Series 65 Unit 7
What is the difference between discretionary and custodial control of an account?
A discretionary account allows the IA or BD to make transactions without having to ask for specific approval. A custodial account is one in which IAs hold funds directly or through a proxy. Discretionary control means the financial representative can decide (1) which security, (2) the number of shares to trade, and (3) whether it should be traded.
What is a fulcrum fee?
A fulcrum fee is performance-based compensation that scales if returns exceed or lag a benchmark i.e. for each 5% the portfolio beats or lags the benchmark the advisory fee hikes or drops by 0.1.
A client with a net worth of $5 million is compensating an investment adviser with a performance-based fee. According to the Investment Advisers Act of 1940, this arrangement must be based on capital gains minus capital losses, including both realized and unrealized gains and losses This arrangement is not permitted because the client has not met the minimum invested assets requirements a period of no less than 6 months the S&P 500 index performance
A. A performance-based fee must be based on capital gains minus capital losses, include both realized and unrealized gains and losses and must reflect a time period of no less than 12 months. This client is well above the minimum net worth requirements of more than $2.1 million. The rule requires that the performance be measured against a recognized benchmark but does not specify one.
Which of the following may an agent determine without written discretionary authority? The time or price at which to enter an order Which security should be purchased How many shares of a particular security should be purchased Whether to buy or sell a particular security
A. An agent must have written discretionary authority to determine which security, what action, and how many shares to purchase or sell; time and price decisions alone do not require discretionary authority.
Which of the following activities by a registered agent of a broker-dealer would constitute a prohibited practice under the Uniform Securities Act? Personally raising capital, without written authorization from the broker-dealer, for a new high-tech venture being run by the agent's former college roommate Informing a customer of a negative research report recently published on a stock that represents the client's largest holding Refusing to lend money to clients Failing to disclose a nonmaterial fact
A. By attempting to effect securities sales by circumventing his broker-dealer, the agent has committed the prohibited practice of a private securities transaction, referred to as selling away. Failure to disclose a material fact would be prohibited, but nonmaterial facts do not carry that burden. One would expect an agent to keep the client informed regarding news about securities held in the account, and agents would be expected to refuse to make loans to customers because that is a prohibited practice.
An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of KAPCO common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the KAPCO stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted improperly; the order should have been placed on Thursday improperly; the order cannot be placed without prior written authorization allowing discretion properly because the agent saved the client money properly because the agent used discretion as to price and time
A. In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day—those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received.
It would not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's commissions, profits, or other compensation from the purchase or sale of securities with any person also registered as an agent for the same broker-dealer with any person also registered as an agent for a broker-dealer under direct or indirect common control as long as the arrangement is in writing as long as the client has approved of the sharing arrangement I and II I, II, III, and IV I, II, and III III and IV
A. NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing, and the customer has no say so in this matter.
Under the rules of the Securities Exchange Act of 1934, trading in a client's account would be considered excessive if the agent receives a commission from trading trading is conducted without considering the client's investment objectives trading is inappropriate in view of a client's resources II and III I only I, II, and III II only
A. Trading is considered excessive if the agent induces a client to trade securities in transactions that are excessive in size or frequency in view of the financial resources, investment objectives, and character of the client's account.
An investment adviser registered with the state wishes to take custody of a client's funds or securities. Which of the following statements best describes NASAA rules regarding notification to the Administrator? The adviser must supply prompt notification to the Administrator by immediately updating its Form ADV The adviser must notify the Administrator within 90 days of the end of the fiscal year by updating its Form ADV If the adviser will be using a qualified custodian, no notification is necessary Prompt notification to the Administrator is made by the independent accounting firm performing the adviser's annual surprise audit
A. Using a qualified custodian still constitutes a form of custody and requires notification to the Administrator
An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with clients who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent is guilty of selling away is required to register as a broker-dealer performed a matched trade as permitted under the rules engaged in an agency cross transaction
A. When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization.
Under what circumstances can an IA pay a referral fee to a lawyer, accountant, or issuance agent?
Actually, IAs can pay referrals to these professionals with disclosure but without registration so long as the referrals are nominal fees and not based on the size of the account being referred.
What is an exculpatory clause?
An exculpatory clause is a "hedge" clause in an advisory contract that can often involve terms of the IA suspending their fiduciary responsibility. These types of clauses void the validity of the entire contract.
What advisory contract feature voids the contract?
Any type of hedge or exculpatory clause that establishes criteria for an IA shirking their fiduciary responsibility
Alice is a financial planner who is properly registered as an investment adviser and occasionally meets with clients with negative cash flow and substantial indebtedness. Alice refers such clients to Norman, a bankruptcy attorney. Likewise, when Norman encounters clients who need help managing their assets, he refers them to Alice. This activity is permissible without disclosure if it occurs on an incidental basis permissible if the referral arrangement is disclosed to clients permissible without restriction Prohibited
B. Referrals to other professionals may be made as long as the reciprocal nature of the arrangement is disclosed.
An IA runs an ad in the business section of the local newspaper. The ad describes the firm's investment model and indicates that it has outperformed the overall market by 800% over the past 10 years, and, therefore, they guarantee that their clients will more than keep pace with inflation. At the bottom of the ad in smaller print is the following statement, "Results are not guaranteed. Past performance is indicative of future results. These results are not normal and cannot be expected to be repeated." This is an example of... A properly worded disclaimer An improper hedge clause A violation of an investment adviser's fiduciary responsibility A wrap fee account
B. The IA makes an irresponsible guarantee of future market returns and then covers it with a hedge clause.
Which of the following statements regarding cash referral fees to solicitors are correct under the Investment Advisers Act of 1940? If the solicitation involves anything other than impersonal advisory services, disclosure must be made to the client regarding any affiliation between the adviser and the solicitor. The agreement must be writing The solicitor must not be subject to a statutory disqualification The adviser's principal business activity must be rendering of investment advice. A and B A, B, and C C and D A, B, C, and D
B. The agreement must be (1) in writing, (2) detail the arrangement between the third party and IA, (3) take care that no party is subject to a statutory disqualification, (4) follow a script that is the responsibility of the IA, and (5) deliver the solicitor's brochure.
Under the Securities Exchange Act of 1934, which of the following statements regarding reports required to be filed with the SEC is TRUE? Persons who become the beneficial owner of more than 5% of a security registered under the Securities Exchange Act of 1934 must file a report within 2 days. Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly. Persons who become the beneficial owner of more than 2% of a security registered under the Securities Exchange Act of 1934 must file a report within 5 days. Institutional investment managers who exercise discretion over accounts valued at $100 million or more need not file reports if all their clients are insurance companies.
B. The requirement for reports of beneficial ownership is that anyone who becomes the owner of more than 5% of a security registered under the Securities Exchange Act of 1934 must file a report within 10 days; therefore, neither 2 days nor 5 days is correct. The requirement for institutional investment managers is that they must file reports quarterly (13F) if they exercise discretion over accounts valued at $100 million or more of 13(f) securities. Whether the institutional investment manager's clients are insurance companies is not relevant.
Which of the following documents must an existing customer sign to establish a discretionary account? New account application Trading authorization Customer's agreement Options agreement
B. To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements.
What is a common soft dollar arrangement that IAs arrange?
BDs and IAs can use customer compensation to fund research which may or may not help influence those same customers to buy into the securities research they indirectly paid for. However, BDs and IAs must disclose such arrangements under section 28(e) of SEC code.
Under the Investment Advisers Act of 1940, cash referral fees may be paid by an investment adviser to a promoter for soliciting for new accounts under no circumstances. only if the referring party is registered as an investment adviser representative. when a written agreement providing certain disclosures has been entered into between the investment adviser and the third party if the compensation exceeds $1,000 over a 12-month period. with no restrictions.
C. A cash referral fee may be paid under the terms of a written agreement spelling out the terms and conditions of the arrangement and making the required disclosures. That written agreement is required only when the compensation exceeds the de minimis amount.
Over which of the following would the investment adviser representative have discretionary authority? An account in which a trustee has power of attorney over another individual's account An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the investment adviser representative An account in which the investment adviser representative chooses portfolio securities on behalf of the client An account in which a customer has power of attorney over another individual's account
C. An order is discretionary when it is placed for a customer's account by the member firm or its representative, without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time and price is not considered to be an exercise of discretion.
ABC Advisers, Inc., a federal covered investment adviser is a wholly owned subsidiary of ABC Corporation, a holding company that also owns ABC Securities, a full-service broker-dealer that is a member of the New York Stock Exchange and FINRA. One of the clients of ABC Advisers calls his IAR to explain that he has just received a margin call in his ABC Securities account. Under these circumstances, it would NOT be prohibited for the IAR to use securities owned in the advisory account to obtain a loan for this client because ABC Advisers, Inc. is in the money lending business if the client agreed to repay the loan within 30 days because the 2 firms are affiliated when the client has furnished ABC Advisers, Inc., with a proper discretionary trading authorization
C. In most cases, the only money lenders on the exam will be banks and broker-dealers. If an advisory client receives a margin call from activity in his brokerage account, securities owned in the advisory account may be used by the affiliated broker-dealer to meet the margin deficiency.
When must an investment adviser disclose personal securities transactions to a client? If the adviser makes trades in his own account that are inconsistent with advice given to a client If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients Investment advisers must disclose all personal transactions to clients II only III only I and II I only
C. SEC Release 1A-1092 requires certain disclosures under the antifraud provisions of the Investment Advisers Act. They must disclose an affiliation with a securities broker-dealer if the advisory service is independent of the broker-dealer, if the adviser only recommends products offered by the broker-dealer, if the adviser will be compensated by the broker-dealer for the transaction, or if the products recommended by the adviser are available from other broker-dealers. The adviser must also disclose personal securities transactions if they are designed to take advantage of the market impact caused by recommendations to clients or if personal transactions are inconsistent with the advice given to clients. Advisers must disclose the amount of compensation received from transactions through any broker-dealer, from any issuer, and from sales of nonsecurities products. They are not required to disclose all personal transactions.
Wealth Creation Advisers (WCA) is a federal covered investment adviser specializing in consulting to pension plans. WCA's principal office is located in State L. The governor of State L is running for re-election. If WCA were to make a $350 contribution to the campaign, under the SEC's pay-to-play rule, WCA could be subject to disciplinary action WCA would be prohibited from rendering any advisory services to any agency of State L for 2 years WCA would be prohibited from receiving compensation for advisory services rendered to any agency of State L for 2 years WCA's contribution is within the de minimis limitation because their principal office is located in State L
C. The SEC's pay-to-play rule prohibits investment advisers from receiving compensation for advisory services to a government entity (any agency, authority, or instrumentality of a state or political subdivision), for 2 years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. Please note that the advisory relationship can continue, just without any compensation. The de minimis exemption of $350 applies to an individual, as long as that person is eligible to vote for the candidate ($150 if he is not), but it never applies to the firm.
Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, discretionary authorization is not required when the IAR is going to determine which assets will be sold and purchased to meet a specific asset allocation mix the number of shares when a client has named the stock to be purchased for the account the price at which at specified security will be sold the specific stock to be purchased when the client has indicated the industry group
C. Time or price are NOT considered discretion. Selecting the asset, the amount or the action is.
Under the NASAA Model Custody Rules, an IA is deemed to have custody of customer funds or securities when... Securities inadvertently received are returned to the customer within 3 business days of receipt Checks made payable to the IA are returned to the customer within 3 business days of receipt Checks made payable to an unrelated third party are returned to the customer within 3 business days of receipt Checks made payable to an unrelated third party are forwarded to that third party within 3 business days of receipt
C. Under the NASAA Model Custody Rule, whenever an investment adviser receives customer checks made payable to an unrelated third party, failure to forward, not return, the check to that third party within 3 business days of receipt is considered to be maintaining custody.
A fiduciary, acting in accordance with the UPIA, would choose investments on the basis of all of the following EXCEPT general economic conditions other resources of the beneficiaries transaction costs needs for liquidity, regularity of income, and preservation or appreciation of capital
C. Under the Uniform Prudent Investor Act, transaction costs are not a primary factor in a trustee's determination of which investments to choose for the trust. They may be a factor in determining where to execute the transactions. The key for the prudent investor is to use skill and caution examining all of the factors involved to meet the stated objectives.
Exceptional Results Advisers (ERA) has $15 billion in AUM and does not accept new clients who are unable to place at least $25 million under ERA's management. From time to time, ERA's clients ask for recommendations for friends or family who don't meet ERA's minimum investment level. In most cases, ERA recommends these prospects to Rational Investment Planning (RIP), a state-registered investment adviser, and receives a referral fee for each person who becomes a client of RIP. The practice would only be acceptable if the fee was nominal and not based on the size of the account. would only be acceptable if the fee was used to reduce the referring client's advisory fees. is acceptable because the referral fee is being paid to a registered investment adviser. is prohibited under any circumstance.
C. When a referral fee is paid to another registered firm, there is no problem. The only other requirement is that disclosure of this relationship and any additional cost possibly resulting from the referral fee must be made to each client who signs up with RIP as a result of the referral.
What do IAs at the federal level need to do if they are paying out cash to solicitors in a nonexempted fashion? State level?
Case referrals must be made in one of the 3 circumstances: (1) a referral for impersonal advisory services, (2) when an IAR pays a referral to another person affiliated with the same IA they work for, and (3) when an IA pays a cash referral to a third party solicitor. In the case of paying a referral to a third party solicitor, the IA needs to make a special disclosure that any script used by the third party is the responsibility of the IA. AT THE STATE LEVEL, third-party solicitors MUST register with the IA as an IAR.
What are the 3 criteria for an IA to pay cash to business solicitors at the federal level? What circumstances?
Cash referrals cannot be (1) conducted by a nonexempt unregistered IA, (2) by anyone subject to a statutory disqualification, and/or (3) cash referral must be paid based on a written agreement including the third party and IA paying them out.
How does the SEC view direct fee deduction?
Custodial IAs that directly deduct compensation fees from client accounts must (1) get written authorization, (2) provide notice to the client each time fees are deducted, and (3) notify the Administrator via a Form ADV update that proper safeguards are in place.
What rules must custodians of customer funds follow, 4 things?
Custodians must (1) maintain client accounts under separate names and account information, (2) notify the client of any qualified custodian third party that is handling the account, (3) send account statements to the client quarterly, and (4) notify the Administrator immediately (via a Form ADV update) that you have custody of the client's account.
What is the definition of custody? What is a qualified custodian?
Custody means holding, even through a proxy, client securities. Custody also includes holding checks made out to the client beyond 3 days. The 3 day also applies to checks made out by the client and meant for a third party, but held by the IA for longer than 3 days. A qualified custodian is a bank or savings institution that has FDIC insurance or an equivalent foreign institution.
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 the ability of the customer to make a one-time wire to a foreign bank account owned by a family member if the customer owns the underlying security on which the call option is sold that the account is in the name of an institutional customer the ability of the customer to move funds out of the account on multiple occasions
D. 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.
Which of the following phrases best describes a prudent investor? The custodian for a minor under the Uniform Transfers to Minors Act An investment adviser representative (IAR) handling a discretionary account A person in a fiduciary capacity who invests in a prudent manner A trustee who invests with reasonable care, skill, and caution
D. Although all of these may have a fiduciary responsibility, the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution.
The duties and responsibilities of a fiduciary are spelled out in the Investment Advisers Act of 1940 the Uniform Gift to Minors Act the Summary Plan Document of the DOL the Uniform Prudent Investors Act of 1994
D. The UPIA is the legal guide for fiduciaries, who must act with skill and caution in the best interest of their clients.
All of the following practices violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT effecting a transaction with no change in beneficial ownership recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer hypothecating customer securities held in margin accounts
D. The normal method of financing customer margin accounts is by hypothecating their securities so there is nothing dishonest or unethical happening. According to the North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, agents may not recommend securities without reasonable basis. Even then, when the same security is recommended to a majority of the firm or agent's clients, it is likely going to be the prohibited practice of blanket recommendations. Effecting transactions with no change in beneficial ownership is a form of market manipulation in conflict with NASAA's Statement of Policy. Conducting securities transactions not reflected on the books of the employing broker-dealer and without the employing broker-dealer's prior written authorization is known as selling away, considered by NASAA to be an unethical practice.
Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases except checks made out to CIA are deposited into the client's account within 3 business days CIA's advisory contract calls for the automatic deduction of advisory fees CIA has a power of attorney granting authority to withdraw funds from the custodian checks made out to 3rd parties are forwarded within 3 business days
D. When a check made payable to a third party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser for deposit to the client's account, it must be returned to the sender within 3 business days or it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody. Please note that a payment to the investment adviser for advisory fees is not considered custody (it is the adviser's money now).
Under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, in which of the following situations has an agent acted properly in placing an order for a client's account? The client agrees with an agent's recommendation of a particular security and the amount that should be purchased. The client then tells the agent to proceed with the purchase when the timing seems best. Because the market as a whole is dropping, the agent waits two weeks until the economy looks brighter before making the purchase. The agent does not have written discretionary authority. The agent obtains written discretionary authority to manage the client's account. The agent then proceeds to restructure the entire account without further consultation with the client. The agent obtains an existing client's oral agreement that shares of XYZ fund are a good buy right now. The client gives the agent oral authority to determine how much of his account should be allocated to XYZ shares. Without written discretionary authority, the agent places an order. A client supplies the agent with written trading authorization. The client proceeds to request the agent to purchase $7,000 of any ADR that would be appropriate for the account. The agent goes ahead and purchases $7,000 of a Taiwanese computer chip company's ADRs. I and III II and III I and IV II and IV
D. Written authority is necessary to restructure an account without client consultation. This is one of the benefits of a discretionary account; the flexibility it gives to the agent. Once the client has supplied the written authorization, the agent has the ability to select any or all of the asset, the action, or the amount. When the client says, "Buy $7,000 worth of an appropriate stock," the amount and the action have already been determined; all the agent has to do is select the asset. Authority to use discretion may be given orally if the discretion relates only to the price or the time at which an order regarding a specified amount of a particular security will be executed, but time and price discretion is only good for that day. Oral authority is not sufficient when the agent is using discretion to determine the amount of a security to be purchased.
What is directed brokerage?
Direct brokerage relates to IAs recommending their clients use a specific brokerage over another. IAs need to disclose any conflicts of interest or relationships related to brokerages they direct clients toward. INTERESTINGLY, IAs need to make a different disclosure if they allow clients to pick a brokerage without any advice. They would be required to inform clients that they may not be able to secure the most favorable trade prices depending on the brokerage the client chooses.
What type of hedge clauses are permissible?
Hedge clauses cautioning that events like war, strikes, natural disasters, or other events can affect portfolio returns are typically acceptable to Administrators.
What 10-day grace period is associated with IAs?
IAs can exercise discretionary control of client accounts within 10 days of the initial oral discretionary agreement without obtaining the client's express written discretionary control. After that, the IA must obtain written consent.
Give an example of promising to provide services that you know you can't provide.
IAs telling prospecting clients that they are willing to give advice on how attorneys should write a will would be an example of an IA giving advice beyond their scope of practice.
What should be returned to the client within 3 business days?
If the IA is not a custodian, stock certificates, securities, and funds should be returned to the client or forwarded to the qualified custodian within 3 days.
What is item 12 of Part 2A of the Form ADV?
Item 12 of Part 2A included information about brokerage selection choices, specifically whether brokerage products, research, and services lead to choosing their services.
What is safe harbor?
Safe harbor simply refers to a professional steering clear of violating rules and regulations.
What is Section 28(e)?
Section 28(e) concerns BDs right to direct client transactions such that they may not be receiving the lowest commission trades so long as the value of the total transaction is reasonable in relation to the price paid. Essentially, the research quality of a brokerage can make up for a greater commission.
How does the Securities Exchange Act of 1934 define brokerage and research services?
Soft dollar activity in the Securities Exchange Act of 1934 includes (1) Research reports analyzing the performance of a particular company or stock, (2) financial newsletters with appropriate specificity, (3) quantitative analytical software, (4) seminars or conferences with appropriate content, and (5) effecting and clearing securities trades.
What are the 3 exemptions to performance-based compensation in advisory contracts?
The 3 exemptions apply to IAs working with qualified clients. Qualified clients are (1) a person with 1.1 million or greater in assets under management with the IA, (2) a person with a net worth IN EXCESS OF 2.2 million excluding the value of their primary residence, and/or (3) a person who is an officer or director of the IA servicing their account or an employee IAR who has worked with the firm for at least 12 months.
What is the Form ADV-E?
The Form ADV-E is for IAs who are custodians of client accounts. It details what accounts they have custody over and is an agreement that the IA will submit to surprise inspection.
What is a solicitor's brochure?
The solicitor's brochure outlines details of any third-party solicitors receiving cash referral payments from the IA. It contains (1) contact information, (2) the nature of the relationship with the IA, and (3) the terms of the compensation structure of the arrangement.
What is time or price discretion? What is the time element?
Time or price discretion is an exclusion for IAs and BDs in which they do not need to have discretionary control over an account to determine WHEN and AT WHAT PRICE to buy or sell securities they were orally instructed to buy or sell. For example, "Buy 100 shares of ABCD and get the best price you can."
What is trade aggregation and allocation?
Trade allocation and aggregation relates to bunching volume trades in order to save on transaction costs. This often occurs when an IA is establishing the same position across multiple clients' accounts.
What three IA brokerage practices might warrant special disclosures?
Trade allocation and aggregation, directed brokerage, and BDs and IAs sharing client referrals.
True or False: The SEC does not prohibit cash referrals
True, however, cash referrals cannot be (1) conducted by a nonexempt unregistered IA, (2) by anyone subject to statutory disqualification, and/or (3) cash referral must be paid based on a written agreement including the third party and IA paying them out.
True or False: IAs with custody over customers' accounts must maintain a $35,000 net worth
True, unless IAs have custody only for the purpose of deducting advisory fees or IAs have custody only for the purpose of advising pooled investment vehicles.
In what circumstance do IAs need to make a special disclosure regarding the potential for their compensation to be performance related? What are the parts of that disclosure?
Under the USA, IAs that draft a contract in which they will share a portion of the capital appreciation of the fund must send a special disclosure to clients. The disclose should include (1) that the fee arrangement could incentivize the IA to take greater risks than without the performance incentive, (2) a disclaimer that the IA can be compensated based on unrealized gains, (3) disclosure regarding the exact period of performance to be measured and how the performance calculator works, and (4) the nature of the index performance will be benchmarked against.
When are IAs subject to a surprise examination by a public accountant?
When they are custodians not utilizing a qualified custodian.
