The following information is intended to be a brief overview concerning the investment adviser industry. Topics include definitions, characteristics of an investment adviser, regulators, application process, licensing periods, record keeping requirements, custody of client funds or securities, disclosure requirements, conflicts of interest, and regulator
audits. This discussion does not purport to cover all aspects of the industry or all regulator requirements. You are urged to obtain and review the federal or state laws and rules that may apply to your activities. Investment Adviser and Investment Adviser Representative Registration Three essential elements that characterize an investment adviser are: Advisers must register or
become licensed with either state or federal securities regulators, based on the following: State-registered Investment Advisers: Federally covered advisers: Filings
Application for registration/licensing is made by:
A notice filing for a federal covered adviser is usually made by:
The SEC requires electronic filing via the Investment Adviser Registration Depository (IARD). Licensing
Period States send out a notice to renew a registration or license some time in advance of the end of the year. Check with each state for specific details. The renewal process for investment advisers will be handled via IARD. Recordkeeping Records generally required of all state-registered investment advisers pursuant to individual state securities statutes and regulations:
Records required of advisers who have custody of client assets:
Records required of advisers that manage client assets:
Custody As part of registration and audit/examination review, state securities regulators will require advisers to show how clients assets are handled by asking the following questions:
Disclosure
The key document in making these disclosures is Part 2A of Form ADV, often referred to as the adviser’s brochure (note that FORM ADV Part 2A replaced FORM ADV Part II in 2011). This document should clearly spell out the details of the advisory relationship and other business interests of the adviser. This is the reference tool with which the client or potential client can compare advisory firms for cost of services and for compatibility with their needs. That is why investment advisory regulations require that Part 2A of Form ADV or the brochure be given to customers in advance or no later than the time of entering into a contract if rescission is permitted within a specifically allotted time. State securities regulators also require FORM ADV Part 2B filings (“the brochure supplement”) from individuals providing advice to customers. Examiners will look for disclosure-related items not only in the disclosure document but in any material describing any facet of the adviser’s business that a client or potential client might see. This can include:
Fiduciary Duty
When examiners review advisory books and records, they will be on the lookout for undisclosed or misrepresented conflicts of interest and prohibited practices. Some are obvious and some not so obvious. Some examples of practices that advisers should avoid are:
The examiner will view perceived conflicts from the point of view of the customer; was the disclosure or lack of disclosure a factor in the client’s decision to use an adviser’s services or ratify an adviser’s recommendations? Was the customer misled? Was the customer placed at a disadvantage or taken unfair advantage of as a result of the conflict and the adviser’s compliance with disclosure requirements? The burden of proof lies with the adviser. Audits Conclusion In This SectionRESOURCESFORM ADV CONTACT INFORMATION State registrants, and SEC-registered firms with IA representative questions, can obtain general assistance from NASAA by calling (202) 737-0900 between 8:30 a.m. and 6 p.m. Eastern. SEC registrants should contact the SEC at (202) 551-7250 or for interpretive and regulatory assistance. What did the Investment Advisers Act of 1940 do?Summary. The Investment Advisers Act (IAA) was passed in 1940 to monitor those who, for a fee, advise people, pension funds, and institutions on investment matters.
Which of the following would not be considered an investment adviser according to the Investment Advisers Act of 1940?EXPLANATION According to the Investment Advisors Act of 1940, an investment advisor is an individual who receives compensation for investment advice. The exclusions from this definition include any bank or bank holding company and any person whose advice or services is related only to U.S. Government securities.
Which of the following are not required to register as investment advisers under the Investment Advisers Act of 1940 persons who give advice?Under the Investment Advisers Act of 1940, which of the following persons is exempt from registration with the SEC? Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration.
Which of the following is not exempt from the definition of an investment advisor?Which of the following are not specifically excluded from the definition of an investment adviser under the Uniform Securities Act? Clerical and ministerial personnel, full-time or temporary, are not included in the definition of either investment adviser representatives (supervised persons) or investment advisers.
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