $350,000 represents an investment account, 50% of which is shared with his cousin. A) Because we can allow all of the jointly held property, this client has the necessary net worth to qualify for a performance-based compensation program. B) Because we can allow none of the jointly held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. C) Because the client's 50% share of the investment account is only $175,000, this client does not qualify for a performance-based compensation program. D) Because the total of the amount invested with the adviser ($400,000) plus the individual's personal net worth ($1,800,000 without counting the joint property) exceeds $2 million, this client has the necessary net worth to qualify for a performance-based compensation program
B. Under federal (and state) law, in order to qualify for a performance-based compensation program, the client must have either $1 million in assets managed by the adviser or a net worth in excess of $2.1 million. This requirement is described in Rule 205-3 of the Investment Advisers Act of 1940 and the NASAA Model Rule makes reference to the federal rule. If using joint assets, only those with a spouse are allowed. Please note: This differs from meeting the net worth standard as an accredited investor. Under Rule 501 of Regulation D of the Securities Act of 1933, one can use assets owned jointly with persons other than a spouse to qualify as an accredited investor, but only to the extent of the percentage ownership of the account or property. U7LO1
When it comes to safeguarding confidential information pertaining to the account(s) of an individual customer or family, the rules deal primarily with what is called a covered account. A key factor in determining if an account meets the definition is A) the ability of the customer to make a one-time wire to a foreign bank account owned by a family member B) that the account is in the name of an institutional customer C) the ability of the customer to move funds out of the account on multiple occasions D) if the customer owns the underlying security on which the call option is sold
C. A covered account is an account, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions. Where the money goes is less of a factor than the frequency of transactions. The only time when a single transaction account might be covered is if there is reason to believe that the identity of the customer is at risk—not likely when wiring to a family member. Institutions are not included in the definition and owning the stock underlying the sale of a call option means the option is covered—totally different from the topic here. U7LO7
Lamar is an investment adviser representative for Southeast Retirement Advisers (SRA), a wholly owned subsidiary of Southeast Retirement Solutions (SRS), a broker-dealer registered in a number of southeastern states. Lamar is also a registered agent with SRS. If one of Lamar's advisory clients sends a check made payable to SRS for a stock purchase, under NASAA's Model Rule on Custody A) SRA would be in violation of the NASAA requirement to use a qualified custodian B) Lamar would have to post a surety bond in the amount of $35,000 C) Lamar is considered to be maintaining custody of client funds and securities D) SRA is considered to be maintaining custody of client funds and securities
C. Under the NASAA Model Rule, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded). IARs would never take custody, and there is no bonding requirement for IARs. U7LO2
NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? I. Transaction-based compensation, such as commissions on recommended securities II. 12b-1 trails on no-load mutual funds in the client's portfolio III. Expenses reimbursed by third-party sources IV. Compensation-sharing arrangements between the investment adviser and its representatives
I, II, and III. All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure. U7LO1
Written complaints
Must be retained by BD's for 3 years 5 years for IA's
Difference for solicitors between state and federal law
State law requires solicitors to be registered as IAR's Federal law does not require registration as long as solicitors are not affiliated with advisory firm
What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A) Accept the certificate and give the customer a receipt. B) Instruct the client to send the certificate to the transfer agent because you cannot accept it. C) Accept the certificate and send the customer a receipt within 24 hours of the delivery. D) File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000
When a client delivers a stock certificate to the broker-dealer's office, the appropriate procedure is to furnish the customer with a receipt on the spot. Broker-dealers are far more likely to have custody arrangements than are investment advisers. U7LO2
Time or Price Discretion
discretion orally granted by the customer to purchase or sell a specific amount of a particular security
A unique requirement for those investment advisers who maintain custody of customer assets is the filing of
the Form ADV-E The Form ADV-E is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets. U7LO2
