Investment Advisory Contracts

  1. What is an investment advisory contract?
    The primary relatonship between a client and an investment adviser is determined by an investment advisory contract.
  2. What is the difference between requirements for an investment advisory contract under USA and IAA 1940?
    • 1.  Contracts must be in writing under USA and written or oral under the IAA 1940.
    • 2.  Under USA fees must be competitite while under IAA 1940 they must be reasonable.
  3. What must the investment advisory contracts provided under both IAA 1940 and USA?
    • - services provided, including custody;
    • - term;
    • - amount of advisory fee or formula;
    • - amount or formula of any prepaid fees to be refunded at contract termination.
    • - granting of discretionary powers to IA or IARs or not;
    • - contract is not assignable withou consent of the other party;
    • - if a partnership, any change to a minority interest will be communicated to the client in a reasonable period of time. A change in majority partner is considered an assignment.
  4. When is a performance fee provision allowed under IAA 1940 and USA? 
    • When the client is a qualified client:
    • - natural person or company entering into a contract with at least $750K($1MM in 2011)  in AUM;
    • - natural person or company who the IA believes has over $1.5MM 9$2MM in 2011) in net worth less home equity (joint accounts count) or
    • - natural person who is an officer or director of the IA or one of their IARs employed for at least 12 months.
    • A fee based on average AUM over time is not considered to be a performance fee.
  5. What is the fulcrum fee?
    The most common type of performance fee, averaged over a period of at least 12 months with an increase or decrease in proportion to the investment performance in relation to an index usually the S&P.  IA must use net performance and the Administrator may authorize even when stated conditions are not met.
  6. What is the technical definition of a assignment?
    any direct or indirect transfer or pledge of an investment advisory contract by the IA or of a controlling block of the IA's outstanding voting securities by a stockholder of the IA.  If a partner dies or withdraws a minority interest or the IA admits one or more minority partners is not an assignment.  A reorganization whid does not affect control or management of an IA is not an assignment either.
Card Set
Investment Advisory Contracts
Investment Advisory Contracts under IAA 1940 and USA