Series 63 - Unit 4

Exception for the performance based compensation for investment advisers

- a natural person or company that immediately after entering into the contract has at least $1 million under the management of the investment adviser - a natural person or company that the IA has reason to believe that immediately before entering into the contract has a net worth exclusive of the primary residence in excess of $2.1 million

Not included in the fee disclosure documents

- commissions - markups and markdowns - advisory fees

Information that must be obtained on the new account agreement

- does the client have the legal capacity to enter into agreements? (full legal age, in jurisdiction, capacity to enter agreement) - employment information - CIP notice - citizenship or visa details - financial information about the client

Disclosure of fees

- fees are typically disclosed when a customer account is opened. If the firm changes the fee schedule, use appropriate methods to give advanced notification of changes to the customer - minimize the fine print, or at least make the fees and charges clear - use standardizes and uncomplicated terms to describe service and maintenance fees in order to help clients compare fees

Brochure delivery requirements

- initial delivery - annual delivery - electronic delivery - exceptions

Typical broker-dealer fees

- issuance of a stock certificate - transferring an account - wiring funds - margin account interest - account maintenance fees - safekeeping of funds/securities - late settlement - postage and handling

Online red flags

- promises of high returns with no risk - offshore operations - e-currency site - recruit friends - professional websites with little to no information - no written information - testimonials from other group members

The account approval of an options account will have

- the date the ODD is furnished to the customer - nature and types of transactions for which the account is approved - name of the agent assigned to the account - name of supervisor approving the account - date of approval - dates of verification of currency of account information

Capacity of broker-dealers

- when acting in a principal capacity, the BD is the contra party to the trade, that is, they are on the other side of the trade of the client, the firms profit comes from a markdown - when the client is buying a security, the BD is selling it out of inventory, the firms profit comes from a markup - when acting in an agency capacity, the firm is acting like any other broker or agent in that they are simply putting the buyer and seller together, earning a commission

Options accounts

A designated supervisory person with knowledge about options must approve the account opening. There is also a special Options Disclosure Document that must be provided to any prospective customer. based upon such information, the designated supervisory person shall specifically approve or disapprove in writing the customers account for options trading

Entanglement

A firm participates in the development of the content of a third-party site. This is not prohibited , but the relationship must be disclosed

Guaranteed security

A party other than the issuer guarantees the payment of principal and interest (on a debt security) or dividend (on an equity security). The important part is that there is no guarantee on the performance of the investment (gains)

NASAA model fee disclosure

A working group convened by NASAA has developed a model fee disclosure schedule and related accessibility guidelines to help investors better understand and compare various BD service and maintenance-related fees

Initial brochure delivery

An IA must deliver part 2A and part 2B supplements required by the rule to a prospective advisory client: - no less than 48 hours prior to entering into any advisory contract with such client or prospective client - at the time of entering into such contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract

Annual brochure delivery

An IA must: - deliver within 120 days of the end of its fiscal year a free, updated brochure and related brochure supplements, which include or are accompanied by a summary of material changes - deliver a summary of material changes that includes an offer to provide a copy of the updated brochure and supplements and information on how the client may obtain a copy of the brochure and supplements (only if there have been changes)

Discretionary account with a broker-dealer

An account where the customer grants the power to a BD to make buy and sell decisions in the account without the need to have prior contact with the customer. You need written discretionary authorization permitting such discretion and the account must be approved by a designated supervisor

Discretionary account with an investment adviser

An account where the customer grants the power to a IA to make buy and sell decisions in the account without the need to have prior contact with the customer. You can rely on oral authorization for the first 10 days after the initial discretionary trade, but need written discretionary authorization permitting such discretion.

Disclosure of capacity

BDs must always indicate their capacity on the trade confirmation, sent no later than completion of the trade (settlement date)

Form ADV part 1A

Contains information about the IA: - location - form of business organization - advisory and business activities - custody and discretion - disciplinary history

Electronic delivery of the brochure

Delivery may be made electronically if: - a potential client obtains verification that a readable copy of the brochure and supplements were received by the client - obtains each clients prior consent to provide the brochure and supplements electronically - prepares the electronically delivered brochure and supplements in the format prescribed in the instructions to Form ADV Part 2 - delivers the brochure and supplements in a format that can be retained by the client in either electronic or paper form - establishes procedures to supervise personnel transmitting the brochure and supplements and prevent violations of this rule

Credit agreement

Discloses the terms of the credit extended by the BD, including the method of interest computation and situations under which interest rates may change as well as the stipulation that the BD may use the client's margin securities as collateral for the loan that it makes to the client

Investment Advisory Contracts

Entering into, extending or renewing any investment advisory contract, unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount or prepaid fee to be returned in the event of contract termination or non-performance, whether the contract grants discretionary power to the adviser and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract

Hypothecation agreement

Gives permission to the BD to pledge customer margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the BD on the basis of the loan value of these securities

Loan consent form

Gives permission to the firm to loan customer margin securities to other customers or BDs, usually for short sale

Guarantee against loss

Guaranteeing a client that a specific result will be achieved (gain or lass) with advice which will be rendered is prohibited

Customer Identification Program

Helps the government fight terrorism and money laundering, BDs are required by federal law to obtain, verify, and record information that identifies each person who opens an account. This includes: - name - DOB - residential or business address - tax identification number

Fiduciary responsibility of investment advisers

IAs and IARs have full fiduciary responsibility to their customers. That obligated these advisers and their representatives to put their clients interests ahead of their own

Disclosure of capacity by and investment adviser

IAs can act as a principal or agent on a rare occasion. This would be permitted if: - the client receives full written disclosure as to the capacity in which the adviser proposes to act - client consent is obtained Both of these must be done prior to the completion of the transaction

Disclosure of conflicts of interest

If there is any doubt about the transparency of the recommendation or transaction, be sure to make a full disclosure

Advertising

It is an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading. The Administrator may by rule or order require the filing advertisement and sales literature unless the security or transaction is exempt or is federal covered security

Margin Accounts

Margin accounts allow investors to leverage their investment dollars by borrowing money from brokerage firms by pledging the purchased stock as collateral. Opening a margin account involves signing two agreements, with an optional third: - credit agreement - hypothecation agreement - optional loan consent form

Unlawful representations concerning registrations

Misrepresentation is a prohibited practice. There are two ares covered: registration of the securities professional and registration of a security

Capacity of investments advisers

On rare occasions, an investment adviser might buy from or sell to an advisory client of a principal, or the adviser might put together a buyer and seller acting in the capacity of an agent.

Misrepresenting a securities professional's registration

Once you are registered all you can say is that you are a registered agent of ABC Broker-Dealer, or you are a registered investment adviser representative of the XYZ Investment Adviser. You cannot use the word 'approval' or any kind of approval language of your registration

New account agreement

Opening an account requires the completion of the new account agreement. It's basically a contract between the BD and the customer explaining the rights and obligations of both and the charges for the services that will be rendered

Supervisory actions to be taken by the broker-dealer for advertising

Prior to allowing associated persons to use social media for business purposes, a firm's policies and procedures must be provided for personnel training and education relating to the parameters of permitted use. These should be: - committed to writing and communicated firmwide - written in a clear and concise manner so as to eliminate confusion - define the responsibilities of all concerned parties - clearly describe the monitoring tools to be used by the firm

Brochure rule

Regulators have recommended that each of the adviser's advisory clients be given a written statement (brochure)prepared by the adviser that makes all appropriate disclosures. The disclosure statement should include the nature and extent of any adverse interest of the adviser, including the amount of compensation he would receive in connection with the account. The adviser should, but is not required to obtain a written acknowledgment from each of their clients of their receipt of the disclosure statement

Form ADV part 2B

Requires advisers to create brochure supplements containing information about certain supervised persons

Broker-dealer advertising

Should analyze all relevant facts and circumstances to determine whether a communication is a recommendation, and they should take the necessary steps to fulfill their suitability obligations

Material disciplinary disclosure in the brochure

Since the brochure is really the only way the potential or existing client can learn about the investment adviser, disclosure must be made to all current clients and to prospective clients regarding material disciplinary action. This includes any actions taken against the firm or management persons by a court or regulatory authority within the past 10 years. They are required to disclose: - state or regulatory proceedings in which the adviser or management persons was found to have violated rules or statutes that led to denial, suspension, or revocation of the firm's or individuals registration - court proceedings, such as a permanent or temporary injunction that is investment related - SRO proceedings in which the adviser or management caused the business to lose its registration, barred, suspended, expelled, or fined in excess of $2,500

Investment adviser advertising

The Model Rule states that publishing, circulating, or distributing any advertisement which does not comply with the IA Act of 1940 would be prohibited, they must indicate that there are limitations and difficulties inherent in using such programs

Misrepresenting a security's regisration

The front page of every prospectus is a statement called the disclaimer, which states that the security has not been approved or disapproved, and any representation to the contrary is a criminal offense. No use of the word 'approval' is allowed

Customer agreements

There are federal laws requiring BDs to obtain enough information about a client to minimize the possibility of money laundering or other illegal practices

Waivers

Waivers are not permitted

Receipt of the Options Account Agreement

Within 15 days after the customers account has been approved for options trading, the BD must obtain from the customer a written agreement that the customer is aware of and agrees to be bound by FINRA rules applicable to the trading of option contracts and that the customer has received a copy of the current ODD. They also agree to be bound by the rules of the Options Clearing Corporation

Form ADV part 1B

additional questions required by state securities authorities, federal covered advisers do not complete this part

Interactive content

has input from both the creator and the viewer

Static content

remains posted until changed by the person who established the account in the site

Margin account risk disclosure document

the BD must provide customers with a risk disclosure document. This information must also be provided to margin customers on an annual basis. The document discusses the risks associated with margin trading

Form ADV part 2A

the IAs brochure and tends to focus on customer related information such as: - compensation arrangements - types of clients, investments, and strategies - method of analysis - educational background - audited balance sheet

Performance based compensation for investment advisers

the USA prohibits certain performance fee arrangements contingent on capital gains or appreciation being part of the advisory contract. When computing the fee, both gains and losses must be considered