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 does the Investment Advisers Act of 1940 require?Investment Advisers Act of 1940
With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.
Who is considered an investment advisor?What Is an Investment Advisor? An investment advisor (also known as a stock broker) is any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of clients' assets or by way of written publications.
Which of the following is are regulated under the Investment Company Act of 1940?Which of the following is/are regulated under the Investment Company Act of 1940? Answer is 1 and 2. The Investment Company Act of 1940 regulates investment companies, their investment advisers, custodian banks, and distributors.
Which of the following requires an individual to be registered as an investment adviser under the Investment Advisers Act of 1940?Which of the following are required for registration as an investment adviserunder the Investment Advisers Act of 1940? The best answer is D. To register as an investment adviser with the SEC, a Form ADV Part 1 and Part 2 must be filed, along with a non-refundable filing fee.
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