Regulatory and Compliance Framework for Investment Advisers
Regulatory and Compliance Framework for Investment Advisers
This domain tests the rules that govern advice: registration, fiduciary conduct, disclosure, marketing, recordkeeping, and client-asset protection. Exact thresholds vary by jurisdiction, so learn the local rule set and the principles behind it.
Core obligations
- Registration and licensing: know when activity triggers registration and what exemptions exist.
- Fiduciary duty: duty of care and duty of loyalty; best interest, full disclosure of conflicts, and consent where required.
- Suitability vs. fiduciary: suitability asks whether a recommendation fits; fiduciary asks whether it puts the client's interest first.
- Client assets: custody rules, segregation, no commingling, and independent verification.
- Marketing: no misleading claims; performance must be net of fees, balanced, and time-period specific; hypothetical results need prominent warnings.
- Records and privacy: retain client agreements, advice rationale, and complaints, and protect personal data.
Worked example
An adviser advertises a "12% annual return." The strategy's gross return was 12%, but the advisory fee is 1.5%, so the client's net return was about 10.5%. Advertising 12% without disclosing fees and the time period is misleading. If the adviser also receives a commission from a product provider, that conflict must be disclosed in writing and managed; disclosure does not automatically cure a breach of loyalty.
Traps
- Assuming disclosure eliminates every conflict.
- Confusing suitability with fiduciary duty.
- Using testimonials or hypothetical performance without required disclosures.
- Commingling client funds with firm funds.
- Failing to supervise or keep adequate records.