65- Sec. 2 Regulation of Investment Advisers and Representatives
Recordkeeping requirements of IARs
If there are any material changes, Form U4 must be updated within 30 days
ADV Amendments for Material Change
In addition to updating annually, the IA must amend the Form ADV by filing additional amendments promptly if information relating to the company changes
IAR Termination Procedures
-If state registered, FIRM must notify Administrator -If federal covered, IAR must notify Administrator "I"AR = Number 1 TERMINATION IS ACCOMPLISHED BY FILING U-5
Under the Uniform Securities Act, any partner, officer, or director of a registered investment adviser is an investment adviser representative if a function of the position involves I. offering advice concerning securities II. managing client accounts or portfolios III. determining securities recommendations for representatives to disseminate IV. supervising personnel engaged in advisory activities but not directly dealing with the public
All
Financial Requirements for Registration Substantial Prepayment of Fees
-Advisers accepting substantial prepayments of fees must have a positive net worth -Advisers maintaining custody of customer funds must have net worth of at least $35k -Advisers maintaining discretion of customer funds must have net worth of at least $10k -Adviser must notify
Exclusions to the definition of investment adviser
-Banks, savings institutions, trust companies -Any lawyer, teacher, accountat, or engineer whose advice is solely incidental to the practice of his profession -Any broker dealer who receives no special compensation -Publisher of any newspaper, column, magazine, that does not give investment advice to the specific situation of each client -Investment adviser representatives
Exemption from the registration requirements under the federal law
-Intrastate Advisers -Advisers to insurance companies -Private Fund Advisers
Exceptions under Dodd-Frank
-Pension consultants with at least $200 million -Mid size advisers between $100-$110 million who elect to register with SEC rather than the state's -Investment advisers affiliated with an adviser that is already registered with the SEC -Investment advisers expected to be eligible for SEC registration within 120 days -multistate investment advisers -Internet advisers
Registration Requirements of IARs
-Registration is accomplished by filing a Form U4 -Automatic registration for officers and partners when they are when their company expands into another state
Form ADV Organization
-application for registration as an investment adviser PART 1: (to SEC) -location of principal office, -form of business organization, -methods of business, -maintaining custody of customer assets or exercising discretion -control persons (1A) (25%+ voting, officer/partner) -indirect owners (1B) (State covered advisors only) -disciplinary history (DRP's) PART 2A (to clients) - Narrative Brochure: -compensation arrangements -types of clients -types of investments -types of strategies -methods of analysis -educational and business background or those who render advice PART 2B (to clients) - Brochure Supplements: -information regarding certain supervised persons **2A and 2B are delivered to the client**
Exempted Private Fund Advisers must have:
-private funds with less than $150 million in assets under management -certain non-US advisers with no place of business in the US that have less than $25 million assets under management (less than 15 clients) -Advisers solely to venture capital funds
If a natural person files an initial application for state registration as an investment adviser representative on October 1, the registration will most likely expire A) December 31 of that year B) on the anniversary date of the following year C) on a date set by the Administrator of that state D) the registration does not expire until the person resigns, retires, or is expelled by the Administrator
A
Sally is registered as an agent with ABC Securities Co., a major brokerage house with offices in most states. ABC has recently introduced a fee-based asset management program and has asked Sally to devote one hour per day soliciting her existing clients for this program. Under the USA, Sally would A) be required to obtain registration as a registered investment adviser representative B) only be permitted to solicit those clients who currently have discretionary accounts with ABC C) not be required to obtain any additional licensing beyond her agent's registration D) be required to obtain registration as a registered investment adviser
A
When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office, A) only the investment adviser representative must notify the Administrator promptly B) only the terminating investment adviser must notify the Administrator C) the investment adviser representative and the employing adviser must notify the Administrator promptly D) the investment adviser representative and the federal covered advisers must notify the Administrator promptly
A A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the state securities Administrator that you are working there, as well as when you terminate.
Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) State licensing fee B) Renewal notice to the SEC C) Consent to service of process D) Form U4
A All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.
Under the Uniform Securities Act, all of the following are required to be registered as investment adviser representatives EXCEPT A) ABD Advisers, Inc. B) a vice president of ABD Advisers, Inc., who serves on the firm's advisory committee C) an individual who furnishes investment advice to clients of ABD Advisers, Inc. D) an employee who solicits new customers for ABD Advisers, Inc.
A An individual or a firm may be registered as an investment adviser, but only an individual can be an investment adviser representative.
Q: An adviser has been responsible for keeping the firm's Form ADV updated yearly. He announces his immediate retirement. This would require: A. Prompt filing of an amended ADV with the SEC indicating the change in contact person B. Prompt filing of an ADV-W with the SEC indicating the change of contact person C. Filing of an amended ADV within 90 days of the end of the adviser's fiscal year giving notice of the change of contact person D. Filing of the ADV-W within 90 days of the end of the adviser's fiscal year giving notice to the change of contact person
A Because he has been responsible for updating the ADV, it is logical to assume that he is the contact person for info regarding this form. His sudden retirement would mean that the firm would have to appoint a new contact person. **This is a change that the SEC deems necessary to promptly amend the Form ADV. **Amendments to the ADV may not be done using Form ADV-W (for withdrawal only)
Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in
A and D Only needs to register as an IAR in the states where he has a place of business since he is a COVERED (FEDERAL) adviser
Intrastate Advisers
Advisers whose clients are residents of the state in which the adviser's principal office is in and who do not give advice dealing with securities listed on any national exchange are exempt
If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is TRUE? A. Investment Adviser must notify the Administrator B. Representative must notify the Administrator C. Both the representative and the investment adviser must notify the Administrator. D. No notice to the Administrator is required.
B
Q: Which individual would be defined as an IAR? A. Melinda, one of the firm's research analysts, who has no contact with public clients B. Johnny, an employee who makes cold calls soliciting for new advisory clients C. Mel, who prepares client account statements D. Jane, who is the firms' VP of HR services
B
Some registered investment advisers are federal covered, while others register on a state by state basis. In the case of a state-registered investment adviser having its only office in Oregon with no offices in any other state, the authority of the office of the Administrator would include: A) the Idaho Administrator requiring registration of IARs who make telephone calls to residents of Idaho B) requiring IARs to pass a qualification exam C) requiring the IA to renew its consent to service of process when paying the annual fee D) requiring each IAR to provide a statement of financial condition
B
Which of the following regarding the registration of investment advisers and their representatives is TRUE? A) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator. B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. C) An investment adviser representative, terminated his employment with ABC Advisers and, 6 months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event. D) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator.
B
KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Claire has 10 clients who reside in Ohio; IAR Sean has 6 clients who live in Kentucky; and IAR Felicia has 3 clients who are Georgia residents. In addition, Felicia conducts a quarterly presentation at the Augusta, Georgia National Golf Club where she discusses current market developments. The seminar is restricted to club members only. Which of the following is CORRECT? A) Because all 3 are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs. B) Felicia must register in Georgia. C) Claire must register in Ohio. D) Sean must register in Kentucky.
B Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state even when the number of clients they have in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to club members only—they are still members of the general public).
Investment Advisers Act of 1940 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. Accountant B. Economist C. Electric engineer D. College professor teaching a course on economics
B. Economist Act specifically excludes accountants, lawyers, any professional engineers and teachers. It does not exclude economists
Failure to maintain minimum net worth
By close of business on next business day, adviser must notify Administrator (T+1). After sending notice, must file financial report with Administrator by close of business next business day (T+2).
Q: XYZ Advisers has principal office in state A. XYZ maintains custody of customer securities and they wish to open an office in state B. They have been informed that the Administrator of state B requires all investment advisers to have a net worth of $65k. Which is correct? A. XYZ will have to meet state B's requirements if it wishes to register there B. They can register is state B only if they cease taking custody C. As long as XYZ meets the net worth requirements of state A, it can register with any other state D. In lieu of meeting State B's requirements, a surety bond may be posted
C
Under the Uniform Securities Act, which of the following qualifies as an investment adviser representative? A) An agent who offers incidental advice on securities as part of his sales commissions B) An individual who renders fee-based advice on precious metals C) A solicitor for an investment advisory firm who is paid a fee for his services D) An employee, although highly skilled in evaluating securities, solely performs administrative or clerical functions for an investment adviser
C If the goal is obtaining clients for the investment adviser, a solicitor is considered an investment adviser representative under the Uniform Securities Act. An employee who performs clerical or administrative functions only is not an investment adviser representative. Precious metals are not securities, and a person advising on them is not considered an IAR.
An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the broker-dealer would have to be registered as an investment adviser B) the agent would now come under a greater fiduciary responsibility C) the agent would be defined as an investment adviser D) the agent would be defined as an investment adviser representative
C Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.
Which of the following IA's would be permitted to use the term investment counsel? A. Financial planner offering wide range of services to his clients, including tax planning, estate planning, and insurance planning, as well as investment advice B. Professional providing a market timing service with an annual subscription fee of $495 (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 in model portfolios D. All
C running model protfolios for clients would meet both requirements of the term investment counsel 2 criteria -IA's principal business must be giving investment advice (eliminates financial planner's whose investment advice is only part of what they do) -Provide continuous and regular investment supervisory services
Exclusions from the definition of IARs
Certain employees of investment advisory firms are excluded from the term IAR provided their activities are confined to clerical or administrative duties -Individual is also not an IAR if the person does not on a regular basis solicit, meet with, or otherwise communicate with clients of the investment adviser or provides only impersonal investment advice
Gibraltar Advisers is a federal covered investment adviser with offices in 13 states. However, Nancy, a Gibraltar employee who solicits accounts for Gibraltar out of an office in one of those states, is required to complete the NASAA examination and register at the state level. Why might this occur? A) All employees of Gibraltar must register at both the state and federal level. B) The state securities Department is required to register all individuals serving professionally in the investment industry. C) The state securities Administrator has stricter standards than federal standards and requires investment associates to register at the state level. D) The Uniform Securities Act requires investment adviser representatives employed by federal covered advisers, including solicitors, to register at the state level, regardless of whether the firm is required to register at the state level, as long as the IAR has a place of business in the state.
D
Q: Zach is an IAR with firm A, an investment adviser registered with the state. Zach has accepted a job with Firm B that is also registered with the same state. What are the notification requirements to the state Administrator? A. Zach is the only person who notifies the Administrator B. Firm A is the only person to notify the administrator C. Firm B is the only person to notify the administrator D. Both Firm A & B notify the Administrator
D
Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in A) States X and Y B) States Y and Z C) States X, Y, and Z D) State Y
D An IAR representing a federal covered investment adviser need only register in the state or states in which she (the IAR) has a place of business. There is nothing in this question to suggest that Brenda has a place of business anywhere other than in State Y, where her branch office is located.
According to the Investment Advisers Act of 1940, which of the following is always a natural person? A) The city of Chicago B) An investment adviser C) A broker-dealer D) An investment adviser representative
D IAR is always a person. A broker-dealer and an IA can sometimes be a firm
Which of the following would have to register with the Administrator of the state? A. Walter, who represents a state-registered adviser, has no place of business in the state, and only serves existing clients who vacation to the state B. May, who represents a covered adviser, has no place of business in the state and has 38 clients who reside in the state C. Aliza, represents a state-registered adviser, has no place of business in the state and had fewer than 6 individual clients who were residents of the state during the last 12 months D. Joe, who represents a covered adviser, has a place of business in the state, and had 4 retail clients who were residents of the state during the past 12 months
D Once an IAR maintains a place of business in the state, they must register with the state regardless of the amount of clients -Walter qualifies for the snowbird exemption -May qualifies for the exemption as an IAR of a federal covered investment adviser. She is only required to register in those states where she maintains a place of business. -Aliza qualifies for the de minimis exemption (5 or fewer)
An investment adviser hires 2 individuals to solicit new customers for the firm's wealth management service. Under the USA, A. each of them would have to register as an investment adviser B. soliciting is generally prohibited C. they may begin soliciting as soon as they have passed their licensing examinations D. registration as investment adviser representatives is required
D The definition of investment adviser representative includes individuals who solicit for the firm's advisory business.
Because of failing economic conditions, KAPCO Advisers, an adviser with slightly less than $120 million in assets under management, lays off a registered investment adviser representative. In this case, who would notify the state Administrator of the termination? A) Both KAPCO and the IAR B) The IAR's new employer C) KAPCO Advisers D) The IAR
D With more than $110 million in assets under management, KAPCO is a federal covered adviser. In that case, the IAR is the one who notifies the Administrator of being terminated.
Exemptions from Registration as an IAR
De minimis Exemption: (state) -If individual represents a state-registered adviser and do not maintain a place of business in the state and, during the preceding 12 month period has had no more than 5 retail clients, registration with the state is not required Snowbird Exemption (state) -A person licensed in the state in which he maintains a place of business and effects securities solely with existing customers who are not residents of the state in which the transaction takes place. Section 203 of 1940 Act (federal) -IAR registration is required only in those states where that individual has a place of business
SEC Release IA-1092
Defines the activities that would subject a person to the Investment Act of 1940 Definition of IA: - Provides investment advice, reports, or analyses with respect to securities - Is in the business of providing advice or analyses - Receives compensation, directly or indirectly, for these services
Substantial Prepayment of Fees
Federal Covered Advisers: -Considered substantial if the IA collects prepayments of more than $1,200 per client, six months or more in advance Under USA: -More than $500, six months or more in advance
Q: Which of the following investment advisers are exempt from registration under the Investment Advisers Act of 1940? I. Adviser whose only clients are insurance companies II. Adviser who maintains offices in only one state, advises only residents of that state, and gives advice relating only to tax-exempt municipal bonds III. An adviser whose only clients are banks
I and II
Which of the following is (are) NOT exempt from registration as an investment adviser representative in the state in which they conduct business? I. A Certified Financial Planner who prepares financial plans and whose only compensation is commissions II. An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients III. A broker-dealer with extensive business in the state IV. A mutual fund company with offices and clients in the state
I and II
Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is (are) TRUE? I. The investment adviser must notify the Administrator whenever a representative is terminated. II. An investment adviser is not required to notify the Administrator when a representative begins employment. III. The registration of a representative is effective only as long as the individual is employed by a registered investment adviser.
I and III
Which of the following would be excluded from the definition of investment adviser under the investment advisers act of 1940? I. Bank offering advice thru its trust department II. Geologist giving advice on the potential prospects of an oil and gas limited partnership III. Person whose only clients are individuals and whose only advice deals with securities which are direct obligations of the US gov
I and III A geologist is not excluded because the law only specifies 4 professional exclusions: accountants, attorneys, engineers, and teachers
The Investment Advisers Act of 1940 would permit an ADV to be filed by a: I. Corporation II. Partnership III. Sole Proprietorship IV. Unincorporated Association
I, II, III, IV Any entity meeting the definition of a person would be eligible to file for registration as an investment adviser on Form ADV
Which of the following persons are required to register in a particular state? I. An investment adviser who manages client accounts in excess of $100 million in value II. An investment adviser who manages client accounts and has less than $25 million in total assets under management III. An adviser to investment companies registered under the Investment Company Act of 1940 IV. An investment adviser representative with a place of business in the state
II and IV
Form ADV-W
If an adviser no longer desires to engage in the business, application to withdraw registration is accomplished by filing Form ADV-W -Becomes effective 60 days after filing for SEC -30 days after filing with the state
Form ADV
Investment Advisers use this form to: -Register with the SEC -Register with one or more state securities authorities -Amend those registrations
Federal Covered Investment Advisers
Investment advisers registered with the SEC Those required to be registered with the SEC b/c they meet the minimum threshold of assets under management ($110 million) -Not required to register under the state if they are federal covered advisers
Dodd-Frank and Assets Under Management 3 Thresholds
Large Investment Advisers -Advisers with $100 million AUM -More than $110 million AUM= SEC registration is mandatory Small Investment Advisers -AUM under $25 million -Registration with SEC is prohibited, registration with state is required --Not unless they are required to register in 15+ states then SEC registration would be required Mid-Size Advisers -AUM between $25 million and $100 million -Register with state not SEC
Q: A registered investment adviser becomes insolvent. Is this a valid reason for the SEC to cancel registration under the Investment Advisers Act of 1940?
No Can be a reason under the Uniform Securities Act
Financial requirements for IARs
No financial requirements (no net worth or bond requirements) -Insolvency (bankruptcy) is a cause for denial or revocation of registration
Cancellation of Registration
SEC has the power to cancel the registration of any adviser upon finding that the adviser is no longer in existence, is not engaged in business as an investment adviser, or does not meet the necessary dollar standards to remain SEC registered
Private Fund definition
Security that is not owned by more than 100 people and is not making a public offer for its securities
Investment Counsel
Term that may be used by investment advisers providing continuous supervisory management services only (not impersonal advice). 2 criteria -IA's principal business must be giving investment advice (eliminates financial planner's whose investment advice is only part of what they do) -Provide continuous and regular investment supervisory services
Registration requirements under the investment advisers act of 1940
The act requires an investment adviser to be registered, unless an exemption is available
USA exempts advisers from registering with a state if:
The adviser does not have a place of business in the state but are registered in another state, provided their clients in the non registered stare 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 -Any others that the Administrator exempts by rule or order
principal office and place of business
The firm's executive office from which the firm's officers, partners, or managers direct, control, and coordinate the activities of the firm. -"home office"
Investment Adviser Representative
any person who is associated with an investment adviser (state IA) that; makes recommendations, manages accounts, determines which recommendations be given, solicits the sale of advisory services, supervises employees who perform these functions
