Investment Adviser Regulations Flashcards

An investment adviser representative (IAR) at a federally covered investment adviser firm is preparing a new advertising campaign. According to the SEC's Marketing Rule (Rule 206(4)-1), which of the following practices is explicitly prohibited?

Answer: Presenting gross performance data without also presenting net performance data.

The SEC Marketing Rule (Rule 206(4)-1) prohibits presenting gross performance results unless net performance is also presented with at least equal prominence. While testimonials from compensated clients and third-party ratings are permissible, they are subject to strict disclosure requirements. Live, extemporaneous communications are generally excluded from the definition of an advertisement.

An investment adviser is deemed to have 'custody' of client assets under the Investment Advisers Act of 1940 under all of the following scenarios EXCEPT:

Answer: The adviser provides advice on assets held at an independent qualified custodian where the adviser has no authority to withdraw funds.

An adviser is generally not deemed to have custody if client assets are maintained with a qualified custodian and the adviser's only authority is to provide investment advice. Having the ability to withdraw funds, holding client securities directly, or having the authority to deduct fees are all examples that trigger the custody rule's requirements, such as surprise annual examinations and specific custodial account setups.

A prospective client is reviewing an investment adviser's Form ADV Part 2. Which of the following pieces of information is the client LEAST likely to find in this document?

Answer: A complete list of every security the adviser has recommended in the past year.

Form ADV Part 2, the 'brochure,' provides clients with narrative information about an advisory firm. It includes details on services, fees, business practices, conflicts of interest, and the backgrounds of key personnel, including disciplinary history. It does not, however, contain a transactional list of all past recommendations.

Under the Investment Advisers Act of 1940, an investment adviser's fiduciary duty is composed of which two primary obligations?

Answer: Duty of Care and Duty of Loyalty.

The SEC has consistently interpreted the fiduciary duty of an investment adviser under the Advisers Act to consist of a duty of care and a duty of loyalty. The duty of care includes providing advice in the client's best interest, and the duty of loyalty requires the adviser to put the client's interests first and disclose all material conflicts of interest.

A Chartered Investment Counselor (CIC) is employed by a large advisory firm and manages portfolios for high-net-worth individuals. The firm changes its ownership structure when a majority of its shares are acquired by a new parent company. Under the Investment Advisers Act of 1940, what is the consequence of this event regarding the firm's advisory contracts?

Answer: The change constitutes an 'assignment' of the contracts, requiring client consent to continue the advisory relationship.

The Investment Advisers Act of 1940 specifies that an advisory contract cannot be assigned to another party without the consent of the client. A change in the controlling interest of an advisory firm is considered an assignment. Therefore, the firm must obtain consent from its clients to continue the advisory relationships under the new ownership.

An investment adviser with $150 million in assets under management (AUM) must register with which regulatory authority and update its primary registration document, Form ADV, how frequently?

Answer: The SEC; at least annually and more frequently for material changes.

Investment advisers with over $100 million in AUM (or $110 million, depending on the specific rule interpretation) are generally required to register with the Securities and Exchange Commission (SEC). The SEC mandates that Form ADV be updated at least once a year, within 90 days of the firm's fiscal year-end, and more frequently if there are material changes to the information.