Review
Use of Material Inside Information
1. May not make recommendations on basis of any inside information until its made public 2. May not repeat inside information except to report to supervisor or compliance officer 3. No criminal liability unless transaction actually takes place
Public Communications - Sales of securities of premises of financial institutions
1. Must display: not FDIC insured, no bank guarantee, may lose value 2. Not required for radio broadcasts of 30 seconds or less
Wrap fee brochure
1. charge a fixed fee for portfolio management, advice, and execution 2. Wrap fee brochure based on Appendix 1 of Form ADV Part 2A 3. Must be provided in lieu of standard brochure and must disclose that wrap fee may cost more than purchasing services separately 4. Must identify whether any of its related persons is a portfolio manager in the wrap fee program and, if so, describe the associated conflicts
4 broad powers administrator has to enforce and administrator that act in his state are to:
1. make, amend, or rescind rules and orders and require the use of specific forms 2. conduct investigations and issue subpoenas 3. issue cease and desist orders and seek injunctions 4. deny, suspend, cancel, or revoke registrations and licenses
Agent also does not include
1. no place of business in a state 2. sell to existing customers not residents of the state 3. Client moves to another state, agent has 30 days to register
Financial requirements for IA's w/ discretionary authority
10K
Financial requirements for IA's taking custody
35K, if both 35k is ok
Uniform Prudent Investors Act of 1994 - What conduct demonstrates prudence?
5 step process encompasses all requirements: - analyze current position - design optimal investment portfolio structure - Formalize investment policy - implement investment policy - monitor and supervise
Penalties and Sanctions for Violation include:
1. Administrative proceedings (e.g. suspensions and revocations) - Administrator 2. Judicial injunctions - courts 3. Criminal and civil prosecutions - courts
Brochure rule
1. Brochure is Form ADV Part 2A (describes the firm) and Supplement, Form ADV Part 2B (personnel) *updated annually at time of updating amendment 2. Deliver to a client or prospective client the current brochure and supplement before or at the time of entry into an investment advisory contract with that client *if not delivered 48 hours in advance, client has 5 business days to rescind w/o penalty
Advertising
1. Can't de deceptive or misleading 2. BD's website is advertising 3. Highlighting or excerpting a prospectus
Unsuitable Recommendations
1. Failure to make reasonable inquiry into customers' financial situations, needs, and investment objectives 2. Recommending security transactions without reasonable grounds
Misleading of Untrue Statements
1. Inaccurate or fictitious market quotations 2. Incorrect statements of an issuer's earnings or projected earnings
If there is a change to any material information in the Form U4,
an amendment must be filed within 30 days
Not included in disclosure of fees (all of these belong in other documents)
- commission - mark ups and mark downs - advisory fees
IAR Exemptions
- de minimus - snowbird - if employed by a federal covered advisor (IAR must register in states only where IAR maintains a place of business)
Disclosure of Capacity by Investment Advisers - Acting as agent or principal with advisory client
- disclosure of which capacity - client consent required - prior to completion of transaction
Security
- efforts of third-party management - an investment of money - common enterprise - profit is anticipated
Authority of the administrator
- written findings of fact and conclusions of law - prior notice - opportunity for hearing
Typical fees include
-issuance of stock certificate - account transfer - wiring funds - margin interest - annual acct fee - safekeeping of certificates
Coordination required documentation
- copies of the latest prospectus - copies of any other documents filed with the SEC - copies of an article of incorporation, underwriting agreement - specimen of the security being offered
IAR Exclusions
- clerical and administrative personnel - providing impersonal investment advice - research analysts - if no advisory clients
Coordination
- A public offering at the state level that is coordinated with an SEC registration - Effective date is simultaneous with federal registration provided that no stop orders issued and no proceeding pending against issuer - 10 to 20 days - on file for 2 business days
Custody of funds and securities
- Adviser may not take custody if administrator prohibits custody or in absence of a rule, adviser fails to notify the administrator - segregation of client securities kept reasonably safe from destruction or loss - client funds are deposited to client only bank accounts - quarterly itemized statements to clients (FDIC insured bank) - Immediate notification of change of location of funds/ securities - annual independent surprise audit to verify funds/securities - Generally use a qualified custodian - FDIC insured bank, SEC and state registered bank
Federal Covered Adviser
- Advisers registered under the IA act of 1940 - Advisers meeting the required AUM - Advisers to registered investment companies - Advisers required to register in 15 or more states
Broker dealer does not include
- Agents - Issuers - Banks, savings institutions, and trust companies (bank holding companies or subsidiaries not excluded) - A PERSON that has no place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers - A PERSON that has no place of business in the state AND is licensed where the PERSON maintains its place of business AND sells only to existing clients who are not residents of the state. - Employee benefit plans (at least 1 million) - Insurance companies - Investment companies registered under the 1940 act
Agent does not include
- Exempt transaction under the Uniform Securities Act - Specific issuers: US (any state, political subdivision), Canada (any province and political subdivision), Bank organized under laws of US or state, Promissory note, bankers' acceptance, certain investment contracts - Employees of that issuer: no compensation is received
SEC Release IA-1092
- Financial Planner - Agent for Sports and Entertainment Talent - Pension consultants
IA does not include
- IAR - Banks, savings, institutions, or trust companies - BD or its agent with incidental advisory services - Publisher of a newspaper, column, newsletter
Investment Advisory Contract
- Initial & renewal must be in writing - Discloses services, fees, discretion - Can't waive compliance w/ laws - performance based compensation for IA
Soft-dollar compensation
- Non-cash compensation received from broker dealers in response to directed business - Allowable soft-dollar payments under Safe Harbor provision of Rule 28(e) of Securities Exchange Act of 1934 - Soft-dollar payments not protected by Section 28(e)
Types of exempt transactions
- Preorganization certificate: before incorporation, max. 10 subscribers - Private placement: restricted to 10 offers in 12 months (retail) - Issuer transactions: Transitions between issuer and underwriter - Financial institutions: sophisticated/professional investors - Nonissuer transactions: secondary market transactions - Fiduciary transactions: those by an executor, administrator, etc. - Liquidation of securities: pledged or collateral for a loan - Certain offers: existing employees and shareholders of the issuer (No commissions are paid)
Qualification
- Used for intrastate offerings - Any security is eligible - effective date is determined by administrator
A BD w/ an office in this state must register as an IA if it charges:
- a fee for selling investment research and additional fees in the form of commissions for the sale of securities - fees for investment research sold exclusively to institutions located in this state
Form ADV Part 3:
- a requirement for IA's to prepare a customer relationship survey - solely to IAs registered w/ SEC who deal w/ retail clients
Not a sale
- a stock dividend or stock split - stock received as a result of a merger or consolidation - pledge or loan - gift of non-assessable stock
Agency cross transaction - Representing both sides of a trade involving an advisory client
- cannot recommend the trade of both parties - written disclosure to client before transaction is complete - client executes a written consent prospectively authorizing transactions
The SEC's Marketing Rule for Investment Advisers requires that any advertisement containing an endorsement of the adviser's services must include disclosure of any compensation in the form of
- cash - directed brokerage - retainer fees
Exclusions from definition of Agent for Administrative Personnel
- clerical and administrative employees of a BD are generally not included - cold callers working for a BD would have to register as agents if they did any more than ask if clients wanted to receive information
An administrator can deny, suspend, or revoke the registration of securities professionals
- files false or incomplete application - willfully violates foreign banking or securities law - was convicted of a misdemeanor involving securities or any felony within the last 10 yrs - has been enjoined by any court or prohibited by any SRO within past 10 yrs from engaging in the securities business - is not qualified on the basis of training and knowledge (but not solely lack of experience)
An administrator can deny, suspend, or revoke the registration of a security
- files misleading or incompetent registration statement - is engaged in an offering that is fraudulent or made on unfair, unjust, or inequitable terms - charges offering fees that are excessive or unreasonable - has a control person (officer, director) convicted of a securities related crime - is subject to a court injunction - is engaged in a method of business that is illegal - is subject to an administrative stop order of any other state - fails to pay the filing fee
Security does not include
- fixed insurance or annuity contracts - retirement plans, IRA or 401(k) - Collectibles, commodities, commodity futures, condominiums used as personal residence, and currency - Nonnegotiable bank CD and confirmation of securities trades
Notice filing
- for federal covered securities (not a registration method) - Primarily used with investment companies registered under IA Act of 1940 - opportunity for the states to collect revenue
If there are material changes in the brochure since last annual updating amendment, deliver the following to each client annually with 120 days after the end of the fiscal yr:
- free current brochure; or - a summary of material changes to the brochure including an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure - may be delivered electronically - if no material changes, no brochure or summary
No final order may be issued w/o administrators:
- giving appropriate prior notice to the affected persons - granting an opportunity for a hearing - providing findings of fact and conclusions of law
Administrators can issue cease and desist orders
- in anticipation of violation w/ or w/o a prior hearing - bring an action in the appropriate court Note: courts issue injunctions
Exclusions from the Definition of Agent for Personnel Representing Issuers
- in certain exempt securities - exempt from registration (exempt transactions) - w/ existing employees, partners, or directors of the issuer, if no commission or other renumeration is paid or given directly or indirectly for soliciting any person in their state
Disclose personal trades if
- inconsistent with advice given to client - investment adviser benefits from client acting on recommendation
Federally imposed exemption from state securities registration
- listed on a recognized exchange or quoted on Nasdaq - Investment companies registered under ICA of 1940 - Transaction exempt under Securities Act of 1933: private placements under Regulation D & Municipals outside the state of issuance
Criminal penalties under the USA
- most commonly involving fraudulent activity - Fines up to $5,000, imprisonment for up to 3 yrs, or both - Statute of limitations/no indictment after 5 yrs from alleged violation - No person may be imprisoned if he proves no knowledge of rule or order
Option Accounts
- must be approved by supervisor w/ knowledge about options - account agreement must be received within 15 days of account approval
Updating Form ADV
- must be updated every yr by filing an annual updating amendment within 90 days after end of adviser's fiscal yr - verification of assets under management to determine if adviser is eligible to register w/ SEC or must remain state registered
IA does not include a person who has no place of business in the state and only gives advice to:
- other investment advisors - Broker-dealers - Financial institutions - Snowbirds - Employee benefit plans - at least 1 million - Maximum of 5 persons (retail clients) during a 12-month period
Disclosure of Investment Advisor Conflicts of Interest
- ownership in recommended securities - gifts or incentives associated with recommended product - that client may execute through other BDs - If recommending products of only the BD or insurance company with whom they are associated
Custody of funds and securities does not include:
- receipt of checks drawn by clients and made payable to unrelated third parties if forwarded to the third party within 3 business days of receipt - Having investment discretion over the clients account
Exempt securities under the USA
- short term notes/debt obligations - securities issued by certain issuers - financial institution securities - Insurance companies - Public utility companies and common carriers - charitable, religions, and nonprofit organizations
If offer is made by newspaper or magazine
- the state where it is published provided at least 1/3 of the circulation remains in the state - No state if more than 2/3 of the circulation is outside of the publishing state within a 12 month period
Disclose amount of compensation when
- the transaction is through a BD with whom the adviser is associated - compensation is received from an issuer - compensation is received for the sale of non-securities products
Disclosure of fees
- typically disclosed when a customer account is opened - must be up to date - Fee changes typically at least 30 days in advance - methods used include email, postal mail, or website
Disclose of conflicts of interest
- underwriter affiliated w/ BD, proprietary products - Incentives from program sponsors (trips, etc.) - Financial interest in recommended security (sister is CEO) - Favorable research report after bringing company public *any doubt of transparency disclose
Qualification required documentation
- used for intrastate offerings - relevant information on issuer as determined by Administrator - Application must contain basic information about the issuer and the issue - any security is eligible
Investment Advisor
A person who meets the "three prong test": is in the business of giving advice or analysis concerning securities and receives compensation directly or indirectly
Treasury bill is an exempt security, not an
exempt transaction
Broker
Agent/agency Broker Commission Disclose
Wash trade
An attempt to manipulate a securities price by creating an appearance in a security that really does not exist
Agent
An individual representing a broker-dealer or an issuer in attempting to sell securities or effecting sales of securities - Meets the definition? Must register - Dual registration OK if under common control or authorized by the administrator
State registered advisors
file both 1 and 2 w/ administrator of each state in which they are registering
IA Representative
Any partner, officer, or other individual employed by or associated with an investment adviser who participates in certain advisory services
Broker-Dealers
Any person, not an agent, who is in the business of effecting transactions in securities for accounts of others or its own account
AUM
Assets Under Management
Investment advisers register at the state or federal level,
never both
BD not obligated to disclose amount of commission on any offer to sell before transaction but is required
on trade confirmation
Jurisdiction under the USA specifically means the legal authority to regulate securities that take place in the state where it
originated, directed, and accepted
Criminal penalties under the USA- review (appeal)
person affected by Administrator's order may obtain review (appeal) by filing position in appropriate court within 60 days
A retail customer of an IA has at least $1.1 million under management with that advisor. That would make this individual a
qualified client
Rights of recovery
Client can recover if proven improper sale: - original purchase price - plus interest at a rate determined by administrator - minus income received while securities were held
A disclosure brochure is not required to be delivered if the client is a
registered investment company or if the advisory service is of an impersonal nature and costs less than $500
NSMIA result
states cannot require registration of securities, transactions, or investment advisors covered by or excluded by federal legislation
Dealer
Dealer Inventory Principal Mark up/Mark down *has to be disclosed
Purpose of NSMIA
Enact to eliminate conflict between federal and state securities laws
Ethical or unethical? Borrowing money from your customer, the XYZ National Bank.
Ethical
Ethical or unethical? Charging fees of $1,000 six or months in advance.
Ethical
Ethical or unethical? Disclosing commissions in addition to advisory fees earned as agent of BD through whom trades are placed.
Ethical
Ethical or unethical? Disclosing that the CEO of a company whose stock you are recommending is your sister.
Ethical
Ethical or unethical? Exercising discretion with oral authorization for 10 business days after the initial discretionary trade.
Ethical
Ethical or unethical? Splitting commissions with another agent of the BD without consent of the customer.
Ethical
NSMIA covers
Federal covered securities and federal covered investment advisors
Form BD
How BDs register. Register on a federal and state level
Form ADV
How IA's register
Administrator may summarily suspend pending registration
the hearing must be granted within 15 days of written request by the applicant
Brochure rule exemptions
IA does not have to deliver brochure if the advisory clients are limited to the investment companies and impersonal advice (subscriptions)
Solicitors must be registered as
IAR
Interactive content
Input from both the creator and the viewer
1. Gives advice 2. Regular part of business 3. For compensation
Investment Adviser 3 prong test
Form ADV Part 2A
Investment advisers brochure and tends to focus on customer related information
Secondary transaction
Investor to investor transactions
Wrap Fee Program
Is a program under which any client is charged a specified fee or fees, not based directly on transactions in the clients accounts, for investment advisory services and exclusion of client transactions
Person
Means any individual, or a legal person. Only 3 nonpersons: minors, deceased individuals, and individuals legally declared mentally incompetent
Guaranteed Security
Means guaranteed as to payment of principal, interest, or dividends, but not capital gains
Sole proprietor of a retirement planning business that exclusively provides advice on fixed-income annuity contracts
Need no register under any security laws
Record keeping requirements for IA's
No less than 5 yrs from the end of the fiscal yr during which the last entry was made on that record (w/ first 2 easily accessible)
An investment adviser need not register in a state if the adviser has
No place of business in the state and only advises 13 trust companies located in the state (trust companies don't count)
An agent would be acting illegally if he sold
Nonexempt securities registered in a neighboring state but not registered in his home state in a nonexempt transaction
National Securities Markets Improvement Act of 1996
Promotes efficiency in capital formation in the financial markets. Registered federally w/ SEC or just states.
Federal Covered Advisers $110 million and over assets under management
Regulatory authority: Federal (SEC)
Federal Covered Advisers $100 million up to $110 million assets under management
Regulatory authority: State or Federal
Static Content
Remains posted until changed by the person who established the account on the site
Institutional client is synonymous with
Retail client
Arbitrage
Simultaneous buying and selling of the same security in different markets to take advantage of different prices; it is not a form of market manipulation and is legal
Federal Covered Advisers under $100 million assets under management
State (Administrator)
Which of the following is responsible for the administration of the USA in a state?
The Administrator
Contumacy
The administrator may apply to the appropriate court in her state and ask for help. May enforce subpoenas issued by Administrators in other states on the same basis as if the alleged offense took place in the Administrators state
Not wishing to confuse a client, an agent omits certain details about a new issue during an offer of the security. This omission would probably be considered a fraudulent act if
The information was material and was necessary to make other statements not misleading
Primary transaction
The issuer will receive proceeds from the transaction
Which of the following must be furnished to the client no later than with the opening of a margin account?
The risk disclosure document
Civil liabilities: statute of limitations
The sooner of 3 yrs from the date of alleged violation or 2yrs from the date of discovery of the violation *claims survives death of either party *client who proves loss due to a violation can sue against professional's surety bond
Form ADV Part 1A
contains information about the IA
Churning Customer Accounts
Transactions excessive in size or frequency in view of customer resources, objectives, or character of the account
Ethical or unethical? Disclosing details of a client's personal account to a spouse without the client's consent.
Unethical
Ethical or unethical? Entering into an advisory contract without disclosing conflicts of interest which could impair unbiased and objective advice.
Unethical
Ethical or unethical? Failing to make a bona fide public offering of all of the securities allotted to a broker-dealer during distribution of an IPO.
Unethical
Ethical or unethical? Helping your former college roommate raise funds for a new commercial enterprise by selling stock in the company directly and not through the BD.
Unethical
Ethical or unethical? Indicating, in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of the USA or of the investment Advisers Act of 1940 as long as agreed to by the client.
Unethical
Ethical or unethical? Sharing in the profits and losses in a customer's account without the written consent of the BD.
Unethical
A registration statement has been filed using the process known as qualification. Under normal circumstances, this registration will become effective
When so ordered by the Administrator
Rights of rescission
amount paid back to the buyer must include original purchase price and interest rate determined by administrator. Buyer has 30 days to respond. No response = forfeiting right to pursue a lawsuit at a later date. Rejecting = able to take the case to court
Issuer
a person who issues or proposes to issue a security
An advisor who compensates a non-affiliated third party promoter for edorsing the services of the IA must have
a written agreement with that promoter if the compensation will exceed $1,000 over a 12 month period
Form ADV Part 1B
additional ?'s required by state securities authorities
In order for a surety bond to meet the requirements of the Uniform Securities Act, it must provide that
any customer who can prove a violation is entitled to collect against the bond
An agent with a broker-dealer making a recommendation to a client would have to disclose
any incentives offered by the issuer to the agent
Form ADV 2B
brochure supplement, must contain certain info about "advisory personnel on whom clients rely for investment advice " 1. cover page 2. Ed background and business experience 3. Disciplinary info 4. Other business accounts 5. Additional compensation 6. Supervision
If an offer is made by a television
the state where the camera is located has jurisdiction
If an offer is made by radio
the state where the microphone is located has jurisdiction
Form U4
used for agents and IARs to apply for registration