The SEC´s new switch rules became effective July 21, 2011.
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What is the reason for the SEC switching the regulatory jurisdiction of mid-sized investment advisors from the SEC to state securities regulators?
November 02, 2018
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in July 2010, the SEC is required to issue rules generally requiring mid-sized investment advisors to switch from the SEC to state registration, which will reallocate the primary responsibility of regulatory oversight of mid-sized investment advisors to the state securities regulators.
When must Appendix 1 be provided to clients?
November 02, 2018
Who must provide the Appendix 1 to clients?
November 02, 2018
Because there may be several entities or intermediaries involved in a wrap-fee program, the responsibility to provide the brochure can be confusing. Ultimately, the sponsor must ensure all clients with an account in its program have received a copy of the brochure. However, the sponsor does not have to deliver the brochure. The sponsor registered investment adviser is not required to furnish the brochure if another registered investment adviser is required to furnish and does furnish the disclosure brochure to clients. Clients will typically acknowledge their receipt of the brochure in the program contract or in a separate Appendix 1 receipt.
Who must prepare the Appendix 1?
November 02, 2018
The registered investment adviser responsible for sponsoring and administering the program must prepare Appendix 1. Usually the sponsor of a wrap-fee program will also be registered as a broker/dealer or affiliated with a registered broker/dealer. However, independent registered investment advisors also sponsor wrap-fee programs through unaffiliated broker/dealers such as discount broker/dealers.
What information must be included in Appendix 1?
November 02, 2018
While considered separate documents, Part 2A of Form ADV and Appendix 1 will contain similar language and details. Appendix 1 must contain specific information about the wrap-fee program. It does not need to contain information regarding other programs offered by the registered investment adviser, such as information which must be contained in Part 2A of Form ADV. A registered investment adviser must provide enough information to meet the minimum requirements listed in the instructions to Appendix 1.
What is Appendix 1 of Form ADV Part 2A?
November 02, 2018
Appendix 1 is the disclosure brochure for wrap-fee programs. Under Rule 204-3(f)(1), a registered investment adviser that is compensated under a wrap-fee program for sponsoring, organizing, or administering a wrap-fee program, or for providing advice to clients under the wrap-fee program, must provide clients Appendix 1 of Form ADV Part 2A. Appendix 1 must be provided to clients in lieu of providing the registered investment adviser’s Form ADV Part 2A. Therefore, Appendix 1 is a completely separate document from Part 2A of Form ADV.
What is the definition of a wrap-fee program?
November 02, 2018
Rule 204-3(g)(4) defines wrap fee program to be a “program under which any client is charged a specified fee or fees not based directly on transactions in a client’s account for investment advisory services (which may include portfolio management or advice concerning the selection of other advisers) and execution of client transactions.” (Italics have been added for emphasis.)
How does an investment advisor firm obtain a surety bond to meet the state’s net worth requirement?
November 02, 2018
It’s recommended that you contact your local commercial insurance agent as soon as possible since this can be a relatively slow process. Please refer to the particular requirements published by your firm’s home state securities regulator. Your state securities regulator will likely have a surety bond form or affidavit that will need to be executed by the surety and/or its agent.
Are investment advisors subject to any net worth/net capital or bonding requirements?
November 02, 2018
The SEC does not currently have a specific net worth/net capital or bonding requirement for an investment advisor. However, the SEC will heavily focus on the financial condition of an investment advisor during a regulatory examination. The following are the specific financial records that must be kept as part of an investment advisor’s books and records. Most states require the same or similar records.
