"Investment Adviser" person/firm compensated for engaging in business of (directly or indirectly) advising others on securities or the advisability of investing (or) who issues analysis/reports concerning securities - AN
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"Investment Adviser" person/firm compensated for engaging in business of (directly or indirectly) advising others on securities or the advisability of investing (or) who issues analysis/reports concerning securities - ANSWER SEC vs Capital Gains Research Bureau basis of Fiduciary Rule, specifically Best Interest
SEC Registration Required when 1) definition of "IA" is met (unless otherwise excepted from definition or exempt/prohibited from registration); AND $100M in AUM (optional for Mid-Sized Advisers AUM $100-115M Buffer Zone) - OR - 2) when ADVISING a Registered Investment Company - OR - 3) AUM $25-100M AND NOT registered/required to register with State OR NOT Subject to EXAMS by State
Registration withdraw required for AUM under $90M - ANSWER SEC Registration Optional when 1) AUM $25-100M (except NY req. at $25M) - OR - 2) Advisers Registered in 15 or more States
(AUM $25M or less PROHIBITED from registering w/ SEC but held to various state requirements)
EXCLUDED from Definition of "IA" are:
1) Domestic banks and bank holding companies; 2) Services SOLELY Incidental by lawyers, accountants, engineers, teachers, (and) 3) BD advisory services w/out special compensation; 4) Publishers of bona fide newspapers/mags w/Regular Circulation; 5) Advising Direct Obligations of US (bonds); 6) NRSROs (Nationally Recognized Statistical Rating Orgs; 7) Family Offices; and 8) Others designated by SEC rulemaking (such as those otherwise prohibited or exempt) - ANSWER EXEMPTIONS from SEC Registration:
1) Intrastate Advisers: NOT advising, analyzing or reporting on NSE Listed Securities* and ALL Clients reside in same state as principal office (*includes securities w/ unlisted trading privileges); 2) Advisers to ONLY Insurance Companies; 3) Private Fund Advisers w/ AUM less than $150M, and Advisers to Foreign Private and Venture Capital Funds; 4) Church Plans, and certain 5) Charitable organizations 6) Registered Commodity Trading 7) Small Business Investment Companies
Private Fund Adviser Exemption Criteria:
PRIVATE FUND: Advise SOLELY private funds (unlimited) so long as aggregate assets of such NOT EXCEEDING $150M (per ADV annual calculation), including Non-US Advisers when ALL US clients are Qualifying Private Funds
VENTURE CAPITAL: Any advising SOLELY venture capital funds
FOREIGN PRIVATE: No place of business in US, Less than 15 private fund clients/investors in US, Less than $25M aggregate AUM attributed to clients/private fund investors, AND doesn't hold out to US public as an IA - ANSWER Form PF (intended to Monitor Systematic Risk to US Financial System) is required by advisers to Hedge & other Private Funds, and SEC-Registered Advisers to 1 or More Private Funds having at least $150M AUM attributable to such as of last fiscal year-end
Form PF filing EXEMPTION: Advisers NOT registered/required to register with SEC
Dodd-Frank also resulted in changes to AUM by 1) raising registration threshold to $100M, and creating Mid-Sized adviser category w/ AUM $25-100M (w/ $100-115 Buffer Zone); and 2) "RAUM" Uniform Calculation of Gross Basis at Market Value (or fair value if n/a) to include: (i) "Securities Portfolios" (any consisting of at least 50%) and/or Private Funds to which adviser provides Regular/Continuous Supervisory or Management services; (ii) Proprietary accounts (owned in aggregate 25% or more), accts managed w/out compensation and those of foreign clients; and (iii) uncalled capital commitments to private fund(s) - ANSWER Repeal of Private Adviser Exemption (per Dodd-Frank) brought into SEC's regulatory view hedge, private equity, venture capital, and other private funds by adding regulation to circumvent adviser's use of a loop-hole to avoid registration in which each fund, and not it's underlying investors, is counted as a "client"
An IAR (supervised person of an Investment Advisor) is required to be licensed when it has more than 5 and with more than 10% of which are natural person clients.
EXCEPTIONS: 1) Qualified Clients (person/company that immediately after entering into contract has at least $1 million AUM by IA or net worth of $2 million; 2) Irregular communication; 3) Impersonal Advisory Services are NOT required for consideration when determining an IARs licensing requirement - ANSWER When is IAR licensing required and what are the exceptions?
Varies by state but generally an SEC-registered IA must notice file in any state in which it has 5 or more clients (de minimus). Exceptions: LA, NE, NH & TX - ANSWER State Notice Filing is generally required when
Investment Advisers are generally required to register in the state where they have a principal place of business and any states where they maintain de minimus (5 or more clients in that state with the exception of LA, NE, NH & TX which have their own de minimus) - ANSWER When is State Adviser Registration generally required?
The following are deemed a SINGLE CLIENT
1) a natural person, and: (i) any minor child; (ii) any relative, spouse, or relative of spouse having same residence; (iii) all accounts of which the person is the only primary beneficiary; and (iv) all trusts of the person or of which the person is the only primary beneficiary;
2) A corporation, general partnership, limited partnership, LLC, trust, or other legal org receiving advice based on investment objectives rather than individual objectives of shareholders/partners/etc. INCLUDING two or more legal orgs having identical owners - ANSWER Define client according to Advisers Act
recommendations in light of a clients experience, situation and objectives - ANSWER Define suitability
Render disinterested/impartial advice, exercise high degree of care to ensure adequate and accurate recommendations/info is presented, and prior due diligence on holdings selected - ANSWER Describe characteristics fulfilling suitability obligation
Advisor must: match portfolio decisions with client mandates, create and maintain client profile, execute investment advisory agreement - ANSWER Describe 3 requirements related to client investment objectives/restrictions
Goal is to provide certain investment advisory programs (such as wrap fees, model accounts and others having similar objectives and investments traded simultaneously with all clients being treated similarly) a non-exclusive safe harbor from the definition of an investment company and from being deemed to be a mutual fund, therefore requiring registration as such. - ANSWER What is the goal of the Safe Harbor Rule?
1. Each account within the program received individualized treatment (managed according to each client's specifics);
2. Client specific information is obtained by each upon account openings;
3. Annual contact confirming no changes;
4. Advisor to notify clients quarterly (a reminder) requesting contact if any changes apply;
5. Advisor consultation reasonably accessible to clients;
6. Ability to impose reasonable restrictions, such as specific securities or sectors;
7. Quarterly statements to clients reporting all activity; and
8. Indication of securities ownership retained by each client - ANSWER What conditions must be met for a program to qualify for the Safe Harbor Rule?
1. Clients will pay advisory fees and fund expenses at the mutual fund level in addition to any account fees; and
2. MFs may be purchased directly without advisory services - ANSWER Disclosure requirements for MFs managed within program qualifying for Safe Harbor
PRINCIPAL: Adviser (owned 25% or more) & Advisory Client
AGENCY: Advisory & Brokerage Clients
(1-sided Discretion w/ trade using broker to represent Brokerage client side. Broker gets commission if any)
INTERNAL: Client Accounts w/out Broker use
(2-sided Discretion w/ trade crossed internally) - ANSWER Principal/Agency Cross Transactions
PRINCIPAL: 1) Written Disclosure before trade completion, and 2) Client Consent each transaction before execution or settlement
AGENCY: 1) Client Consent, 2) Trade summary at/before completion, 3) Annual notice disclosing for prior period total # agency trades including total $ received by Adviser, and 4) Notice consent may be revoked any time
*NOT permitted where adviser acts on behalf of buyer AND seller
INTERNAL: 1) Best interest both parties including fair price and best execution to both, 2) Practice described in ADV 2A, and 3) for Investment Companies, compliance with Rules of Investment Company Act; or ERISA accounts, ONLY when both accounts are Index or Model driven AND meet DOL Terms or Act Exemptions - ANSWER Requirements for each type of cross transaction include
Adviser finds buyer/seller before settlement date then buys/sells security through advisor's own account - ANSWER Define riskless principal trade
BEFORE transaction advisor must provide WRITTEN disclosure to client that the advisor is acting as principal of buying/selling account;
Following, either prior to transaction execution or settlement, client must provide advisor with consent to EACH INDIVIDUAL TRANSACTION - ANSWER Describe the disclosure process/requirements applicable to Principal Transactions
Expired on Dec 31, 2016, this rule allowed IAs dually registered as BDs to engage in principal transactions - ANSWER Describe Temporary Rule for Principal Trades with Certain Advisory Clients
Between client accounts:
Between advisory and brokerage accounts where advisor (having discretion on only advisory account side) arranges trade through investment manager (IM) or BD to act as broker for other account, in which case any applicable trade commission goes to IM/BD. - ANSWER Define Agency Cross Trade
Written consent obtained from client, Written confirmations detailing trades is sent, Annual (minimally) written disclosure identifying agency cross trades during preceding period, and Notice that consent may be revoked at any time.
Not permissible where advisor recommended transaction to both buyer and seller - ANSWER In dealing with Agency Cross Transactions for Advisory Clients, what requirements apply?
Fair and equitable distribution of transaction costs across accounts traded - ANSWER
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