Fradulent and Prohibited Practices

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  1. What is unlawful for an IA to do under the IAA 1940 and USA?
    acts of fraud or deceit upon the other person or engage in dishonest or unethical practices
  2. Are brokers/dealers affected by the fraudulent and prohibited practices under the IAA 1940 and USA?
    Yes, so long as they defraud or committ acts of dishonesty while rendering investment advice they are affected just like an investement advisor.
  3. What are the model rules under NASAA's?
    • - analyze a client's financial situation and needs;
    • -otain prior written consent on discretionary activities (can be oral authorization so long as it is followed by written consent within 10 business days;
    • - should not trade in excessive size or frequency;
    • - placing trade without authorization.
    • - placing trade authorized by third party without direct authority from client.
    • - borrowing money from client unless client is broker/dealer, affiliate of IA or financial institution in the business of loaning funds.
    • - loaning money to a client unless it is a financial institution in the business of loaning funds or affiliate of IA. 
    • - misrepresent or omit material facts to the client.
    • - providing a report issued by third-party without sharing this with client.
    • - charging unreasonable advisory fees.
    • - failing to disclose in writing prior to rendering advice any conflicts of interest.
    • - guaranteeing results.
    • - publishing advertising not conforming to IAA 1940.
    • - breaching identity, affaris, or investments of clients unless required by law.
    • - using clients securities for his own account or against the IAA 1940 rules.
    • - creating a written investment advisory contract
  4. What is the definition of an IA under the IAA 1940 and USA?
    Any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in securities or, as part of a regular business, issues analyses or reports concerning securities.
  5. What are the exclusions of definition of an IA under IAA 1940?
    • - Banks;
    • - Lawyers, accountants, teachers and engineers.
    • - Broker/Dealer;
    • - Publisher of any bona fide newspaper, news magazine, or other publication of general circulation.
    • - Any person whose advice relates solely to US government securities.
  6. What are the exclusions from the IA definition under USA?
    • - Banks.
    • - Lawyers, accountants, teachers, engineers.
    • - Broker/Dealers
    • - Publishers of bona fide newspaper, news magazine, newsletter, or other publication that does not consist of the rendering of advice on the basis of the specific investment situation of each client.
    • -investment adviser representatives.
  7. What are the exemptions of the IA definition under the IAA 1940?
    • 1. The Private Fund adviser for advisers with less than $150 million in AUM for private equity funds.
    • 2. His only clients are insurance cos.
    • 3. Instraste business only and no advice for securities listed in national exchanges and do not have any private funds as clients.
  8. What are the exemptions of the IA definition under the USA?
    • He has no place of business in the state and
    • a.  his only clients are investment cos., banks and trust cos., insurance cos., broker/dealers and other investment advisers, $1MM or larger employee benefit plans, governmental agency or instrumentalities, or
    • b.  he does not direct communications to more than 5 clients in the state (other than above) during the previous 12 months (de minimis).
  9. How does an IA register under IAA 1940?
    • File Form ADV with the SEC.
    • Effective within 45 days.
    • No net worth requirements.
    • No surety bonds.
    • Withdrawal of registration on 60th day.
    • Successor firm pays fee.
    • No registration of investment adviser representatives.
  10. How does an IA register under USA?
    • File Form ADV with administrator
    • Pay initial and renewal (12/31) fees.
    • Effective at noon 30th day.
    • There are net worth and/or surety bonds required (custody or discretion)
    • Withdrawal of registration on 30th day.
    • Successor firm pays no fee until renewal.
    • Registration automatically register any investment adviser representative who is a partner, officer, director, or similar in status.
  11. What are the record keeping requirements under IAA 1940?
    must be kept easily accessible for 5 years.
  12. What are the record keeping requirements under USA?
    • Broker/dealers - generally 3 years
    • Investment advisers - generally 5 years.
  13. What are the fines and penalties under IAA 1940?
    • $10,000 fine
    • 5 years in jail
  14. What are the fines and penalties under USA?
    • $5,000 fine
    • 3 years in jail
  15. What are the rules fo custody of customer funds and securities under IAA 1940?
    • Must be kept by Qualified Custodian.
    • Custody represents:
    • -  securities or funds are not returned or forwarded within 3 days.
    • -  Balance sheet is required if IA takes advance fees of more than $1,200 six months or more in advance
    • -  Balance sheet is not required if adviser maintains custody.
  16. What are the custody of customer funds or securities under USA?
    • If not prohibited, only with the written consent of the Administrator.
    • Minimum net worth or surety bond of $35,000
    • Custody occurs if securities or checks are not returned within 3 days and third-party checks forwarded within 24 hours.
    • Balance sheet is required if IA charges more than $500.00 in fees six or more months in advance and if IA maintains custody.
  17. What are the rules for Performance Fees under IAA 1940?
    • Prohibited unless:
    • - contract with investment co.
    • - certain clients with $750K in AUM or net worth over $1.5MM (Proposed change to $1MM or$2MM, respectively)
  18. What are the rules for Performance Fees under USA?
    Not allowed, but compensation can be based on the total value of the account averaged over a definite period.  An exeption can be made  to coordinate with federal law.
  19. What is the statute of limitations for civil action
    under IAA 1940?
    Sooner of 3 years of the sale or one year after discovery.
  20. What is the definition of a person under IAA 1940?
    • A natural person or
    • company (corporation, a partnership, an association, a joint stock co., a trust or any organized group of persons, whether incorporated or not)
  21. What is the definitionof a person under the USA?
    • An individual,
    • A corporation,
    • An association,
    • A joint stock co.
    • A trust where the interest of the beneficiaries are evidenced by a security
    • An unicorporated organization
    • A government
    • A Political subdivision of a government.
  22. What is the filing of adverstisement rule under IAA 1940?
    No filing with the SEC ever.
  23. What is the filing of advertisement rule under the USA?
    • No filing for exempt securities or exempt transactions
    • All other must be filed with the Administrator.
  24. What is the Private Placement exemption under IAA 1940?
    Up to 35 nonaccredited investors.
  25. What is the Private Placement exemption under the USA?
    Up to 10 offers within the state within a12-month period.
  26. What are the similarities between IAA 1940 and the USA?
    • No assignement of the contract may be made without the client's consent.
    • The adviser, if a partnership, must notify the client of any change in the membership of the the partnership.
    • May not use initials RIA or IAR on business card or letterhead.  Professional or educational designations are ok.
  27. Miscellaneous rules under the IAA 1940:
    • The Brochure and Brochure Supplement rule
    • The term investmetn counsel may not be used unless:
    • 1.  principal business is investment advice; and
    • 2.  substantial portion of his service is providing investment supervisory services (the giving of continuous advice on the investment of funds on the basis of the individual needs of each client).
    • Insolvency is not a cause for revocation. 
    • Registration is required with the SEC when IA has $100 million or more in AUM.
  28. Miscellaenous rules under the USA?
    • Delivery of the ADV Part 2 with annual offer to deliver.
    • An investment adviser representative is an associated person of the advise firm (not clerical) who:
    • 1.  makes recommendations or otherwise give advice;
    • 2.  manages accounts of clients;
    • 3.  solicits or negoatiates for the sale of advisory service; and
    • 4.  supervises any of the above.
    • Insolvency is a cause of revocation.
    • Less than $100MM in AUM registers with the Administrator or state.
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Fradulent and Prohibited Practices
Fraudulent and Prohibited Practices under IAA 1940 and USA
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