Ch. 4 - State and Federal Regulations Governing IA's and IARs

IAR Reps do the following actions: (4)

1. Provides investment advice

2. Manages accounts

3. Solicits advisory services

4. Manages those who do the above^

Who does an IAR register with?

state admin

under NSMIA, what type of advisor is not considered an investment advisor?

Federal covered

when are investment advisors exempt from state registration? (1) & (2)

1. has no office in a state

and

1. all clients there are financial institutions

or

2. has no more than 5 non-institutional clients in the state within 12 months

what is an IA who has $110m+ in AUM?

Federal covered advisor

who does a federal covered advisor register with?

SEC

who does an IA register with if they have between $100m and $110m in AUM?

either SEC or state admin

what do you call an IA that has between $25m and $100m AUM, and who do they register with?

mid-sized advisor. Register with the state admin

under $25m AUM? and who do they register with?

Small advisor. Register with state admin

If IA is registered with the SEC and assets under management falls under $90m, what happens?

they must withdraw SEC registration and register with the state

What form do they file?

form ADV-W

When are federally covered advisors (FCA) subject to notice filing?

states in which it has an office

when would a pension consultant need to register with the SEC?

if the plan they advise on has at least $200m

when do advisors to private (hedge) funds need to register with the SEC?

if the fund has assets of $150m or more

for advisors that have clients in a bunch of different states, how many states is the magic # before they have to register with the SEC

15 or more states

When is state registration required for NON federal covered IA's and IARs? (2)

1. If IA has an office in state

OR

2. More than 5 non-institutional clients

When is state registration required for FEDERAL covered IA's and IARs?

never for IA's, only if they have an office in the state for IARs

person who directly/indirectly solicits any client for, or refers and client to, an IA

Solicitor

If a solicitor is affiliated (a partner, officer, director, or employee) with the IA, the IA must…

disclose the relationship to clients

For third-party (non-affiliated) solicitors (CPAs, attorneys), what (2) things are required to receive a cash referral fee from an IA?

1. Advisor must be registered

2. Written contract must exist between solicitor and advisors outlining activity and compensation

What does the IA act of 1940 say about solicitors and registration?

they're not required to register, but state admin might require them to

Information required on form ADV part 1:

General info about the firm

• IA name, # of employees, nature of business

• Name, address, education, 10 year business history of each partner

• How firm provides custody of assets

• If business involves advisory services

• Number of discretionary and non-discretionary accounts

Changes to form ADV must be made within….

30 days

Information required on ADV part 2:

Info for clients and conflicts of interest

When is a balance sheet required on ADV part 2? (2)

1. They provide custody for accounts

2. They collect prepaid fees of more than $1200 6+ months in advance

The Brochure rule requires a disclosure document with conflicts of interest be delivered by when? (2)

1. 48 hours prior to signing the contract

OR

1. At the time the contract is signed (if the client is allowed to cancel within 5 business days with no penalty)

What are the 2 exclusions for the brochure rule?

1. Contracts with registered investment company

2. Impersonal advisory services (less than $500 per year)

What (2) things are prohibited on an advisory contract?

1. Exculpatory (hedge) Provisions - releases or limits one party's liability, puts a cap on how much client can sue for

2. Performance fees - asking for a % of profit

What is the one exclusion for performance fees?

qualified clients

Requirements to be a qualified client (2)

 

1. $1.4m+ under management

OR

2. $2.7m+ net worth

What is the proper way for IA's to receive compensation for non-qualified clients?

AUM - % of total value of account on average

When can a client be assigned to another advisor?

only with client consent

An IA is considered to have custody of client assets if they have (2):

1. Full discretion over acct with separate BD

2. Check-writing privileges

An IA does not have custody if (2)

1. inadvertently held assets and returned them to clients within 3 business days

OR

2.forwards third part checks within 3 business days

(4) things an IA must do if they do have custody

1. Notify state admin (in writing)

2. Appoint a qualified custodian to hold assets in separate account

3. Notify clients of the name of custodian and how they hold the securities

4. Ensure clients receive quarterly statements

If the IA sends the quarterly statements directly, what's required?

a surprise annual audit by an independent CPA

What must the CPA do after reporting the audit results to the state admin?

provide form ADV-E within 120 days of audit completion

Who determines the minimum financial requirement for an IA?

 state admin where the IA's home office is

what is the minimum financial requirement for an IA that provides custody AND discretion?

$35,000 net capital

what is the minimum financial requirement for an IA that only provides discretion?

$10,000 net capital

if an IA has an office in NY (home office) and one in CA, if the minimum financial requirements differ, which one supercedes?

NY, because it’s the home office

If an IA is deficient, they must (2)

1. Submit statement of financial condition within one business day

2. Obtain a surety bond to make up the deficiency

How long must an IA maintain books, records, and correspondence?

5 years

When must an IA file advertising/sales literature/communication with the state admin?

always, unless it's an exempt security

What type of documents can an IA provide disclosure with? (2)

1. Their own brochure

2. Form ADV-W part 2

Records that must be maintained by an IA:

• Checkbooks

• Bank statements

• Written agreements

• Ledgers

• Written communications

• POAs

• Advertising sent to 2 or more persons

• Political contributions

• Written complaints