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Investment advisor regulation in a nutshell definition

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The Investment Advisor's Compliance Guide 2nd edition. Only 3 left in stock more on the way. Investment Lawyer's. Creating an Investment Policy Statement. Norman M. Only 1 left in stock - order soon. Register a free business account. Product details Item Weight : Don't have a Kindle? Customer reviews. How are ratings calculated? Instead, our system considers things like how recent a review is and if the reviewer bought the item on Amazon. It also analyzes reviews to verify trustworthiness.

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Handy little book purchased because finding legible text on the Advisers Act is neigh on impossible. However, Financial Reform Act will change a bit of it. See all reviews. Customers who bought this item also bought. Broker-Dealer Regulation in a Nutshell Nutshells. Securities Regulation in a Nutshell Nutshells.

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Learn more about Amazon Prime. Get free delivery with Amazon Prime. Publishers of bona fide newspapers, news magazines, and business or financial publications of general and regular circulation. Under a decision of the United States Supreme Court, to enable a publisher to qualify for this exclusion, a publication must satisfy three elements: 1 the publication must offer only impersonal advice, i. See Lowe v.

Securities and Exchange Commission, U. Persons and firms whose advice, analyses, or reports are related only to securities that are direct obligations of, or obligations guaranteed by, the United States, or by certain U. In addition to these exclusions, the Advisers Act gives the Commission the authority to exclude, by order, other persons and firms not within the intent of the definition of investment adviser.

Exemptions From Registration A person or firm meeting the definition of investment adviser in Section a 11 does not need to register with the Commission if the person or firm qualifies for one of the exemptions from registration set forth in Section b of the Advisers Act. Investment advisers exempt from registration under Section b are still subject to certain anti-fraud provisions included in Section of the Advisers Act.

For more information on anti-fraud provisions, refer to the discussion below under "Anti-Fraud Provisions. Section b 1 exempts any adviser 1 all of whose clients are within the same state as the adviser's principal business office, and 2 that does not provide advice or issue reports about securities listed on any national securities exchange. Section b 2 exempts advisers whose only clients are insurance companies.

Section b 3 exempts any adviser that: 1 during the previous twelve months has had fewer than fifteen clients; 2 does not hold itself out generally to the public as an investment adviser; and 3 does not act as an investment adviser to a registered investment company or business development company. Rule b 3 -1 under the Advisers Act provides guidance on how to count clients when determining eligibility for this exemption.

In determining if a person or firm holds himself or itself out as an investment adviser within the meaning of Section b 3 , the Division looks at a number of factors, including, for example, whether the person or firm advertises; refers to himself or itself as an "investment adviser"; maintains a listing as an investment adviser in a telephone, business, building, or other directory; expresses a willingness to accept new advisory clients; or uses letterhead indicating any investment advisory activity.

Section b 4 generally exempts any adviser that 1 is a charitable organization, or is employed by a charitable organization, and 2 provides advice, analyses, or reports only to charitable organizations, or to funds operated for charitable purposes. Section b 5 exempts advisers to church employee pension plans. Prohibition on Commission Registration A person or firm that does not meet any of the criteria in Section A of the Advisers Act or Rule A-2 thereunder is prohibited from registering with the Commission.

Additionally, advisers are required to report their continuing eligibility for Commission registration annually by amending Schedule I to Form ADV within ninety days of the end of their fiscal year. For additional information on the prohibition on Commission registration, refer to Investment Advisers Act Release Nos.

Successors to SEC-Registered Investment Advisers An unregistered firm that is acquiring or assuming substantially all of the assets and liabilities of the investment advisory business of an SEC-registered investment adviser may rely on special registration provisions for "successors" to SEC-registered advisers.

Specifically, if an unregistered successor files an application for registration as an investment adviser on Form ADV within thirty days following the succession, it may rely on the registration of its predecessor until its registration is declared effective by the Commission. If a new investment adviser is formed solely as a result of a change in an adviser's structure or legal status e. For further information on the registration of successors, refer to Investment Advisers Act Release No.

For more information on what constitutes a change of control, refer to the discussion below under "Prohibited Contractual and Fee Provisions, Assignment. As a fiduciary, an investment adviser owes its clients undivided loyalty, and may not engage in activity that conflicts with a client's interest without the client's consent.

Capital Gains Research Bureau, Inc. Section applies to all firms and persons meeting the Advisers Act's definition of investment adviser, whether registered with the Commission, a state securities authority, or not at all. In addition to the general anti-fraud prohibition of Section , Rules 4 -1, 4 -2, 4 -3, and 4 -4 under the Advisers Act regulate, respectively: investment adviser advertising; custody or possession of client funds or securities; the payment of fees by advisers to third parties for client referrals; and disclosure of investment advisers' financial and disciplinary backgrounds.

These rules are discussed in greater detail below. Disclosure Obligations The Brochure Rule Rule under the Advisers Act, commonly referred to as the "brochure rule," generally requires every SEC-registered investment adviser to deliver to each client or prospective client a Form ADV Part 2A brochure and Part 2B brochure supplement describing the adviser's business practices, conflicts of interest and background of the investment adviser and its advisory personnel.

An adviser must deliver the brochure to a client before or at the time the adviser enters into an investment advisory contract with a client. The rule also requires an adviser, if there are material changes in the brochure since the adviser's last annual updating amendment, to deliver annually, without charge, to each client within days after the end of the adviser's fiscal year either i a current brochure or ii a summary of material changes to the brochure as required by Item 2 of the brochure that offers to provide the adviser's current brochure without charge, accompanied by the Web site address if available and an e-mail address if available and telephone number by which a client may obtain the current brochure from the adviser, and the Web site address for obtaining information about the adviser through the Investment Adviser Public Disclosure system.

An adviser must deliver to each client or prospective client a current brochure supplement for a supervised person before or at the time that supervised person begins to provide advisory services to the client. An SEC-registered adviser is not required to deliver a brochure supplement to a client i to whom it is not required to deliver a brochure, ii who receives only impersonal investment advice, or iii certain officers, and employees of the adviser.

The Division takes the position that an investment adviser must disclose to clients all material information regarding its compensation, such as if the adviser's fee is higher than the fee typically charged by other advisers for similar services in most cases, this disclosure is necessary if the annual fee is three percent of assets or higher.

An investment adviser must disclose all potential conflicts of interest between the adviser and its clients, even if the adviser believes that a conflict has not affected and will not affect the adviser's recommendations to its clients. This obligation to disclose conflicts of interest includes the obligation to disclose any benefits the adviser may receive from third parties as a result of its recommendations to clients. An investment adviser even if unregistered may be subject to disclosure obligations not only under the Advisers Act, but also under other federal statutes, including the Securities Exchange Act of the "Exchange Act".

Books and Records To Be Retained Section of the Advisers Act and Rule thereunder require that SEC-registered investment advisers maintain and preserve specified books and records, and make them available to Commission examiners for inspection. Rule permits investment advisers, under certain conditions, to maintain books and records on microfilm and magnetic disk, tape, or other computer recordkeeping devices.

Rule requires every SEC-registered investment adviser to retain copies of all advertisements and other communications collectively, "advertisements" that the adviser has circulated, directly or indirectly, to ten or more persons excluding persons connected with the adviser. Generally, the adviser also must create and retain all documents necessary to substantiate any performance information contained in advertisements.

With respect to the advertisement of performance information for managed accounts, an adviser need retain only 1 all account statements, if they reflect all debits, credits, and other transactions in a client's account for the period of the statement, and 2 all worksheets necessary to demonstrate the calculation of the performance or rate of return of all managed accounts.

Prohibited Contractual and Fee Provisions Assignment Section a 2 of the Advisers Act requires each investment advisory contract entered into by an investment adviser whether SEC-registered or not, unless exempt from registration under Section b to provide that the contract may not be assigned without the client's consent. Section a 1 of the Advisers Act defines "assignment" generally to include any direct or indirect transfer of an investment advisory contract by an adviser or any transfer of a controlling block of an adviser's outstanding voting securities.

Rule a 1 -1 under the Advisers Act, however, provides that a transaction that does not result in a change of actual control or management of the adviser e. Section a 3 of the Advisers Act provides that if an investment adviser is organized as a partnership, each of its advisory contracts must provide that the adviser will notify the client of a change in its membership. Performance Fees Section a 1 of the Advisers Act prohibits an investment adviser whether SEC-registered or not, unless exempt from registration under Section b from receiving any type of advisory fee calculated as a percentage of capital gains or appreciation in the client's account "performance fee arrangement".

Advertising Restrictions Rule 4 -1 under the Advisers Act prohibits SEC-registered investment advisers from using any advertisement that contains any untrue statement of material fact or that is otherwise misleading. The rule broadly defines "advertisement" to include any notice, circular, letter, or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, that offers any investment advisory service.

In addition, an advertisement may not: use or refer to testimonials which include any statement of a client's experience or endorsement ; refer to past, specific recommendations made by the adviser that were profitable, unless the advertisement sets out a list of all recommendations made by the adviser within the preceding period of not less than one year, and complies with other, specified conditions; represent that any graph, chart, formula, or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions, unless the advertisement prominently discloses the limitations thereof and the difficulties regarding its use; and represent that any report, analysis, or other service will be provided without charge unless the report, analysis, or other service will be provided without any obligation whatsoever.

The Division takes the position that an adviser may advertise its past performance both actual performance and hypothetical or model results only if the advertisement meets certain conditions and restrictions. An advertisement using performance data must disclose all material facts necessary to avoid any unwarranted inference. Among other things, an investment adviser may not advertise its performance data if the adviser: 1 fails to disclose the effect of material market or economic conditions on the results advertised; 2 fails to disclose whether and to what extent the advertised results reflect the reinvestment of dividends or other earnings; or 3 suggests or makes claims about the potential for profit without also disclosing the potential for loss.

In addition, generally an adviser may not advertise gross performance data i. The staff has taken the position, however, that an adviser may provide gross performance information, accompanied by appropriate disclosure regarding the impact of fees and expenses, in certain limited circumstances that present minimal risk that the client will not understand the impact of fees and expenses, such as when the client is a sophisticated institution, and the adviser presents the information to the client "one-on-one.

Suitability Requirements As fiduciaries, investment advisers owe their clients a duty to provide only suitable investment advice. This duty generally requires an investment adviser to determine that the investment advice it gives to a client is suitable for the client, taking into consideration the client's financial situation, investment experience, and investment objectives. Investment Advisers Act Release No. Custody Requirements Rule 4 -2 under the Advisers Act details how client funds and securities in the custody of the adviser must be held, and requires an SEC-registered adviser with "custody" to provide specified information to clients.

An adviser will be deemed to have custody if it directly or indirectly holds client funds or securities, has any authority to obtain possession of them, or has the ability to appropriate them. Restriction on Payment of Referral Fees Rule 4 -3 under the Advisers Act generally prohibits an SEC-registered investment adviser from paying a cash fee, directly or indirectly, to a third party a "solicitor" for referring clients to the adviser unless the arrangement complies with a number of conditions.

Among other things, the rule requires that: 1 be a written agreement between the adviser and the solicitor a copy of which the adviser must retain detailing the referral arrangement; 2 at the time of any solicitation activities, the solicitor provide the prospective client with a copy of the investment adviser's brochure pursuant to Rule , and a separate, written disclosure document that discloses, among other things, that the solicitor is being compensated for referring or recommending the adviser, and the terms of the compensation including any additional amounts the client will be charged by the adviser as a result of the referral arrangement ; and 3 the adviser receives from the client, prior to, or at the time of, entering into any written or oral investment advisory agreement with the client, a signed and dated acknowledgment that the client received the investment adviser's brochure and the solicitor's written disclosure document.

Solicitors generally will not be required to register separately as advisers with the Commission if they comply with the conditions of the rule. Failure to comply with these conditions, however, could result in liability to the adviser under the Advisers Act's anti-fraud provisions, and could result in the solicitor being deemed an unregistered investment adviser.

Wrap Fee Programs Many advisers participate in wrap fee programs. Rule f under the Advisers Act requires a sponsor of a wrap fee program to prepare a "wrap fee brochure" that provides, in narrative form, a full explanation of the program and its sponsor, and to deliver the wrap fee brochure to wrap fee clients. A "wrap fee program" for purposes of the rule is a program under which investment advisory and brokerage execution services are provided for a single "wrapped" fee that is not based on the transactions in a client's account.

An investment advisory program under which all clients pay traditional, transaction-based commissions is not a wrap fee program. Similarly, a program under which client assets are allocated among mutual funds is not a wrap fee program because normally there is no payment for brokerage execution. The wrap fee brochure must be prepared by the "sponsor" of the wrap fee program, i.

Some wrap fee programs will have more than one sponsor, in which case only one of the sponsors, as selected by the sponsors, needs to prepare the wrap fee brochure. An investment adviser providing portfolio management services to wrap fee clients is not a sponsor unless it performs other duties that would cause it to fall within the definition. Wrap fee programs and other discretionary advisory programs that provide similar advice to a number of clients should be structured in a manner designed to avoid the creation of an unregistered investment company.

The Commission has adopted Rule 3a-4 under the Investment Company Act of to provide a non-exclusive safe harbor from the definition of an investment company for advisory programs that meet certain requirements. Duty of Best Execution As a fiduciary, an adviser has an obligation to obtain "best execution" of clients' transactions.

In meeting this obligation, an adviser must execute securities transactions for clients in such a manner that the clients' total cost or proceeds in each transaction is the most favorable under the circumstances.

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RIAs of any size can build competitive advantage and serve clients at lowest cost. is designed for persons interested in learning the fundamentals of. ) (person selecting investment advisers for clients meets the Advisers Act's definition of “investment adviser”). Release , supra note 3. RDM.