RIA Securities Law & Regulations 2 — Questions and Answers

Question 1: The Dodd-Frank Wall Street Reform Act of 2010 changed investment adviser regulation by:

Eliminating all state investment adviser regulation
Raising SEC registration thresholds and expanding registration requirements for certain advisers (Correct answer)
Deregulating hedge funds completely
Transferring SEC authority to FINRA

Correct answer: Raising SEC registration thresholds and expanding registration requirements for certain advisers

Dodd-Frank raised the SEC registration threshold to $100-110M AUM and eliminated the private adviser exemption, bringing many hedge fund advisers under registration.

Dodd-Frank made major changes to investment adviser regulation: (1) raised SEC registration threshold from $25M to $100M AUM (mid-sized advisers register with states); (2) eliminated the private adviser exemption used by hedge fund advisers; (3) created new registration categories (venture capital advisers, private fund advisers); (4) expanded SEC authority over systemic risk. These changes significantly increased the number of advisers required to register.

Question 2: State securities laws are known as:

Federal Acts
Blue Sky Laws (Correct answer)
Uniform Commercial Codes
Banking Regulations

Correct answer: Blue Sky Laws

State securities laws are called Blue Sky Laws, designed to protect investors from speculative schemes with no basis in reality.

Blue Sky Laws are state securities regulations that predate federal securities laws. Each state has its own Blue Sky Law requiring registration of securities offerings and investment advisers within the state. The National Securities Markets Improvement Act (NSMIA) of 1996 preempted certain state registration requirements for federally covered securities. Advisers registered with the SEC are largely exempt from state registration but may still be subject to state anti-fraud provisions and notice filings.

Question 3: An insider trading violation requires:

The trade results in a profit
Trading based on material, non-public information in breach of a duty (Correct answer)
The trader works for the issuing company
The trade occurs after market close

Correct answer: Trading based on material, non-public information in breach of a duty

Insider trading is illegal when material, non-public information is used to trade in breach of a fiduciary or other duty of trust.

Classical insider trading involves corporate insiders (officers, directors) trading on material non-public information. Misappropriation theory extends liability to outsiders who misappropriate confidential information for trading. Key elements: (1) material information (would affect investor decisions); (2) non-public information; (3) breach of duty (fiduciary or contractual). Tippee liability attaches when tippee knows the tipper breached a duty. Both civil (SEC) and criminal (DOJ) penalties apply.

Question 4: The Investment Advisers Act anti-fraud provisions apply to:

Only registered investment advisers
All persons meeting the definition of investment adviser, regardless of registration (Correct answer)
Only advisers with over $1 billion AUM
Only foreign investment advisers

Correct answer: All persons meeting the definition of investment adviser, regardless of registration

Section 206's anti-fraud provisions apply to all persons meeting the definition of investment adviser, whether registered or not.

Section 206 of the Investment Advisers Act prohibits fraud by 'any investment adviser'—not just registered ones. This broad application ensures that advisers who are exempt from registration (like small advisers or certain private fund advisers) cannot engage in fraudulent conduct. The SEC can bring enforcement actions against any entity that qualifies as an investment adviser under the Act's definition, regardless of registration status.

Question 5: FINRA is primarily responsible for regulating:

Investment advisers
Broker-dealers and their registered representatives (Correct answer)
Mutual fund companies
Insurance companies

Correct answer: Broker-dealers and their registered representatives

FINRA (Financial Industry Regulatory Authority) is a self-regulatory organization that oversees broker-dealers and their registered representatives.

FINRA is a self-regulatory organization (SRO) created by the SEC to regulate broker-dealers and their registered representatives. FINRA writes rules for broker-dealer conduct, examines firms, and enforces compliance. Registered investment advisers are regulated by the SEC (or states) under the Investment Advisers Act, not FINRA. Some firms are dually registered as both broker-dealers and investment advisers, subjecting them to both regimes.

Question 6: A 'no-action letter' from the SEC:

Means the SEC is taking no action against violators
Provides informal guidance that the SEC staff will not recommend enforcement for a described activity (Correct answer)
Grants formal exemption from securities laws
Prohibits an activity under securities laws

Correct answer: Provides informal guidance that the SEC staff will not recommend enforcement for a described activity

No-action letters provide informal SEC staff opinions that they would not recommend enforcement action for a specific described activity.

No-action letters are issued by SEC staff in response to requests for guidance on whether a specific activity would require SEC action. They are not formal legal opinions and do not bind the Commission, but they provide practical guidance on how securities laws will be applied. Investment advisers frequently seek no-action letters regarding novel business practices, exemptions from registration, or the applicability of specific rules to their situations.

RIA Securities Law & Regulations 2

The Dodd-Frank Wall Street Reform Act of 2010 changed investment adviser regulation by: