Business Practices & Disclosure Flashcards

An investment adviser has discretionary authority over client accounts when:

Answer: The adviser can buy and sell securities without obtaining client consent for each transaction

Discretionary authority allows the adviser to make investment decisions and execute trades without prior client approval for each transaction.

Trade aggregation (bunching orders) allows investment advisers to:

Answer: Combine multiple client orders to obtain better execution and reduced costs

Order aggregation combines multiple client orders into a single larger trade to achieve better execution prices and lower per-share transaction costs.

'Pay-to-play' rules for investment advisers primarily restrict:

Answer: Advisers from receiving advisory fees from government entities after making political contributions to certain government officials

SEC Rule 206(4)-5 prohibits advisers from receiving compensation for advisory services to government entities if they or their employees made political contributions to certain officials.

When an investment adviser charges performance-based fees, the client must be:

Answer: A 'qualified client' as defined by SEC rules (typically $1.1M under management or $2.2M net worth)

Performance-based fee arrangements with investment advisers are only permitted with 'qualified clients'—those meeting minimum AUM or net worth thresholds.

The Investment Advisers Act prohibits assignment of advisory contracts without client consent. 'Assignment' includes:

Answer: Change of control of the advisory firm when a majority of ownership transfers

Under the Advisers Act, a change in control of the advisory firm constitutes an 'assignment,' requiring client consent to continue the advisory relationship.

An investment adviser's books and records must be maintained for a minimum of:

Answer: 5 years (with 2 years in accessible location)

SEC-registered investment advisers must maintain most records for 5 years, with records easily accessible for the first 2 years.