A diversified financial services firm conducts multiple operations across capital markets, including offering portfolio management advice, executing equity trades, and interfacing with securities depositories and issuers. Which of the following statements correctly distinguish the regulatory definitions, firm capacities, and operational roles of these financial intermediaries? (Select all that apply.)
- Providing continuous investment advice for an asset-based fee subjects a firm to regulation as an Investment Adviser under the Investment Advisers Act of 1940.Answer
- Fulfilling customer buy orders directly from the firm's own inventory constitutes acting in a principal (dealer) capacity, compensated via a markup.Answer
- CContinuous trade netting and central counterparty clearance for equity transactions between broker-dealers are primary functions performed by the issuer's transfer agent.
- DActing in an agency capacity permits a broker-dealer to sell securities to clients from its proprietary account while charging a commission instead of a markup.
Answer
The correct statements are that providing investment advice for asset-based compensation qualifies a firm as an Investment Adviser under the Investment Advisers Act of 1940, and that filling customer orders from inventory constitutes acting in a principal (dealer) capacity with compensation derived from a markup or markdown.
Providing advice for asset-based fee compensation triggers registration as an Investment Adviser under the Investment Advisers Act of 1940. Additionally, when a firm executes client trades directly out of its proprietary inventory, it acts as a dealer (principal) and earns a markup or markdown.
Step-by-Step Solution
Key Concept
Broker-Dealer Capacities, Investment Adviser Regulation, and Clearing Intermediary Roles