An financial analyst is comparing the operational structures and regulatory duties of two securities firms: Firm X provides continuous portfolio management services and charges clients an annual fee calculated as a percentage of assets under management, while Firm Y buys and sells securities for retail customers and maintains a proprietary inventory to execute trade orders. Which of the following statements regarding these financial intermediaries are correct?
- Firm X is classified as an Investment Adviser under the Investment Advisers Act of 1940 and owes a fiduciary duty to act in its clients' best interests.Cevap
- Firm Y operates as a Broker-Dealer and is primarily regulated under the Securities Exchange Act of 1934.Cevap
- CFirm Y is legally prohibited from charging a markup when executing client buy orders using securities from its proprietary inventory.
- DFirm X must register directly with the National Securities Clearing Corporation (NSCC) to validate its asset-based management fees.
Cevap
The correct statements are that Firm X is classified as an Investment Adviser subject to a fiduciary duty under the Investment Advisers Act of 1940, and Firm Y operates as a Broker-Dealer regulated primarily under the Securities Exchange Act of 1934.
Firm X earns an asset-based fee for portfolio management, defining it as an Investment Adviser under the Investment Advisers Act of 1940 and placing it under a fiduciary duty to act in the client's best interest. Firm Y executes transactions for customers and trades from its own account, defining it as a Broker-Dealer subject to oversight under the Securities Exchange Act of 1934.
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Distinction between Broker-Dealers (governed by the 1934 Act, earning commissions/markups) and Investment Advisers (governed by the 1940 Act, bound by fiduciary duty, earning fee-based compensation).