Chapter 6
according to the IA Act of 1940, which of the following are excluded from the definition of "investment advisor": 1. an insurance company formed under the laws of the state 2. a bank which is not an investment company 3. a person whose investment advice relates solely to securities issued by the US govt
a) 1 and 2 b) 1 and 3 c) 2 and 3 d) 1, 2, and 3 C) according to the IA Act of 1940, an IA is an individual who receives compensation for investment advice. the exclusions from this definition include and bank or bank holding company and any person whose advice or services is related only to US govt securities. when looking at the exclusions from the definition of an IA, according to the IA Act of 1940, choices 2 and 3 are specifically listed. there is not an exclusion listed for an insurance company formed under the laws of a state
according to the Investment Company Act of 1940, which of the following may purchase mutual fund shares at a discount from the public offering price 1. a plan company 2. a qualified retirement plan 3. an officer of the fund's investment advisor
a) 1 and 2 b) 1 and 3 c) 2 and 3 d) 1, 2, and 3 D) according to the investment company act of 1940, all 3 choices offered represent situations where the purchaser may qualify for a discount from the public offering price, either due to a quantity discount or prior written agreement. plan companies, qualified retirement plans, and an officer of the funds IA all qualify for discounts from the public offering price according to the investment company act of 1940 and SEC rules
which of the following adhere to the NASAA brochure rule regarding the electronic delivery of the investment advisor brochure 1. in the case of an initial delivery to a client, the IA obtains verification that a readable copy of the brochure and supplements were received by the client 2. in the case other than initial deliveries, the IA obtains each client's prior consent to provide the brochure and supplements electronically 3. in the case of an initial delivery to a potential client, the IA obtains a verification that a readable copy of the brochure was received by the client 4. in the case other than initial deliveries, the IA obtains each client's consent to provide the brochure and supplements electronically within 48 hours of the delivery
a) 1 and 2 b) 1 and 4 c) 2 and 3 d) 3 and 4 A) the correct choices are: in the case of an initial delivery to a potential client, the IA obtains verification that a readable copy of the brochure and supplements were received by the client and in the case of other than initial deliveries, the IA obtains each client's prior consent to provide the brochure and supplements electronically. the brochure and supplements must be delivered, and the IA cannot seek consent after it has already sent the documents electronically. the IA cannot seek consent within 48 hours of delivery, it must obtain consent prior to delivering the documents
according to the IA Act of 1940, which of the following statements are true regarding the acceptance of prepaid advisory fees by an investment advisor? 1. the fees must be disclosed in writing in the advisory contract 2. the fees cannot exceed more than 6 months payment in advance 3. prepaid fees in excess of $1200 six months in advance require that the advisor's balance sheet be disclosed to the client 4. acceptance of a prepaid fee would be deemed "custody" of client funds
a) 1 and 3 only b) 2 and 4 only c) 1, 2, and 3 d) 1, 2, 3, and 4 A) prepaid advisory fees in excess of $1200, six months in advance require the advisor to disclose their balance sheet. all fees must be disclosed in writing in the advisory contract. fees could be prepaid for more than 6 months if disclosure requirements are met. prepayment of an advisory fee would not be considered custody of client funds
under the securities act of 1933, which of the following could be found liable for omission or misstatements of material fact in a registration statement 1. officers of the issuer 2. lawyers for the issuer 3. accountants for the issuer 4. board of directors of the issuer
a) 1 and 4 only b) 2 and 3 only c) 1, 2, and 3 d) all D) under the securities act of 1933, all of the choices of issuers would be liable for omission or misstatements of material fact in a registration statement
the investment company act of 1940 regulates which of the following? 1. investments by one investment company in another 2. who may or may not have custody of investment company assets 3. the return to its clients an investment company must achieve in order to remain registered
a) 1 only b) 1 and 3 only c) 1 and 2 only d) 1, 2, and 3 C) the investment company act of 1940 does regulate restrictions on one investment company into another and does regulate who may or may not have custody of investment company assets. however, the act does NOT regulate returns to clients. that is determined by the market performance of the securities in the funds portfolio
according to the IA Act of 1940, which of the following must register as an investment advisor: 1. an investment adviser whose only clients are insurance companies 2. an investment adviser whose only clients are accredited investors 3. an investment adviser whose only clients are banks, savings and loans and trust companies
a) 2 only b) 1, 2 c) 2, 3 d) 1, 2, 3 C) under the IA Act of 1940, one of the exceptions to registration requirements is an investment advisor whose only clients are insurance companies. there is a difference between when the bank IS the investment advisor or if the bank is a client of the investment advisor. banks do not have to register as an IA. however, in answer 3 it says the clients are banks so they would have to register
an investment advisor must retain copies of investment letters if they are sent to a minimum of how many customers
a) 30 b) 15 c) 10 d) 2 C) according to IA recordkeeping rules, IAs must retain a copy of each notice, circular, newspaper article, investment letter, bulletin, or other communication (including seminar materials) circulated, directly or indirectly, to 10 or more people
under the securities act of 1933, members of an underwriting group must receive payment in full on sales of a new issue within
a) 5 days b) 35 days c) 40 days d) 45 days B) members of the underwriting group must receive payment in full within 35 days of the purchase of a new issue
under the securities act of 1933 exempt securities include all of the following except
a) US govt securities b) securities issued by state banks and savings and loans c) regulation A+ offering d) common stock of an investment company D) all choices shown except for D represent securities that are exempt from registration with the SEC. stock of a registered investment company would be required to register with the SEC. though a reg A+ offering is exempt from full registration with the SEC, the company offering securities through a reg A+ would still have to file paperwork with the SEC
under the IA Act of 1940, which of the following statements is true regarding a firm's use of the term "investment counselor"?
a) a firm may use the term synonymously with investment advisor b) a firm may use the term if it also publishes lists of securities along with buy and sell recommendations c) the use of the term investment counsel is prohibited under the Act d) a firm may use the term only if it derives a substantial part of its business from providing continuous investment advice according to clients' individual needs D) the term investment counsel may be used if a substantial part of the investment advisor's business consists of providing investment supervisory services, ie providing continuous advice according to clients' individual needs
an IAR has several clients who own Kimbo Inc shares. one client contacts her today and tells her that an issue has come up and he has an immediate cash need. the IAR recommends selling 5,000 Kimbo shares to meet this need. before she places the order, she calls another client who is already long Kimbo shares to see if the client is interested in owning 5,000 more shares. the client agrees to purchasing more shares. given this scenario, is an agency cross of Kimbo shares performed by the IAR for these 2 clients a valid option?
a) an agency cross by the IAR would not be permitted in this situation b) an agency cross is a valid option for the IAR but should be vetted by the IAR's supervisor before proceeding c) the IAR can proceed with an agency cross but anti-fraud provisions limit it to 2,000 shares in one trade d) the selling client contacted the IAR for her advice, so an agency cross is a valid option as it meets the client's need A) under the anti-fraud provisions in the IA Act of 1940, investment advisors are prohibited from effecting an agency cross if the advisor recommends the transaction to both the buyer and the seller. in this scenario, the IAR recommended selling Kimbo shares to one client and recommending buying Kimbo shares to another. therefore, the IAR cannot proceed with an agency cross
which of the following communications is not considered to be an advertisement under the new marketing rule for investment advisors? offering
a) an existing securities related investment service to a prospective client b) an existing securities related investment service to a current client c) a new securities related investment advisory service to a current client d) a new securities related investment advisory service to a current private fund investor B) in general, one on one communications with existing clients that do not pertain to offering new advisory services are not considered to be advertisements
under definitions in the investment advisors act of 1940, which of the following describes a disclaimer that, when included in a client contract, attempts to relieve the advisor of liability regarding errors, omissions, and oversights?
a) an investment contract b) an equity option c) a hedge clause d) an exemption provision C) under definitions in the IA Act of 1940, a disclaimer that, when included in a client contract, attempts to relieve the advisor of liability regarding errors, omissions, and oversights is known as a hedge clause
according to the investment company act of 1940, the definition of investment company could include which of the following?
a) broker dealers who have investment discretion over more than 100 accounts b) a company whose business is to invest and reinvest in securities c) pooled investments in precious metals d) insurance company general accounts funding fixed insurance and annuity contracts B) broker-dealers and insurance companies are not investment companies. pooled investments in precious metals would be a commodity pool, not an investment company. an investment company invests and reinvests in securities
the brochure supplement of Form ADV part 2B requires an IA to disclose to prospective and existing clients all of the following info about the individuals working for the IA who are involved in the investment management of the clients' funds, except:
a) education over the last 5 years b) experience over the last 10 years c) disciplinary actions over the last 10 years d) additional compensation from other sources related to investment services rendered B) experience over the last 5 years is required, not 10 years. the other choices are required to be disclosed
which one of the following would be considered a marketing rule prohibition in an advertisement?
a) emphasizing the benefits associated with an investment b) stating that an advisory is a fee-only advisor c) referring to past recommendations that were profitable d) offering an analysis that is free of charge without any conditions placed on the offer A) focusing on or discussing only the benefits associated with particular investment services or advice would be prohibited. an advertisement must provide a fair and balanced description, including both the associated benefits and risks. an advisor may be described as fee only if the fee is not based solely on performance. performance-based fees are not appropriate for the general public, they are only allowed for qualified clients. an advertisement may refer to profitable past recommendations if all relevant info is disclosed, including significant market events or investment constraints. an investment advisor may offer an analysis free of charge if it is truly free without any strings attached
what of the following statements about testimonials and endorsements is true?
a) endorsements must be in writing b) only testimonials are permitted in advertisements c) compensation for advertisements may be provided in the form of reduced advisory fees d) compensation for solicitation activities must be paid in cash C) non-cash compensation for endorsements and testimonials in advertisements may be provided indirectly (ie through reduced advisory fees, directed brokerage, and sales awards or other prizes). however, both cash and non-cash compensation are permitted. testimonials and endorsements may be made orally or in writing and are directed at one or more persons
under the IA Act of 1940, the registered IA is required to
a) furnish an annual financial statement to all clients b) establish a fixed schedule of fees or hourly charges c) provide each client or prospective client with a disclosure brochure d) maintain a bond based on the amount of assets under management C) investment advisors must provide clients with written disclosure statements (brochure rule)
all of the following are required disclosures when a testimonial or endorsement is used in an advertisement except
a) material conflicts of interest b) name of the broker dealer that will execute trades c) description and terms of any compensation d) whether the person providing the testimonial or endorsement is a client B) the name of the broker dealer responsible for executing trades is not a required disclosure when a testimonial or endorsement is used in an advertisement. neither is the business background of the solicitor
according to SEC rules, access persons of a registered investment advisor firm must report their personal securities holdings at least
a) monthly b) quarterly c) semi annually d) annually D) SEC rule 204 A-1 requires access persons to report annually their personal securities holdings
according to SEC rules, access persons of a registered IA firm who have conducted securities transactions in their personal securities accounts must report these transactions at least:
a) monthly b) quarterly c) semi-annually d) annually B) SEC Rule 204A-1 requires access persons to report their personal securities transactions at least quarterly
a registered publicly traded company has 10,000,000 shares of common stock outstanding. a wealthy individual that buys 3,000,000 shares would
a) not file a report with the SEC b) file a 13D report with the SEC c) file a 13F report with the SEC d) file a form ADV part 2 promptly with the SEC B) any person who owns 500,000 shares or more (5%) would be required to file with the SEC and the form filed is a 13D
according to the IA act of 1940, "person associated with an investment advisor" does not include
a) outside directors b) non-managing partners c) clerks d) any of the above C) a person associated with an investment advisor would not include receptionists or clerks
which of the following regulations would regulate broker-dealers, the OTC market, transfer agents, and stock exchanges
a) securities act of 1933 b) investment advisors act of 1940 c) investment company act of 1940 d) securities exchange act of 1934 D) the securities exchange act of 1934 regulates all aspects of the secondary market which includes broker dealers, the otc market, transfer agents, and securities traded on the floor of a registered stock exchange
which of the following would require registration under the securities act of 1933
a) securities issued by insurance companies b) commercial paper issued with 9 month maturities c) regulation D offering d) stocks issued by small business investment companies A) answers B, C, and D are examples of some of the exempt securities (do not have to register under 33 act). securities issued by an insurance company must adhere to the 33 act registration requirements
under the investment advisor act of 1940, a person would be excluded from the definition of an investment advisor if that person's investment advice pertains only to:
a) securities listed on a registered stock exchange b) US govt securities c) securities issued by banks d) securities issued by Canada B) under the IA Act of 1940, persons who give advice with regard to US govt securities only do not have to be registered as an investment advisor
under the securities act of 1933, all of the following are exempt securities except
a) securities sold by non-profit religious organizations b) fractional interest in a mining corporation c) stocks sold only to residents of a single state d) municipal bonds B) a fractional interest in a mining corporation is defined as a security under the securities act of 1933 but is not listed under the exemptions. choices a, c, and d are all listed as exemptions from registration under the securities act of 1933
according to the IA Act of 1940, which of the following is considered to be providing advice related to securities
a) someone who issues reports about securities in general without mentioning specific securities b) someone who advises clients on the desirability of investing in securities as opposed to non-securities financial instruments c) both a and b d) neither a nor b C) an IA is an individual who receives compensation for advising others about securities or about the advisability of investing in securities including: providing advice or issuing reports or analyses with regard to securities, engages in the business of providing such advice, and/or receives compensation for these services. the exclusions from the definition include newspapers, new magazines, and other financial publications, not reports.
which of the following communications would subject an investment advisor representative to the investment advisor advertising rules?
a) talking with an existing customer over the phone about the customer's current portfolio holdings b) speaking on a radio program about the securities market c) answering a question as a guest speaker on a panel about industry trends d) meeting with a prospective client and offering the firm's securities-related investment advisory services D) offering investment advisory services to prospective clients falls under the definition of advertising. however, one on one communications with existing customers are excluded from the definition of an advertisement with the caveat that they don't involve new advisory services. also excluded are extemporaneous, live, and oral communications, either broadcast or one on one
the required records of an IA may be stored in electronic format if
a) the IA makes proper disclosure to clients as to how the records are stored b) the IA organizes the records so as immediate access to them is available c) the IA makes and stores a separate paper copy of the records d) the IA discloses the format to all of the appropriate regulatory authorities B) records may be kept in electronic format as long as there is a means to access (read) them; there's a way to make copies of the records, as needed, and a duplicate copy is stored in a separate location
according to the Investment Company Act of 1940, all of the following statements are true except
a) the compensation to be paid to a mutual fund's investment advisor must be included in the written advisory contract and approved by a majority of the fund's shareholders b) an affiliated person of a mutual fund is prohibited from investing in the fund's shares c) a mutual fund must file reports with the SEC at a minimum of annually and send semi annual reports to all shareholders d) investment companies are prohibited from owning more than 3% of another investment company's shares without getting an exemption from the SEC B) according to the Investment Company Act of 1940, investment companies are required to file annual reports with the SEC and semi annual reports with all shareholders, they are prohibited from owning more than 3% of another investment company, and compensation to be paid must be in writing. however, an affiliated person is not prohibited from investing in the fund's shares
the investment banking department of a large wall street brokerage firm has knowledge of and is going to participate in a large initial public offering. the info that the department has is not publicly available. the investment banking department could NOT share this info internally with any of the following departments except:
a) the research department b) the market making department c) the trading department d) the legal department D) the info barrier known as the Chinese Wall prohibits sharing of material non-public info with the other operational departments of the brokerage firm. this info could be market moving info. this prohibition is mandated by SEC rule 10b-5 under the SEA '34
a federally covered IA instructs its IARs to add the initials "RIA" (registered investment advisor) after their names on their business cards
a) this is permitted bc the IAR is registered b) this is permitted bc the SEC lacks authority to object to the content of business cards c) this is prohibited by the SEC bc the use of RIA implies that the IAR is competent d) this is prohibited by the SEC bc RIA may be confused with IAR C) the SEC prohibits the use of RIA bc it may suggest that an IAR has obtained a certain level of competence
ken, a CPA, charges an annual fee to all of his clients for his services. Ken's services sometimes include investment advice but no extra fee is charged for that advice. after he begins spending 30% of his time giving investment advice, he decides to advertise the availability of the investment advisory services. according to the IA Act of 1940, ken is subject to regulation as an investment advisor:
a) when he gives advice about specific securities to clients b) when he starts spending more than 25% of his time providing investment advice c) when he begins advertising the availability of the investment advisory services d) when he starts charging investment advisory clients different fees than those charged to the accountant's clients C) according to the IA Act of 1940, a person is subject to regulation as an investment advisor if the person gives advice and holds themselves out (advertising) as offering such services
if a client is charged a wrap fee, the client
a) would be gifting securities to another individual and would like the gift to remain discreet or wrapped until a specified time b) would have to fall into the classification of an accredited investor for this to be a suitable fee structure c) is being subjected to excessive fees and should report the incident to the SEC d) must receive a written statement containing schedule h of form adv D) a wrap fee is a fee charged to a client which covers investment advice and execution of transactions but is not based on transactions executed. clients must receive a written statement containing schedule h of form adv when a wrap fee is charged. each of the other statements is false
