Series 65 Unit 10 Regulation of investment adviser representatives

representative

always represent someone else

in this case, these are individuals who represent an investment advisory firm

as defined in the law, an investment adviser representative (IAR) is any partner, officer, director (or an individual occupying a similar status or performing similar functions), or other individual employed by or associated with an investment adviser and is registered or required to be registered under the Uniform Securities Act

IARs register only with the states

an individual meets the definition of an IAR by doing any of the following:

makes any recommendations or otherwise renders advice regarding securities

manages accounts or portfolios of clients

determines which recommendation or advice regarding securities should be given

solicits, offers, or negotiates for the sale of or sells investment advisory services

supervises employees who perform any of the foregoing

employees of investment advisory firms are not considered investment adviser representatives if:

they perform only clerical or incidental duties

do not regularly interact with clients

or provide impersonal investment advice that does not cater to specific individual needs

Practice Question

Which of the following individuals would be defined as an investment adviser representative?

A. Melinda, one of the firm's research analysts who has no contact with public clients

B. Johnny, an employee who makes cold calls soliciting for new advisory clients

C. Mel, who prepares client account statements

D. Jane, who is the firm's VP of HR services

Answer: B. One of the functions that makes a supervised person an IAR is soliciting for new business. Research personnel are not considered IARs unless they have client relationships. Mel's job is purely clerical and, even though Jane is a vice president, the HR department is far removed from anything to do with giving investment advice.

de minimis exemption:

no state registration required if an IAR has no place of business in the state and has had no more than five retail clients in the past 12 months

snowbird exemption:

applies to IARs who temporarily move to another state

federal covered adviser exemption:

IARs need to register only in states where they have a place of business

place of business definition:

any office or location where an IAR regularly provides advisory services or communicates with clients

Practice Question

Under the Uniform Securities Act, which of the following is not required to register as an investment adviser representative?

A. A director of a state-registered investment advisory firm who determines specific recommendations for clients

B. An associate in an SEC-registered investment advisory firm who has a place of business in the state and manages the account of only one individual client

C. A clerk employed by a state-registered investment advisory firm

D. A vice president of a state-registered investment advisory firm who supervises employees who solicit clients for the firm

Answer: C. Clerical and ministerial (administrative) personnel are specifically excluded from the definition of investment adviser representative. Specifically included in the definition are directors, officers, partners, associates, and employees of state-registered advisers who carry out investment advisory or solicitation functions or who supervise those functions. Also included in the definition are persons who perform similar functions for SEC-registered advisers and who have a place of business in the state. Once there is a place of business in the state, the de minimis rule no longer applies.

Practice Question

Which of the following individuals would be required to register with the Administrator of a state?

A. Walter, who represents a state-registered adviser, has no place of business in the state, and only serves existing clients who vacation in the state.

B. May, who represents a covered adviser, has no place of business in the state and has 38 clients who reside in the state.

C. Aliza, who represents a state-registered adviser, has no place of business in the state and had fewer than 6 individual clients who were residents of the state during the past 12 months.

D. Joe, who represents a covered adviser, has a place of business in the state, and had 4 retail clients who were residents of the state during the past 12 months.

Answer: D. Once an IAR maintains a place of business in a state, they must register in that state regardless of the number of clients—such is the case with Joe. Walter need not register because he qualifies for the snowbird exemption. May qualifies for the exemption as an IAR of a federal covered investment adviser. She is only required to register in those states where she maintains a place of business. Aliza qualifies for the de minimis exemption (fewer than 6 is the same as 5 or fewer). Important note: Even if May's employer had a place of business in the state, she would not have to register because she, the IAR, doesn't. Of course, her employer, being federal covered, doesn't register in any states.

form U4 filing

required for registration through FINRA's CRD

form U4 asks for detailed personal information

disclose past disciplinary events, including any felony or securities-related misdemeanor charges or convictions

included in form US, allowing legal documents to be served

used in certain cases, but rarely tested

other IARs must file an amended Form U4 for registration in the new state

must pass Series 65

automatic registration:

partners, officers, or directors of an IA are automatically registered as IARs when the IA registers

function over title:

registration depends on the function performed, not just the title

new state registration:

when an IA registers in a new state, partners, officers, or directors listed in the Form ADV are automatically registered as IARs

Practice Question

When an investment adviser registers in a new state, which of the following are automatically registered as IARs?

A. Any employee who is functioning as an IAR in at least one state

B. Officers, partners, and directors of the firm who are functioning as IARs

C. Clerical employees stuffing the envelopes with research reports

D. Any employee who will be soliciting clients for the adviser

Answer: B. As we just stated, the "automatic registration" provision applies to those officers, partners, and directors of the IA who are already IARs in at least one state.

IAR termination process

state-registered adviser - the firm notifies the administrator if an IAR terminates

federal covered adviser - the IAR notifies the administrator if they terminate

prompt notification - all notifications must be made promptly

IAR moving firms - if an IAR moves to another firm the new firm must file a new form U4 for the IAR

Practice Question

Zack is an IAR with Unicorn Investment Advisers (UIA), an investment adviser registered in State W. Zack has accepted an employment offer from Elite Research Associates (ERA), an investment adviser also registered in State W. What are the notification requirements to the State W Administrator?

A. Zack is the only person who notifies the Administrator.

B. UIA is the only person who notifies the Administrator.

C. ERA is the only person who notifies the Administrator.

D. UIA and ERA notify the Administrator.

Answer: D. This is bit sneaky. We've just told you to remember the "I" in IAR resembles the number "1," so only one person must notify. We've also stated that, if the IAR represents a state-registered investment adviser, it is the IA who does the notification. In this specific instance, because two IA firms are involved, each of them must notify the Administrator: UIA that Zack is no longer under their control and ERA that Zack now is. This is just an example of how every rule has an exception.

requirements of IARs

no net worth or bonding requirement

no ongoing recordkeeping requirements

Practice Question

When an investment adviser representative's permanent residence address changes, updates must be made to the information on file with the regulatory bodies. The proper procedure to be followed is

A. file a Form U4 within 30 days.

B. file a Form U4 within 45 days.

C. file a Form U5 within 30 days.

D. file a Form U5 within 45 days.

Answer: A. Amendments are made to Form U4 and must be filed within 30 days. Form U5 is for terminations.