STC Notes: Federal Regulations Governing Investment Advisers

surety bonding requirement could be waived by the Administrator if....

1. IA does not have custody of clients asset 2. has a min net worth of 35K

A registered investment adviser is normally required to post a surety bond to satisfy the Uniform Securities Act requirements. Under which conditions could this requirement be waived?

If an investment adviser does not maintain custody of client assets and has a minimum net worth of $35,000, the surety bonding requirement could be waived by the Administrator

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that any fee arrangement based on capital gains or portfolio appreciation may only be used if which of the following disclosures is made in writing

That the arrangement may cause the adviser to recommend strategies that encourage a client to take greater-than-normal risks

According to NASAA's Statement of Policy on Unethical Business Practices, contract may not be assigned without the consent of the client

True

If an IA acts as a qualified custodian and holds customer cash and securities, the assets must be subject to an unannounced annual audit by a CPA. At the completion of the audit, the CPA (not the IA) must file Form ADV-E.

True

Investment advisers may only charge performance-based fees to clients who are qualified. A qualified client is one who has at least $1 million of assets under management with the adviser or has a net worth of at least $2 million.

True

The USA does not specifically prohibit monthly performance fees. However, the advisory contract must disclose the periods that will be used to measure investment performance throughout the term of the contract.

True

The rules for advisers having custody of client assets are independent of the rules for discretion. The client accounts for which the adviser maintains custody may be either discretionary or nondiscretionary.

True

Under the Investment Advisers Act of 1940, performance fees are generally prohibited. Exceptions include contracts for clients who have at least $1,000,000 under management with the adviser or who have a net worth in excess of $2,000,000. Performance-based fees may also be charged to a client who is an executive, a partner, or a knowledgeable employee of the adviser. The amount of funds under management is not a factor for these clients. The type of account (individual, joint, or IRA) is also not a factor

True

When an investment adviser has access to customer funds and securities, custody exists. Investment advisers would not normally pay personal bills such as rent, credit cards, or cable television on behalf of their clients. Written authorization is required for this type of activity and usually is referred to as full discretionary authority. Custody arrangements are covered by securities regulations

True

investment advisory firm needs to register with SEC? Various circumstances

Under the Investment Advisers Act of 1940, advisers that manage assets of $100 million or more generally register with the SEC and are referred to as federal covered advisers. IAs are not required to register with both the state and federal regulators and there is no one-year business requirement. The SEC has created a buffer for investment advisers with assets under management (AUM) between $90 million and $110 million and clarifies with whom they should be registered. An adviser may register with the SEC once it reaches AUM of $100 million. However, an adviser must register with the SEC if it has AUM of $110 million or more. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided it has AUM of at least $90 million. This means that a mid-sized adviser that is currently registered with the SEC may remain registered with the SEC if it has AUM of at least $90 million. If an adviser's AUM falls below $90 million, it must instead register at the state level.

Must Register with SEC

adviser s AUM reaches $110 million, firms that provide advice to an investment company firms that provide advisory service in 15 or more states,