Under U.S. federal securities regulations, market participants receive services from both Broker-Dealers and Investment Advisers. Which of the following statements correctly distinguish the regulatory obligations and operational characteristics of Investment Advisers from those of Broker-Dealers?
- Investment Advisers owe an ongoing fiduciary duty to act in their clients' best interests at all times under the Investment Advisers Act of 1940.Cevap
- Investment Advisers are primarily compensated through fee-based arrangements, such as a percentage of assets under management (AUM), rather than transaction-based commissions.Cevap
- CInvestment Advisers fill customer order flow primarily by acting as market makers trading directly out of their own inventory for a markup.
- DBroker-Dealers rely on state securities administrators to automate post-trade clearing, netting, and settlement comparison across member firms.
Cevap
The correct statements are that Investment Advisers owe an ongoing fiduciary duty to act in their clients' best interests under the Investment Advisers Act of 1940, and that they are primarily compensated through fee-based arrangements (such as an AUM percentage) rather than transaction-based commissions.
Under federal law, Investment Advisers are subject to the Investment Advisers Act of 1940, establishing an explicit fiduciary duty to put client interests first. Furthermore, their business model centers on fee-based compensation (such as percentage of AUM, hourly rates, or flat fees) rather than transaction-driven commissions or markups earned by broker-dealers.
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Investment Adviser vs. Broker-Dealer Statutory Roles and Intermediary Clearing Infrastructure