66 chapter 4
According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is: a.10 or fewer b.10 or more c.More than 10 d.Less than 10
A An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising
Mammoth Investments is a federal covered investment adviser with offices in 42 states. Which of the following statements concerning the firm's registration is TRUE? a.Mammoth's federal registration is sufficient to do business in all states and state registration of the firm is not required b.Mammoth must also register as an adviser in each state in which it has an office c.Mammoth must maintain dual federal and state registrations in all states in which it does business d.Mammoth must maintain both federal and state registrations in all states in which it does business with noninstitutional customers
A The federal government and the states have divided the responsibility for regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requirement to register at both the federal and state levels. The basis for the federal/state division is usually the amount of assets under management. If an investment adviser has $110 million or more under management, registration with the SEC as a federal covered adviser is mandatory. Smaller advisers generally register with one or more states. (Note: An IA may also choose to register with the SEC if it has AUM of $100 million up to $110 million.)
A multi-state adviser must file a Form ADV-W to withdraw from federal registration if the number of states in which it is required to register is less than: a.5 b.15 c.20 d.30
B A person, who is required to register as an investment adviser based on the laws of 15 or mores states, is considered a multi-state adviser and, therefore, must register with the SEC. If the number of states in which the adviser is required to register falls below 15, the adviser is required to file Form ADV-W indicating a partial withdrawal at the time of filing its annual updating amendments.
Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all electronic communications and their amendments must be maintained by the adviser for how long if distributed directly or indirectly and to how many persons? a.Three years if sent to two or more persons b.Five years if sent to two or more persons c.Three years if sent to ten or more persons d.The life of the firm if sent to thirty-five or more persons
B According to NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all investment adviser records must be maintained for not less than five years, the first two years in the principal office of the adviser, including those made by electronic media (Web sites, e-mail, etc.) if directly or indirectly sent to two or more persons
An Administrator receives a written notice indicating that an IA has just violated the net capital rule and is currently below the minimum requirement. Which of the following reports would the Administrator demand? I. A current balance sheet II. Contact information for the qualified custodian that handles the clients' funds III. A client ledger IV. A list of all client-owned securities and nonsegregated funds a. I and II only b. I, II, and III only c. I, III, and IV only d. I, II, III, and IV
C According to NASAA rules, if an IA violates the net capital rule, the Administrator may require the adviser to provide its balance sheet, client ledger, and a list of all customer-owned securities and nonsegregated funds. However, the Administrator would not require the qualified custodian's name since that information is already disclosed in the investment adviser's Form ADV
According to the recordkeeping requirements for IAs, if a client trade is executed, which of the following items is NOT required to be included on the order memorandum? a.The person who recommended the transaction b.The person who placed the order c.The time that the order was executed d.The date on which the order was entered
C According to the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, the order memoranda (order ticket) should show the terms and conditions of the order, instructions, modification, or cancellation, the person connected with the IA who recommended the transaction, and the person who placed the order.
On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator? a.On Tuesday, June 3 b.On Wednesday, June 4 c.On Thursday, June 5 d.On Friday, June 6
CIf an IA's net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its financial condition by the next business (in this question, Thursday, June 5). Thereafter, the Administrator may require the IA to post a bond for the deficiency
According to the Uniform Securities Act, investment advisers are required to maintain their books and records for: a.Three years with the most recent two years in an appropriate office b.Three years with the most recent two years easily accessible c.Five years with the most recent three years in an appropriate office d.Five years with the most recent two years in an appropriate office
D According to the Uniform Securities Act, investment advisory firms are required to maintain their books and records for a minimum of five years with the most recent two years in an appropriate office of the investment adviser
Under the Uniform Securities Act, what information is NOT disclosed in an investment advisory contract? a. Any other states in which the investment adviser is registered b. The manner in which the advisory fee will be computed c. A provision disallowing the investment adviser to assign the contract to another party without client consent d. A provision prohibiting the investment adviser from being compensated based on a share of capital gains
A The investment advisory contract must disclose the manner in which the adviser will be compensated. The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and may not be compensated based on a share of capital gains.
Under the Uniform Securities Act, all of the following are exempt from registration as an investment adviser EXCEPT an IA: a. That is owned by a fraternal nonprofit organization b. That has five or fewer clients in the state, but is actively soliciting for more clients c. That limits its advice to clients that are insurance companies in the state d. That owns an accounting practice and occasionally provides advice that is an incidental part of its accounting practice
B If an investment adviser actively solicits more than five individual customers in a state, registration is required there. There are a number of situations in which a person may provide advice and yet not be required to register as an investment adviser. Some examples include professionals (e.g., the CPA in this question) whose advice is incidental, advisers whose only clients are insurance companies or other institutions, and firms that do not receive compensation (i.e., nonprofits
According to the Uniform Securities Act, which of the following conditions constitutes completion of the registration application process? a.The application has been sent to the Administrator b.All required documents are received by the Administrator c.The adviser is approved by the Administrator d.The application, any other documents, and fees have been received by the Administrator
D An application for initial or renewal registration is not considered filed until the Administrator has received all of the required fees and documents. Remember, state Administrators receive, process, and grant registration; however, they do not approve these items
Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE? a. Client notification must be made immediately regarding the location where the firm will hold the funds b. Client funds may only be held in an account that is established for that specific purpose c. Client funds may be held by a qualified custodian that has met certain standards d. Clients must receive a statement at least annually that discloses certain details of the funds held by the firm
D Client account statements are sent on a quarterly basis and must include the amount of funds in the firm's possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided
An investment adviser wants to gain access to equity initial public offerings (IPOs). In order to have more IPO choices, the adviser contacts Jane who is not affiliated with the firm. Jane is not registered with any state Administrator or with the SEC. Jane will charge the firm a finder's fee for any investment secured through her service. Under the Investment Advisers Act of 1940, why is Jane prohibited from accepting payment? a.Because she must be registered as a broker-dealer to sell securities to individuals b.Because the IA has gone outside its normal broker-dealer research group who could have performed the same service for a lower cost c.Because the investment is not suitable and the clients have never expressed interest in IPOs d.Because Jane is acting as a solicitor for the adviser when she finds the IPOs
D Since Jane is assisting the IA, she is considered a solicitor and there must be a written agreement in place with the firm for which she is soliciting. Making payments to solicitors is allowed provided such an agreement exists and is disclosed to clients. Choice (a) is incorrect because Jane is not selling securities directly to individual investors and is, therefore, not required to register as a broker-dealer
All of the following choices are maintained for five years by an IA, EXCEPT: I. Partnership agreements II. Articles of incorporation III. A copy of audited financial statements IV. Written complaints V. A copy of a solicitor's written disclosure documents a. I and II only b. I and V only c. III and IV only d. II, III, and IV only
a Partnership agreements, articles of incorporation, minute books from board meetings, and stock certificate books are preserved for the life of the firm and for at least three years after termination of the firm. All other records are retained for five years
Foresight Advisers does not have an office in New Mexico. Under the Uniform Securities Act, in which of the following situations would the firm be required to register as an investment adviser in that state? I. Foresight limits its practice to wealthy individual investors with $1 million or more in net assets who are domiciled in New Mexico. II. Foresight only advises government entities. III. Foresight solicits its services to eight retail customers in New Mexico. IV. Foresight has assets of $103.4 million under management. a.I and II only b.I and III only c.III and IV only d.I, III, and IV only
B Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. Another exemption exists for firms that send communications to a maximum of five noninstitutional customers in a 12-month period and have no office in the state. Any firm with assets under management (AUM) of $100 million up to $110 million is given the choice to register with the state or the SEC. Firms with AUM of $110 million or more are categorized as federal covered advisers and are, therefore, exempt from state level registration
According to NASAA's model rules, which of the following is NOT required to be disclosed to a client when an investment adviser renews or extends its contract? a.The formula used to calculate its investment advisory fee b.The length of the contract c.Any prepaid fees or penalties assessed to clients who elect to cancel the contract d.The investment adviser's level of experience
D When renewing an advisory contract, a firm is required to disclose the formula used to calculate its advisory fee, the amount of the fees, and the length of the contract. The adviser's experience level is not required to be disclosed. Advisers are not disciplined or subject to additional disclosures simply because they are new to the industry.
Walck Asset Management has $67.5 million in assets under management. Under the Uniform Securities Act (USA), if Walck transacts business with clients in State A, it is: a.Required to pay an initial and renewal filing fee to State A b.Not required to pay any filing fees in State A c.Required to pay filing fees in State A only if it has an office in State A d.Required only to pay an initial filing fee in State A
a Advisers with assets of $110 million or more must register with the federal government and are known as federal covered advisers. Advisers with assets of $100 million up to $110 million may register with the federal or state government. Those with fewer assets generally fall under state jurisdiction. Since the Advisory firm has assets under management of less than $100 million, it must register with State A and pay a registration fee and annual renewal fee, as well as in any state in which the firm is required to register
All of the following accounts would be considered institutional, EXCEPT: a. An account with a total value in excess of $1 million b. An account for a pension plan c. An account for a qualified purchaser d. An investment adviser's omnibus trading account
a Under the USA, there is no minimum size that would define an institutional account. Choices (b), (c), and (d) are examples of institutional accounts
If an IA or any advisory affiliate pleads nolo contendere to a felony that was committed in a foreign jurisdiction, this action is: a.Disclosed to clients on Form ADV Part 1 b.Disclosed to clients on Form ADV Part 2 c.Disclosed to clients on Form ADV-NR d.Not required to be disclosed since the action occurred in a foreign jurisdiction
b An investment adviser is required to provide clients with disclosure of certain disciplinary events on Form ADV Part 2 and then must complete a Disclosure Reporting Page (DRP) to provide details regarding the event. DRPs are sections of three different regulatory forms that are used in the financial industry to provide information to the public and/or to regulators about specific criminal, regulatory, and civil actions. Any felony or misdemeanor charges or convictions against an IA must be reported on a Criminal Action DRP. For any actions that are taken by the SEC, state, or a foreign financial regulatory authority, reporting is done on a Regulatory Action DRP. For proceedings in a civil court, reporting is done on a Civil Judicial DRP
Which of the following firms would be required to register as an investment adviser in the state of Utah? a.A firm with $24.6 million in assets under management with no office in that state that deals exclusively with institutions b.A firm with $90 million in assets under management and an office in Utah that deals exclusively with four small institutional customers c.A firm with $107 million in assets under management that leases or owns several offices in Utah d.A firm with no office in that state that sends communications to five or fewer noninstitutional customers within a 12-month period
b Firms without an office in a given state that deal only with institutions, choice (a), or send communications to five or fewer noninstitutional customers within a 12-month period, choice (d), are not required to register as investment advisers in that state. Although a firm has a place of business in a state, it can choose to register with the state Administrator OR the SEC if it has assets under management (AUM) of $100 million up to $110 million, choice (c). A firm that has an office in the state and is below the $100 million AUM minimum, choice (b), must register with the state. Note: Firms with more than $110 million in assets under management must register with the SEC and are federal covered investment advisers. Federal covered advisers may not be forced to register in an individual state
According to NASAA's Statement of Policy on Unethical Business Practices, what information is required to be included in the renewal of an investment advisory contract? I. The investment advisory fee II. A statement that no assignment of the contract will be made by the investment adviser without the consent of the client III. A statement regarding the amount of prepaid fees that must be returned if the contract is terminated IV. The educational background of each IAR a. I and II only b. I, II, and III only c. I, II, and IV only d. I, II, III, and IV
b NASAA's Statement of Policy on Unethical Business Practices states that the renewal of an investment advisory contract must include the disclosure of all fees and services provided, the method for computing the advisory fee, the amount of prepaid fees to be returned in the event of an early termination of the contract, and the fact that no assignment of the contract will be made without the client's consent. There is no requirement to disclose the educational experience of each investment adviser representative that works with clients.
According to the Uniform Securities Act, the Administrator may require federal covered advisers to: a. Register in every state in which they have a branch office b. Give notice or notice file in any state where they transact business with six or more individual retail clients c. Register with the Administrator in any state where they transact business with six or more individual retail clients d. Do nothing because the Administrator has no jurisdiction
b The Administrator may require federal covered investment advisers to notice file if they transact business with more than five noninstitutional clients over a 12-month period. Notice filing is not a form of registration. Instead, it is the process of a federal covered adviser sharing information with the Administrator that it has filed with the SEC
Under the Uniform Securities Act, an Administrator who requires the posting of a surety bond MAY: I. Accept cash II. Accept securities III. Use discretion as to whether the type of securities and the amount of the deposit are appropriate IV. Disallow the deposit of cash or securities instead of a bond a. I only b. I, II, and III only c. I, II, and IV only d. I, II, III, and IV
b The state Administrator may accept a deposit of cash or securities in lieu of a surety bond. The Administrator may determine the type of securities acceptable for deposit but may not altogether disallow deposits of securities in lieu of a bond
Rancho Rio Investments is a single-office investment advisory firm that is based in New Mexico and plans to expand its business to New Jersey. Under the Uniform Securities Act, in which TWO of the following situations is Rancho Rio NOT considered to be an IA in New Jersey? I. The firm transacts business only with New Jersey broker-dealers II. The firm transacts business in New Jersey, but only with a few employee benefit plans that contain assets under $500,000 III. The firm's only business in New Jersey is with 10 or fewer non-institutional customers within a 12-month period IV. The firm's only business in New Jersey is with a limited number of federal covered advisers a.I and II only b.I and IV only c.II and III only d.II and IV only
b Under the Uniform Securities Act, any investment adviser that has no place of business in a given state and whose clients are banks, broker-dealers, investment advisers, and other institutions is exempt from registration in that state. Also, any IA that has no place of business in the state and deals with five or fewer retail customers who are residents of the state within a 12-month period is also exempt. Since this question makes no reference to Rancho Rio having an office in New Jersey, it may transact business with New Jersey institutional investors, such as broker-dealers (choice I) and investment advisers (choice IV), without being registered in New Jersey. To do business with an employee benefit plan in a state without being registered, the plan must have assets of $1 million or more.
Triangle Advisers is a very small investment adviser that is planning to register in three states. Which parts of Form ADV must Triangle file? I. Part 1A II. Part 1B III. Part 2 a. I and III only b. II and III only c. I, II, and III d. Triangle is not required to file any part of Form ADV since it does not fall under federal jurisdiction.
c A firm must file Form ADV to register as an investment adviser. Generally, this is done electronically through the Investment Adviser Registration Depository (IARD), which forwards the forms to the appropriate regulator(s). The first section of the form consists of Parts 1A and 1B. Part 1A is completed by all firms regardless of their status as a state or federal adviser. Part 1B is completed only by firms that are registering at the state level. Form ADV also contains a separate section (Part 2), which is filed by both federal and state advisers. Part 2 contains the information about the investment adviser's business. Information contained in this section may be copied directly to, or used as, the basis for investor disclosure information found in the investment adviser's investor brochure.
According to the Investment Advisers Act of 1940, which of the following statements is NOT TRUE regarding the storage of records? a. Records may be stored on microfiche b. Records may be stored electronically, such as on a tamper-evident CD-ROM c. Records must be destroyed after five years d. Records must be indexed for easy retrieval
c All choices are true, except the statement that records must be destroyed after five years. In fact, some records must be maintained for up to three years after termination of the firm (e.g., partnership agreements, articles of incorporation, minutes from board meetings, etc.).
According to the Uniform Securities Act, an entity can avoid meeting the definition of a broker-dealer if it: I. Has no office in the state II. Only deals with institutional clients III. Does not hold customer funds or securities a. I only b. II only c. I and II only d. II and III only
c If a broker-dealer has no office in a state and effects transactions only with institutional clients, it would be exempt from the definition of a broker-dealer. An institutional broker-dealer cannot qualify for this exemption if it has an office in the state, even if it avoids holding customer funds and securities
If an investment advisory firm decides to increase its fees for all new business, which of the following steps must it take to properly disclose its new fees? I. Change its brochure to reflect the new fee schedule II. Deliver a copy of its brochure with the new fee schedule to all current clients III. Deliver a copy of its brochure with the new fee schedule to all new clients IV. Continue to use the current brochure while it awaits the Administrator's approval a.I only b.I and II only c.I and III only d.IV only
c If an investment adviser changes its fee schedule, it is considered a material change and it must update its Form ADV Part 2 to reflect the new fees. Many IAs use Form ADV Part 2 as the disclosure document that they provide to their clients. After the update is made, the revised brochure must be provided to all new clients; however, the firm is not required to deliver the brochure to current clients. (Note: investment advisers must offer to deliver their disclosure brochures to all of their clients annually.) If an IA changes its fee schedule, it is considered a material change and the firm must amend its Form ADV Part 2
If an IA has recently changed the number of partners, but not control of the firm, the IA registration must be amended within 30 days. Since there is no change in control or ownership of the firm, a Form ADV-W is not filed. This type of change, however, is known as succession by: a. Majority b. Application c. Amendment d. Partners
c This is an example of succession by amendment, as the ADV is simply amended to reflect the new control structure. If the advisory firm were sold, then a change in ownership occurs and the new firm must submit a new application or ADV. Once effective, a Form ADV-W is filed to withdraw the registration of the acquired adviser
Under the Investment Advisers Act, records that MUST be maintained by an investment adviser include: I. All checkbooks, bank statements, and cancelled checks II. A record of the personal securities transactions of the adviser and its employees III. Copies of all circulars, advertisements, and newspaper articles sent to ten or more persons a. I and II only b. I and III only c. II and III only d. I, II, and III
d The Investment Advisers Act specifies which records an adviser must keep and maintain. All of the choices listed are required.
According to the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, a federal covered adviser is required to maintain which of the following records for five years? a.All order memoranda b.Financial statements c.The originals of all written communications received by the adviser d.None of the above
d For this question, the trick is to recognize that there are conflicting details in the setup. The question makes reference to NASAA (which is indicative of state law), but it also makes reference to a federal covered adviser (one that is subject to SEC regulation). The NASAA Recordkeeping Requirements apply to state registered advisers, NOT federal covered advisers. For that reason, the records indicated by choices (a), (b), and (c) apply to state-registered advisers only
ABC Inc., a financial services company, is registered as both a broker-dealer and an investment adviser. On a regular basis, ABC is required to provide its clients with disclosures and obtain written agreements from them regarding acting in both a broker-dealer and investment adviser capacity. In which of the following situations is ABC not required to obtain a written agreement from the client prior to effecting the transaction? a. The client sells a security, and ABC, who is acting in a principal capacity for its own account, buys the security for its own account b. The client buys a security, and ABC, who is acting in a principal capacity for its own account, sells the security to the client c. At the time of initiating her contract, the client signed a document waiving her right to receive any and all disclosure documents d. The investment adviser side of ABC makes no recommendation to the client, but the client decides to effect a securities transaction through the broker-dealer
d Since the client in choice (d) has not used the services of the investment adviser, the disclosure rules for investment advisers do not apply. However, broker-dealers are required to disclose on trade confirmations when they act in a principal or agency capacity