Registering as an investment adviser and the disclosure brochure that goes with it, the line between adviser and broker, the examination and the deficiency letter that follows, industry arbitration of customer disputes, the disciplinary record a firm must report, suitability and the duty owed to a retail customer, books and records, and settling an enforcement action.
Arbitration under the industry code is required when a written agreement calls for it or when the customer requests it, the dispute is between a customer and a member or associated person, and it arises in connection with the business activities of that member or person. Panels are constituted from ranked lists after each side strikes candidates. Awards need not be explained unless jointly requested, and a court may vacate one only on the narrow grounds the Federal Arbitration Act supplies.
Customer dispute information may be removed from the central registration record only where a panel unanimously finds that the claim is factually impossible or clearly erroneous, that the person was not involved in the alleged violation, or that it is false. A specialized panel of three public arbitrators decides the request, state securities regulators may participate, and a court order confirming the award is required.
The Investment Advisers Act excludes from the definition of investment adviser any broker or dealer whose advisory performance is solely incidental to the conduct of its brokerage business and who receives no special compensation for that advice. A firm outside the exclusion is an adviser and must register as one. Many firms are registered in both capacities, and the applicable rules then depend on the capacity in which a particular recommendation is made, which the firm must disclose.
At the close of an examination the staff ordinarily issues a written communication describing the deficiencies observed. The letter is not a finding of violation and is not published, but it identifies the rule implicated by each observation and requests a written response within a stated period. A response should address each item, state what has changed, and identify who is accountable and by when.
Records made and kept by a registered adviser are subject at any time to reasonable periodic, special or other examinations by representatives of the Commission. An examination opens with a document request covering the compliance program, client files, trading records and marketing, proceeds to fieldwork and interviews, and closes with a written communication of the findings. Scope is set by the staff.
A registered adviser must make and keep specified books and records, and must preserve them in an easily accessible place for not less than five years from the end of the fiscal year during which the last entry was made, with the first two years in an appropriate office of the adviser. Certain records, including organizational documents and performance support for materials distributed, are held longer. Electronic records must be reproducible, indexed and protected against alteration or loss.
An investment adviser must register unless an exemption applies, and the choice of regulator is set by statute. Advisers below the statutory asset threshold register with the states; those above it register with the Commission. A middle band of mid-sized advisers registers federally only in defined circumstances. Registration is made on Form ADV and becomes effective within forty-five days unless proceedings are instituted.
Any person notified of a proceeding, or any party to one, may propose an offer of settlement in writing. Submitting an offer waives the hearing, the right to file proposed findings, the right to appear before the hearing officer, post-hearing procedures and judicial review. A rejected offer is deemed withdrawn and may not be used in the record of a later proceeding. Orders commonly recite that the respondent neither admits nor denies the findings, and may impose bars and disqualifications.
A member firm must report specified events within thirty calendar days of becoming aware of them, including violations of investment-related laws, written customer complaints alleging theft, misappropriation or forgery, indictments and convictions, disciplinary actions by other authorities, and civil outcomes above stated thresholds. Statistical and summary information about written customer complaints is reported quarterly.
When a broker-dealer or an associated person makes a recommendation of a securities transaction or investment strategy to a retail customer, the firm must act in the customer's best interest without placing its own interest ahead. The rule is discharged through four component obligations covering disclosure, care, conflicts of interest and compliance. None of the four is satisfied by disclosure alone.
A registered adviser must deliver its current brochure to a client or prospective client before or at the time of entering into an advisory contract, and must thereafter deliver annually, within one hundred twenty days of fiscal year end, either the current brochure or a summary of material changes with an offer to provide the full document. Where the brochure is amended to disclose a disciplinary event, delivery must be prompt and accompanied by a statement of the material facts.
