Quick Answer
An investment adviser is a fiduciary owing a duty of care (best-interest advice) and a duty of loyalty (client first, disclose every conflict). Custody triggers a qualified custodian, quarterly statements, Form ADV reporting, and an annual surprise exam. Agency cross needs prospective consent; principal trades need consent before completion of each trade.
The whole ethics unit on one sheet: fiduciary duty, custody, compensation, agency-cross rules, and the prohibited practices the exam loves.
The One-Liners That Win Points
- Fiduciary duty = duty of care + duty of loyalty. Investment advisers (IAs) owe it; broker-dealers (BDs) owe a suitability / best-interest obligation. It cannot be waived by the client.
- Custody = access to client assets. Physical possession, fee deduction, acting as trustee, password/authority access (not read-only aggregation), or signatory power all create custody.
- A limited power of attorney to trade = discretion, not custody. Custody requires authority to withdraw or transfer.
- Deducting your advisory fee directly from the account IS custody. Many advisers miss this.
- Soft dollars: directing client brokerage to a broker-dealer for research and brokerage services. The soft-dollar safe harbor (under the Securities Exchange Act of 1934) covers eligible research/brokerage only; office rent, salaries, travel, and general hardware do not qualify.
- Best execution is the fiduciary counterweight to soft dollars: the incentive to route trades for soft-dollar benefits must never override getting clients the best price and execution.
- Agency cross transaction: the IA acts as agent for BOTH sides. Allowed only with prospective written consent, written disclosure of the conflict, per-transaction confirmation, an annual statement, a stated right to revoke, and no recommendation to both parties.
- Prohibited practices: insider trading, market manipulation (wash trades, matched orders, painting the tape, front-running), churning, selling away, commingling, and guaranteeing results.
Numbers to Lock In
| Item | Value |
|---|---|
| Custody: qualified custodian statements to clients | at least quarterly |
| Custody: surprise examination | annual, irregular time, no notice |
| Certified public accountant (CPA) files Form ADV-E after surprise exam | within 120 days |
| Pooled-vehicle audit exception distributes audited financials | within 120 days of fiscal year-end |
| Written discretionary authority after oral start | within 10 business days |
| Code-of-ethics access person: initial holdings report | within 10 days (info current within 45 days) |
| Code-of-ethics access person: annual holdings report | every 12 months |
| Code-of-ethics access person: quarterly transaction report | within 30 days of quarter-end |
| Agent discloses pre-existing outside brokerage account | within 30 days |
| Minimum net worth with custody | $35,000 |
| Minimum net worth with discretion (no custody) | $10,000 |
| Prepaid fees more than 6 months in advance | $500+ triggers positive-net-worth requirement |
| Qualified client (performance fee): assets under management | at least $1,400,000 |
| Qualified client (performance fee): net worth | over $2,700,000 (excludes primary residence) |
| Currency Transaction Report (CTR) to FinCEN | cash over $10,000 |
| Suspicious Activity Report (SAR) | $5,000 or more |
| Vulnerable-adult delayed disbursement / temporary hold | up to 15 business days |
| Securities and Exchange Commission (SEC) pay-to-play de minimis | $350 per election (can vote for official) |
| Municipal Securities Rulemaking Board (MSRB) pay-to-play de minimis | $250 per election |
Memory Aid: AAA (an order is discretionary if any is missing)
- Asset (which security)
- Action (buy or sell)
- Amount (number of shares)
Time and price alone is NOT discretion, so no power of attorney is required.
Top Gotchas
- Duty of care vs duty of loyalty: care = suitable, best-interest advice built on knowing the client; loyalty = client's interests ahead of the adviser's own, with every material conflict disclosed. Both must hold.
- Agency cross allows prospective (blanket) consent because ongoing protections (per-trade confirmation, annual statement, revocation right) backstop it; the key limit is no dual recommendation (at least one side must be unsolicited).
- What counts as custody: withdrawal/transfer authority, fee deduction, trustee role, signatory power, or password access. A trade-only limited power of attorney does not; read-only data aggregation does not.
- Commingling needs no loss. Mixing client and firm assets in one account is a violation the instant it happens, even if every dollar is returned. Street-name securities in a segregated account are proper safekeeping, not commingling.
- Structuring is a crime by itself: two $9,500 deposits to dodge the $10,000 CTR is illegal even if the funds are clean.
- Immunity for a vulnerable-adult hold is not automatic: it requires good faith AND reasonable care, and the suspected exploiter is never notified.
- Performance fees are barred except for a qualified client, and the net-worth test excludes the primary residence.
One-Breath Recap
An investment adviser is a fiduciary owing a duty of care (best-interest, know-your-client advice) and a duty of loyalty (client first, all conflicts disclosed), and that duty cannot be waived. Custody means any access to client assets (fee deduction counts), and once it exists you need a qualified custodian, quarterly client statements, Form ADV reporting, and an annual surprise exam at an irregular time. Compensation must be disclosed up front, performance fees are limited to qualified clients, and soft dollars fit only inside the safe harbor without defeating best execution. Agency cross transactions run on prospective consent plus per-trade confirmations and no dual recommendation. Lock in the prohibited practices (insider trading, manipulation, churning, commingling, structuring) and the vulnerable-adult 15-business-day hold, and this heavy ethics unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Ethical Practices and Fiduciary Obligations unit for the complete lesson.