Series 66 CH 4-6

Form ADV Part 1

requires the disclosure of information about an adviser’ s business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the adviser or its employees

additional adv part 1 information of interest to regulators

investment adviser’s name, number of employees and form of organization

name address disciplinary history, and business affiliation for the past 10 years of each partner officer

education and business backgroud of certain employees of the IA

how the IA will maintain custody of client assets

number and size of discretionary and non discretionary accounts

statement as to if principal business will consist of investment supervisory services

Form ADV Part 2

series of items that contain disclosure requirements for an investment adviser brochure as well as other required supplement

Must be written in plain english

The Brochure Rule

all registered IA need to provide clients with a disclosure to describe their overall business as well as acutal or potential conflicts of interest

state registered IA entering into a contract with a client must deliver its brochure when

not less than 48 hours prior to signing

or

at the time of signing but the client then has the ability to terminate the contract without penalty within five business day after entering into the contract

how often must the adviser give an updated brochure

annual basis and must take place within 120 day of end of adviser fiscal year

a brochure must include the following

adviser name, address, website, and the date of the brochure

statement that registration doesn’t imply a certain level of skill or expertise

description of the advisory firm and other info

fee and compensation, types of clients, methods of analysis used and investment strats

disciplinary info

adviser code of ethics

soft dollar arrangements

whether the firm has been subject to bankruptcy during the last 10 years

financial info

Who needs Form ADV Part 2A appendix 1

adviser that sponsor a wrap fee program

wrap fee program

arrangement between broker dealers and both affiliated and unaffiliated IA. discretionary account management, trade execution and clearing, custodial service all in one fee

Form ADV Part 2B brochure Supplement

similar to a resume- describes the education, qualifications, and disciplinary history of all supervised person who directly interact with clients or have discretionary authoriy over accounts

balance sheet audited is required if

adviser

has custody of client funds or securities

has full discretionary authority over a clients account

solicits prepayment of advisory fees

federal registed more tha 1200 in six moth or more advance

only 500 for state

Form ADV Part 2- Schedule G

Not requried but it contains instructions related to the manner in which an audited balance sheet should be prepared

Form ADV A

only filed when an investment adviser is applying for its intial registration about direct owners

Form ADV E

when adviser has custody of client funds and securities must file by an independent public accountant following the audit of the adviser books and submit within 120 day of the audit

Form ADV W

full or partial withdrawal of registration must file

can be full or partial withdrawl

Full withdrawl

firm withdrawing from all jurisdictions and will no longer be operating

Partial withdrawal

withdrawing registration in some but not all jurisdictions

Form ADV NR

if has general partners or agents who are non-residents of the US appointing SEC as agent for receipt of legal papers

Form ADV H

unable to file forms electronically

updates and amendments of ADV

at least once per year by filing annual updating amendment within 90 days of end of fiscal year

and

must file summary of the changes to advisory clients within 120 days of their fiscal year end

If any material change occurs when do you have to update brochure

promptly 30 days

limited discretion

allows an adviser to enter order to buy or sell securities but not remove money or securities from the account

Full discretion

gives an adviser all of the abilities acquired through limited discretion with the addition of check writing privileges and authority to remove other assets

Oral discretion

allows IA to buy or sell on clients behalf and is effective for 10 business days

Custody

legal responsibility over someone assets

If an advisor has custody what must it do

provide immediate written notification to the admin using form ADV

use a qualified custodian to hold the funds and securities in a separate account

written notification to all clients of the custodian name address and manner in which funds maintained

send quarterly account statements to clients that indicate the amount of fund a list of each secuity held in custody record of transaction and any fees

minimum financial requirements if custody of clients assets

35000

min for limited dicretionary authority

10000

min prepaid fees of more than 500 six months in advance

positive net worth at all times

how many year must adviser disclose to their clients material, legal, or disciplinary actions

preceding 10 years

what are investment adviser recordkeeping requirements

keep record of account correspondence and books for a period of 5 years with 2 of those years being accessible

exclusions from the definition of state investment adviser

IARs

Bank, savings institutions, and trust companies

LATE lawyers accountants teachers engineers

or any other person admin decides

broker dealers and their agents

publishers

federal covered advisers

Broker dealers and their agents exclusion for IA

as ong as the investment advice being provided is within the scope of the broker dealer business and there no special compensation for he advice

Publisher IA exemptions

for bona fide newspapers

may not contain promotional material and the advice given must be impersonal

Federal Covered adviser exemption IA

For adviser that are registered with the sec or regulated under the investment adviser act of 1940

State requirements for federal covered advisers

only required to register with the sec states may require them to fill out a notice filling (pay a fee and file same documents given to SEC) not a registration

Exemptions from state registration

first: the adviser has no oplace of business in the state and its only clients are institutional investors

second adviser has no place of business in the state and the adviser doesn’t direct communications to more than five non institutional clients in the state within 12 consecutive months

De minimis exemption

no place of business in the state and no direct communication with more than 5 non institutional clients within 12 months

how do IARs register with the state

file an application

file a consent to service of process

pay a filing fee

IARs exemptions for state (De minimus)

have no place of business and don’t direct solicitations to more than 5 non instiutional clients who are residents of the state within 12 consecutive months

continuing education for IARs

1. siz credit hours of regulator and ethics content from an authorized provider. of the six hours three credit hours must cover ethics

2. six credit hours of products and practice content form an authorized provider

home state requriments if registered in multiple states

how and with who are federal covered adviser required to register

are only required to register with the sec at the federal level

who are federal covered advisers

investment adviser with 110 mill or more AUM

Adviser to registered investment companies mutual funds

adviser that provide advisory service in 15 or more states

operate almost exclusively thorugh an interactive website

pensionconsultants that provide advice to emplyee benfit plan with assets of at least 200 mil

newly formed adviser that believe they will becom eligible in 120 days

SEC Release IA 1092

list of all person that provide investment advice as an integral prat of their business as investment advisers

A in abc

advice, reports, analyses

• may provide advice about an investment instrumet instrument may not be defined as a security

B- ABC

The Business Standard

holds itself out as an investment adviser

receives any separate or additional compensation representing a definable charge for providing advice

provides recommendations anaylses or reports about specific securities or specific categories of securities on anything other than reate incidental isolated instances

C- ABC

Compensation

any economic beneit

what are some additional examples of investment advisers

Financial planners, Pension consultants, Sports and entertainment reps (agents)

Exclusion from the IA definition

Banks and bank holding companies, professional providing incidental advice (lawyers accountants.teachers, and engineers)

Exclusions from the IA defintion

Broker dealers and RR, publishers, us government securities advisers, credit rating agencies, family offices

The local exemption

available to an investment adviser whose cliets are all residents of the state in which the adviser maintains its principal office and it doesn’t provide advice on exchange traded securities

The insurance exemption

available to an investment adviser whose only clients are insurance companies

Foregin private adviser exemption

1 has no place of business in the us

2 has fewer the 15 total clients and investors in the us in private funds

3 aggregate aum less than 25 mill

4 doesnt hold itself out to public in us

Exempt Reporting Adviser (ERAs)

not required to register as an adviser with sec or state regulator but must still notice file with state admin

Who can use the Exempt reporting adviser

Private Fund adviser exemption and the Ventur capital fund adviser exemption

qualified clients

1.1 million under managment with adviser or 2.2 mill net worth

SEC may suspend IA registratin for up to 12 months

false ore misleading report

convited of misdemeanor invlolving securities

violated federal securities law or aided

subject to an order of the commssion barring

When are federally covered adviser NOT required to provide a brochure

registered investment companies or clients whose contract is limited to impersonal advisory services for which the client pays less than 500 per year

What is the wrap fee program brochure

amount of wrap fee, nature of fee, how portfolio manager are chosen, client info that communicated and restrictions

who are not included in the wrap fee program brochure

Mutual fund asset allocation programs

managed account programs

Fulcrum Fee

A type of performance based fee with two parts- base fee plus performance based fee

what type of clients may be charged performance based fees

registered investment companies

qualified clients

not us residents

individuals who are assoiated with IA

section 3c1 or 3c7 hedge funds

Bunching orders

aggregate order to obtain volume discount ( must be allocated fairly no favortism allowed)

Business continuity plan

written plan that identifies

data backup and recover

financial and operational assestments

alt comm for customer and firm

alt com firm and employees

alt physical location

comms with regulator

Client solicitation

adviser is registered

cash exceeding 1000 in year is disclosed

disclosure of any material conflics

how long does a person have to appeal orders

written petition within 60 days

violations and penalties

max fine of 10000 or prison for 5 years or both

Fiduciary

someone who acts for and on behalf of another person. trust and confidence

must operate in the best intrest of the client

The prudent man rule

observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of the capital to be invested.

Uniform Prudent Investor Act (UPIA)

theory of investing that was formulated by the modern protfolio theory

criteria for prudent investing

• the standard of prudence applies to the entire protfolio, rather than on an investment by investment

• a central consideration for a fiduciary is the trade off between risk and reward

• categorical restriction on specific types of investments have been removed theorefor any investment may be appropriate as part of a portfolio designed to chieve specific goals

• The recognition of the explicit need for diversification in a protfolio

All fiduciaries should do what

Pay close attention to their clients goals

determine their clients risk tolerance

develop an appropraiate investment policy

Focus on the management of risk, not the complete avoidance of risk

diversify appropriately

SECs views of fiduciary duty

Being loyal to clients

having a reasonable and onbjective basis for the investment advice being provided

ensuring that investment advice is suitable based on the client’s objectives, needs, and circumstance

obtainting the best execution for its clients securities transactions when in a position to direct brokerage transactions

soft dollars

commission rebates that money manager receive for channeling some or all of their trade through certain brokerage firms

Section 28 (e) of the securities exchange act of 1934

soft dollar arrangements are acceptable if they satisfy

1. must be exercising investment disccretin over the accounts of others

2. Broker dealer must provide the adviser with services that assist the adviser in making investment decisions for client accounts

3. must determine that the value of these services is reasonable in relation to the commissions being charged by the brokerage firm

soft dollar dos

research reports, discussions with research analysts, software for analyzing prts, market and economic data , coverage of attendance fees for seminar

soft dollar don’t

payment for ads and marketing, travel expense reimbursement, overhead and admin, employee salries, accounting and pfoessional licensing fees, hardware, office space

Suitability obligations

KYC Know your customer

KYP Know your product

how do you satsify know your customer

1. make a reasonable inquiry into the customer’s background

2. provide only suitable recommendations

duty to inquire

should make a reasonable check into the clients financial situation invesmetne xperience and investment obbjectives

Duty to give only suitable advice

once duty to inquire has been completed client must give tailor advice based off cilent situation and adhere to Know Your Product

fraud

intentional deception carried out for personal gain or to damage another person

USA states hat unlawful for any person to indirect offer,sale or purchase to

1. employ any device scheme or artifice to defraud

2. make an untrue statement of material fact or omit material facts

3. engage in any act, practice or course of business that operates as a fraud or deceit

Claiming that a security has been approved by a regulator

solicts the sale of an IPO saying it is approved by sec or admin is not allowed. IPO is registered not approved by

Stating that a security is about to be listed without justification

saying that a stock is about to be listed on the nasdaq can be seen as misleading if you have no material facts to back up this statment

Using inflatd language

saying things like stock x is definently going to rise is a violation cause you have no idea what it will do

Providing inaccuarate market quotations

stock x is down a lot today so the agent provides the previous days price as it was higher

Providing False Info

saying an account is no load but fails to mention the back end fees.

Exepction: if the 12-b1 fee is less than .25% you can consider it no load

Spreading Rumors in order to effect trnscations

you are not allow to try to gernerate hype top pump up a stock that you own

Selling Dividends

This is when an adviser recommend the stock due to the dividend that will be issued. However when the dividend is issued the stock price decrease by the same amount so the client end up paying more for the stock then if they where to wait till after the dividen was issued

Inside information rules

an agent that has acess to insider information is not allow to make recommendation on said info

Churning

agent engaging in excessive trading in a clients account usually for the purpose of generating commissions

Reverse Churning

Locking a client that doesn’t trade often into a wrap account to recieve a larger commision

Brrowing and lending rules

For BDs and IA it is generally not allowed

BDs if written authorization from bother parties then it is ok

IAs if client is a broker dealer , affiliate of IA, or in the business of loaning funds

Note: IA are not allowed to borrow money or lend money to immediate family member

sharing in the profits or losses in a clients account

only allowed if a sharing arrangement is approved in writing by the customer and the agent’s broker dealer (common for spouse of IA)

Guaranteeing the client a Profit

can not promise returns or reimburse bad recommendation losses

Failing to Notify a supervisor of a written client complaint

may be written or email and sent to supervisor

Market Manipulation types

pegging and capping

frontrunning

painting the tape

trading ahead

Pegging

Involves buying large amounts of securities to keep the price from falling

Capping

selling securities in order to keep the price from rising