Fed - IAR - advertising, cross trans, cash referral, 28(e), harbor, other brokerage, compliance, enforcement

There are various ways in which an investment adviser may be compensated for services rendered. All of the following would be permitted under the Uniform Securities Act EXCEPT A)1% of the increase in account value over the next quarter B)hourly fees C)1% of the average annual assets D).25% of the asset per quarter

A)1% of the increase in account value over the next quarter Unless the question specifically references the allowable exception, investment advisers are not permitted to receive performance-based compensation.

When an investment adviser prepares a BCP, is should be based upon the size of the firm the firm's annual net income the number of locations of the firm the types of services provided A)I, III, and IV B)III and IV C)I, II, III, and IV D)I and III

A)I, III, and IV The amount of an investment adviser's net income is not relevant to a BCP

For purposes of safeguarding customer information, which of the following would be considered a covered account? A)An account in the name of the State of X employee pension fund B)A margin account in the name of MaryBeth Simmons C)An account in the name of the Wells Morgan Bank D)A margin account in the name of the Interglobal Hedge Fund

B)A margin account in the name of MaryBeth Simmons The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.

All of the following statements are true regarding investment advisory contracts under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers EXCEPT: A)the contract must describe the discretionary powers the client is granting to the adviser. B)the contract must be written in 10-point type or larger. C)the contract must describe the services the adviser will provide to the client. D)the contract may be for an initial period of more than 1 year.

B)the contract must be written in 10-point type or larger. There is no specific requirement in NASAA's Model Rule concerning type size. Contracts must describe the adviser's services, discretionary powers, and initial term period, which may be for any period of time.

Under the Investment Advisers Act of 1940, what is the maximum fine that may be imposed for violating the act? A)$1,000. B)$20,000. C)$10,000. D)$5,000.

C)$10,000. Any person who violates the act or SEC rules is subject to a fine of up to $10,000 and/or a prison term of up to five years. Note that this is different than the Uniform Securities Act, which provides for penalties of three years and $5,000.

Under the Investment Advisers Act of 1940, a registered investment adviser may: A)use the initials RIA after its name on a business card. B)imply SEC approval or sponsorship because of passing an exam. C)use the statement, registered with the SEC, in advertisements. D)imply SEC approval or sponsorship because of registration.

C)use the statement, registered with the SEC, in advertisements. Although an investment adviser registered with the SEC may state that fact, a registered investment adviser may not use the title in any way to suggest or imply that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. Because RIA is not an academic designation, it may not be used as such.

Under the Uniform Securities Act, delivery of the investment adviser's brochure may be made less than 48 hours prior to the entering of the advisory contract, provided the customer can cancel without penalty within: A)30 business days of entry. B)7 business days of entry. C)10 business days of entry. D)5 business days of entry.

D)5 business days of entry. The brochure is generally given to customers at least 48 hours before they enter into a contract for advisory services. In that case, a client who has paid an up-front fee is not entitled to a refund once the contract commences. If the brochure is not delivered at least 48 hours in advance, the customer must have the right to cancel within 5 business days of the contract date and obtain a return of all up-front fees (other than advisory fees proportionate to the time the money was managed).

Which of the following would justify an investment adviser's use of a full-service broker? Obtaining special reports dealing with economic projections from the broker. Expense-paid business trips paid for by the broker. The use of the research analysis provided by the broker. A)I and II. B)I and III. C)II and III. D)I, II and III.

B)I and III. Full-service brokerage firms often provide research reports, securities and portfolio analysis, and special reports without specific charges, but are usually compensated by their higher commissions. Nothing in industry rules prevents an adviser from using a full-service broker to effect customer transactions. However, it would be unethical if the adviser were to benefit personally from the direction of the client business.

Which of the following activities of an investment advisory firm would NOT require notification to and consent of the clients of the advisory firm? A)An investment adviser wishing to merge with a larger national advisory firm. B)The retirement of a sole proprietor investment adviser who wishes to sell the practice to another investment adviser. C)A minority partner resigning from the firm to start his own advisory firm. D)The chief operating officer of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm.

C)A minority partner resigning from the firm to start his own advisory firm. Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification to and consent of the clients of the investment adviser. The change in a minority interest is not considered to be an assignment so only notification, but not consent, is required.

Under the Investment Advisers Act of 1940, advertising done by investment advisers prohibits: the use of testimonials. reference only to specific past recommendations. untrue statements. A)I and III. B)I only. C)I, II and III. D)III only.

C)I, II and III. SEC Rule 206(4), issued under the Investment Advisers Act, prohibits untrue statements of material fact; testimonials; reference only to specific past recommendations; references to charts, formulas, or devices used to forecast securities prices without setting forth the difficulties or limitations in their use; offerings of free services without the intent or ability to perform; and guarantees of future performance.

In their advertising campaigns, investment advisers are prohibited from doing all of the following EXCEPT: A)exaggerating the capabilities of the firm and its personnel. B)offering free services. C)using testimonials. D)guaranteeing future performance.

B)offering free services. It is not unethical to advertise free services as a benefit of using a firm, but failing to supply services offered as free is unethical. Using testimonials, guaranteeing future performance, and exaggerating the capabilities of the firm and its personnel are unethical.

Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? Client pre-payment of $1,000 of advisory fees, 6 months in advance. Having temporary custody of a client's securities. Depositing client funds in bank accounts accessible by the investment adviser. A)II only. B)II and III. C)I only. D)I, II and III.

C)I only. "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees.

Which of the following would NOT be considered evidence of custody of a client's funds or securities? A)The client makes a partial purchase, and the broker-dealer holds the securities until full payment is made. B)Client funds and securities are kept at a qualified custodian. C)The investment adviser has discretionary authority over the client's account. D)The adviser writes checks on the client's account to pay for client's securities.

C)The investment adviser has discretionary authority over the client's account. "Custody" means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority.

Under the Investment Advisers Act of 1940, which of the following is TRUE regarding an investment adviser's use of a full service broker to make transactions for an account over which the adviser has investment discretion? A)A full-service broker may not be used for any transaction that could be done by a discount broker. B)Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full-service broker. C)A full-service broker may be used only if the broker is not affiliated with the adviser. D)A full-service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services that the broker provides to the adviser.

D)A full-service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services that the broker provides to the adviser. Use of a full-service broker to effect transactions for an account over which an adviser has investment discretion is not a breach of fiduciary duty as long as the full-service broker's commission is reasonable in view of the services he provides to the adviser. "Services" can mean advice, analyses, research, custodial services, etc., but the term does not include sales incentives provided to the adviser.

Which of the following situations violates the contractual requirements for investment advisory partnerships under the Uniform Securities Act? A)A partner with a 5% interest in an advisory firm leaves the firm and the remaining partners do not inform their clients because the departing partner held a minority interest in the firm. B)A partnership, without undergoing any change in membership, assigns its smallest accounts to another firm with written consent of the clients. C)A renewal of an investment advisory contract requires the written repetition that an adviser shall not be compensated on basis of a share of capital gains; not assign contract without consent; and notify clients of any change in membership of partnership. D)A partner with a 25% interest in an advisory firm dies and is replaced by a new member. The partnership continues business with its existing clients and informs them of the change in partnership composition within a reasonable period.

A)A partner with a 5% interest in an advisory firm leaves the firm and the remaining partners do not inform their clients because the departing partner held a minority interest in the firm. An investment advisory partnership must notify clients of any change in membership within a reasonable time period. The death of a minority partner does not constitute assignment of contract. A partnership may assign contracts with written consent of clients. A contract renewal does require written repetition that an adviser shall not be compensated on basis of a share of capital gains; not assign contract without consent; and notify clients of any change in membership of partnership.

What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A)Accept the certificate and give the customer a receipt. B)File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000. C)Accept the certificate and send the customer a receipt within 24 hours of the delivery. D)Instruct the client to send the certificate to the transfer agent because you cannot accept it.

A)Accept the certificate and give the customer a receipt.\ When a client delivers a stock certificate to the firm's office, the appropriate procedure is to furnish the customer with a receipt on the spot.

Al is an investment adviser representative for a federal covered investment adviser. Al has discretionary authority over most of his accounts and determines that shares of the RAN Corporation are a suitable investment for seven of them. He enters a buy order for 1,000 shares of the RAN and receives three trade confirmations, all at slightly different prices. When allocating these shares to his clients, how should Al determine the price per share?. A)Allocate the shares using the average price of all the shares combined. B)Allocate the lowest priced shares to the customers with the largest accounts. C)Allocate the lowest priced shares to the customers who have had accounts with the firm the longest period of time. D)Allocate the highest priced shares to the customers with the highest net worth.

A)Allocate the shares using the average price of all the shares combined. It frequently happens that an IAR will submit an order for a large quantity of a specific security that is to be allocated among several clients. If the order is filled at different prices, the only fair treatment is to distribute the shares on an average price basis.

Which of the following compensation arrangements is typically NOT allowed under the Investment Advisers Act of 1940? A)An adviser waives a client's fee if the client experiences a loss for the year. B)An adviser varies fees according to the time spent managing the account. C)An adviser charges all clients a set fee, regardless of how long it takes to generate a recommendation or a recommendation's results. D)An adviser charges clients a percentage of assets under management.

A)An adviser waives a client's fee if the client experiences a loss for the year. A fee in which payment is contingent on investment results is prohibited unless the client meets certain financial standards; advisers are permitted to charge by the hour.

Under the Investment Advisers Act of 1940, which of the following advisers is considered to have custody of client securities or funds? A)An adviser who can write checks on the client's account for the purpose of paying custodial fees to the bank. B)An adviser who requires 1 year of advisory fees to be prepaid. C)An adviser who contractually requires 5 months of advisory fees to be prepaid. D)An adviser who has discretionary authority.

A)An adviser who can write checks on the client's account for the purpose of paying custodial fees to the bank. An adviser who can write checks on a client's account or who can deduct advisory fees from the client's account is considered to have custody of the client's assets.

A federal covered investment adviser would like to charge a client a performance fee based on a selected benchmark. The client has $400,000 invested with the adviser, but has a net worth of $2,150,000, of which $350,000 represents an investment account, 50% of which is shared with his cousin. A)Because we can allow none of the jointly-held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. B)Because we can allow all of the jointly-held property, this client has the necessary net worth to qualify for a performance-based compensation program. C)Because the total of the amount invested with the adviser ($400,000) plus the individual's personal net worth ($1,800,000 without counting the joint property) exceeds $2 million, this client has the necessary net worth to qualify for a performance-based compensation program. D)Because the client's 50% share of the investment account is only $175,000, this client does not qualify for a performance-based compensation program.

A)Because we can allow none of the jointly-held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. Under federal (and state) law, in order to qualify for a performance-based compensation program, the client must have either $1 million in assets managed by the adviser or a net worth of $2 million. This requirement is described in Rule 205-3 of the Investment Advisers Act of 1940 and the NASAA Model Rule makes reference to the federal rule. If using joint assets, only those with a spouse are allowed. Please note: This differs from meeting the net worth standard as an accredited investor. Under Rule 501 of Regulation D of the Securities Act of 1933, one can use assets owned jointly with persons other than a spouse to qualify as an accredited investor, but only to the extent of his or her percentage ownership of the account or property.

The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a Code of Ethics. Which of the following is charged with the responsibility of enforcing that Code? A)Chief compliance officer of the IA. B)Administrator of the state in which the IA has its principal office. C)The SEC. D)Each individual IAR.

A)Chief compliance officer of the IA. Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the Code of Ethics is being followed. Although each individual IAR must follow that Code, it is the CCO with the supervisory responsibility.

Which of the following forms of soft-dollar compensation to an investment adviser from a broker-dealer is permissible? A)Computer software that is programmed to receive real-time stock quotes. B)Coverage under the broker-dealer's group health insurance plan. C)A cell phone that is programmed to receive real-time stock quotes. D)A plane ticket to attend a lecture on economics to be held at the Federal Reserve Bank in New York City.

A)Computer software that is programmed to receive real-time stock quotes. Computer software is a permissible form of soft-dollar compensation between broker-dealers and investment advisory firms. Although seminar fees are permissible soft-dollar compensation, transportation and meals associated with attending such seminars are not. Broker-dealers are prohibited from providing cell phone costs to investment advisers. Coverage under the broker's group health insurance plan would be prohibited.

Under Section 28(e) of the Securities Exchange Act of 1934, which of the following is allowable soft-dollar compensation from a broker-dealer to an investment adviser under the safe harbor provisions? A)Custodial services provided by the broker-dealer. B)Cell phones to rapidly communicate with clients. C)Office rental payments. D)Vacations.

A)Custodial services provided by the broker-dealer. The use of a client's commission dollars to purchase a broker-dealer's custodial services is an allowable soft-dollar compensation. It is an investment benefit that accrues directly to the client and not to the adviser. Office rental payments, cell phones, and vacations are not allowable because their benefits do not accrue directly to the client. Other examples of permitted soft-dollar items are research and analytical software because they benefit the client whose commission dollars are, in effect, paying for them.

Because of the fiduciary relationship enjoyed by investment advisers, disclosure of information material to their clients is required. Which of the following items must be disclosed? A)Educational background of employees of the IA engaged in rendering investment advice. B)Fees paid to the independent accounting firm who conducted the annual audit of the IA's books. C)Performance statistics for the IA's recommendations over the past 12 months. D)An IA clerical employee's conviction of felony embezzlement 5 years ago.

A)Educational background of employees of the IA engaged in rendering investment advice. The educational background of each member of the investment committee or group that determines general investment advice to be given to clients must be disclosed in the IA's brochure. Felony convictions of officers would be disclosed, but not those of a clerical employee.

In addition to the normal required filings, an investment adviser who maintains custody of client funds and or securities will be required to complete: A)Form ADV-E. B)Form ADV Appendix 1. C)Form ADV-W. D)Form ADV Part 1.

A)Form ADV-E. The Form ADV-E (E for Examination) is completed by every investment adviser who maintains custody of client assets. Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser's records. The accountant is the one who submits the ADV-E to the SEC (or the state if appropriate).

A unique requirement for those investment advisers who maintain custody of customer assets is the filing of the: A)Form ADV-E. B)Form ADV Appendix 1. C)Form ADV-H. D)Form ADV Part 1.

A)Form ADV-E. The Form ADV-E is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets.

Examples of identity theft would include taking over an individual's credit card account applying for new credit cards in the compromised individual's name lending money in the name of the compromised individual purchasing lottery tickets in the name of another individual A)I and II B)II and III C)III and IV D)I and IV

A)I and II When an individual's identity is stolen, it is common to find that the thief takes over the current credit card accounts and also applies for new ones. Identity thieves borrow money in the name of the compromised individual, they don't lend it, and—although buying a lottery ticket in the name of someone else could help evade taxation on a big prize—the publicity attached to the winning ticket would certainly not be something the thief would relish.

Under the Investment Advisers Act of 1940, an IA that uses a Website would be required to: maintain a copy of the screens used on their site in the firm's advertising file. place copies of new screens into the firm's advertising file each time a change was made. file copies of the Web design with the SEC. password protect the site to limit access to existing clients only. A)I and II. B)I and III. C)II and IV. D)III and IV.

A)I and II. A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons. Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm's advertising file. Advertisements are never filed with the SEC.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an investment advisory contract? The formula used to determine the investment adviser's compensation. A statement of the discretionary authority, if any, given to the investment adviser. A statement that the investment adviser may assign the contract without the consent of the client. A)I and II. B)I, II and III. C)II and III. D)I and III.

A)I and II. Advisory contracts must contain the services to be provided; the term of the contract; the amount of the advisory fee or the formula used to compute it; the amount of fee to be refunded if the advisory fee is prepaid; whether the adviser has discretionary authority and to what extent; and a provision explaining that the consent of the client is required to assign the contract.

Under the Uniform Securities Act, an investment adviser may legally have custody of money or securities belonging to a client: if the Administrator has not prohibited this practice. if the investment adviser has notified the Administrator that it has custody. as long as the adviser does not also have discretionary authority over the account. A)I and II. B)I only. C)II and III. D)I and III.

A)I and II. The Administrator may prohibit advisers from having custody of client securities or funds. If no such prohibition applies, the Administrator must be notified in writing that the adviser has custody.

Willful violations under the Investment Advisers Act of 1940 may result in which of the following punishment(s)? $10,000 fine. A prison term of up to 10 years. Being barred from association with any investment adviser. A)I and III. B)II and III. C)I, II and III. D)I only.

A)I and III. Violations of the Investment Advisers Act or SEC rules carry penalties of up to $10,000 in fines and prison terms of up to five years. The SEC also has the power to suspend the violator for up to 12 months or bar individuals from the industry. This is in addition to any disciplinary actions that may be imposed by SROs, state Administrators, or civil actions brought by clients or regulatory authorities.

Rule 206(4)-1 of the Investment Advisers Act of 1940 regulates advertising by investment advisers. It would be prohibited under that rule for any adviser: to place an advertisement in a newspaper with photos of clients accompanied by statements claiming the adviser helped them meet their financial goals. to advertise past, specific investment recommendations that were or would have been profitable, unless the advertisement fully disclosed all recommendations for at least the past year (including the security recommended, the date, price, and nature of the recommendation—buy, sell, or hold—the price triggering the recommendation, and the most recent price) and included a mandated cautionary legend that past performance is no assurance of future results. to advertise any graph, chart, formula, or other device that consumers can use to determine when to make investment decisions while prominently disclosing the device's limitations and difficulties in its use. to offer a free subscription to the adviser's quarterly market review once the subscriber has completed a detailed financial profile. A)I and IV. B)I and II. C)II and III. D)III and IV.

A)I and IV. Testimonials of any kind are prohibited. Offers of free service must be totally free, not only free of cost but also free of any obligation. Disclosure of the limitations and difficulties of using a formula or charting system makes an advertisement permissible.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must contain: the formula used to compute an advisory fee. provisions on discretionary power. a clause stating that the client's consent is needed to assign the contract. A)I, II and III. B)I and II. C)II only. D)I only.

A)I, II and III. Advisory contracts must disclose services provided; the term of the contract; the amount of the advisory fee or the formula used to compute the fee; the amount of fee to be refunded (if any) if the advisory fee is prepaid and the contract is terminated; a provision as to discretionary authority; and a provision requiring the consent of the client to assign the contract. All choices listed must be included.

The Investment Advisers Act of 1940 addresses the issue of investment advisers (IA) maintaining custody of client funds and/or securities. In which of the following cases would that Act consider the IA to have custody? Possession of client funds or securities. Any arrangement under which the IA is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the IA's instruction to the custodian. Any capacity that gives the IA or a supervised person legal ownership of or access to client funds or securities. Receipt of a check made out to a third party. A)I, II and III. B)I and III. C)I, II, III and IV. D)I and II.

A)I, II and III. One of the things that makes the federal rules on custody different from the USA is that receipt of a check made out to a 3rd party other than the IA is not considered to be custody.

Which of the following are required for an initial application for registration as an investment adviser? A consent to service of process. A fee. Disclosure as to whether the applicant will have discretionary powers over client funds and/or securities. Disclosure as to whether the applicant will have custody of client funds or securities. A)I, II, III and IV. B)I and II. C)II only. D)I, II and IV.

A)I, II, III and IV. An initial application must contain a consent to service of process, a fee, and must disclose whether the applicant will have discretionary powers over, or custody of, client funds and/or securities.

Which of the following statements is (are) TRUE concerning wrap fee programs under the Uniform Securities Act? Wrap fee disclosure documents must be filed with the Administrator. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. Amendments must be filed promptly with the Administrator if the disclosure document becomes inaccurate in any material way. The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A. A)I, II, III and IV. B)I, III and IV. C)I only. D)I and III.

A)I, II, III and IV. Wrap fee disclosure documents must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Amendments must be filed promptly with the Administrator if the disclosure document becomes inaccurate in any material way. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end.

Under the Investment Advisers Act of 1940, which of the following statements are TRUE? Part 2 of Form ADV may be used to satisfy the brochure requirement. Advisers who have custody of clients' securities or require prepaid fees in excess of $1,200, 6 months or more in advance are required to provide audited balance sheets to their clients. Advisers with $110 million or more in assets under management must be SEC registered and are exempt from state registration. It is misleading and prohibited for an adviser to use RIA or R.I.A. after his name. A)I, III and IV. B)III and IV. C)I, II, III and IV. D)II, III and IV.

A)I, III and IV. For advisers covered under federal law, inclusion of the audited balance sheet is only required when demanding or accepting substantial prepayments, but not for custody. RIA is not a legal designation and may not be used. The same is true for an investment adviser representative using the initials, IAR. If you are a CPA, CFP, CLU, etc. or have an MBA, PhD., you may use them. ADV Part 2 may be used to meet the brochure requirement under the Investment Advisers Act.

An investment adviser advertises a computer-based formula for making buy and sell decisions. Under the Investment Advisers Act of 1940, which of the following disclosures is required? How long the adviser has used the formula. Degree of difficulty involved in applying the formula. Limitations of using the formula. Recommendations based on the formula for the previous year. A)II and III. B)III and IV. C)I and III. D)I and IV.

A)II and III. An advertisement containing a formula for making investment decisions must also prominently disclose its limitations and the difficulty of using it.

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be: disclosed promptly to all customers by amending the brochure. disclosed promptly only to those customers who will be affected by the change through a new brochure. disclosed in the summary of material changes in the annual updating amendment to the SEC. disclosed promptly to the Administrator of the state where the IA maintains its principal office. A)II and III. B)I, III and IV. C)I and III. D)I and IV.

A)II and III. Because this will only affect new clients, the brochure (or Part 2A of the ADV), must be amended to reflect this new method of operation and made available to these clients and to the SEC at the end of the year. The state has no cause to receive a copy of a federal covered adviser's brochure.

Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE? Funds may be deposited in any account as long as the adviser is named as trustee for the client and adequate records are maintained. Clients must be kept informed in writing of the location of their funds and securities and of any changes. Clients must receive quarterly statements from the adviser itemizing the funds and securities in custody and all transactions on the account during the period. A)II and III. B)I and II. C)I and III. D)I only.

A)II and III. The specifications for the account are such that using the term "any account" is incorrect. When advisers have custody, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC.

An investment adviser wishes to engage the services of a third party to solicit new clients for the firm. To be in compliance with the Investment Advisers Act of 1940: the solicitor must be registered as an IAR. compensation may not be sales related. the solicitor must not be subject to statutory disqualification. disclosure of the solicitation arrangement must be made to clients upon request. A)II and III. B)I and III. C)II and IV. D)I and IV.

A)II and III. Third-party solicitors are not required to be registered as IARs and therefore may not receive sales-related compensation. However, they must not be subject to statutory disqualification that would prevent them from becoming registered. Disclosure is necessary whether or not it is requested.

Areas of concern for protecting customer data would include agents recommending securities that are unsuitable for the customer a vendor misusing, or inadequately protecting, confidential customer information a retail customer loaning money to the agent handling the account a vendor possibly failing adequately to protect confidential customer information after its relationship with the firm is terminated A)II and IV B)II and III C)I and IV D)I and III

A)II and IV Although we generally think of security breaches occurring within the confines of the firm itself, many broker-dealers, especially smaller ones, contract with outside vendors for data storage. That can be a weak link. Unsuitable recommendations and improper loans are prohibited practices, but that has nothing to do with securing customer Personally Identifiable Information (PII) or Sensitive Personal Information (SPI).

When describing the differences between an investment adviser and an investment adviser representative, it would be correct to state that the investment adviser may: exercise discretion in an account whereas an IAR may not. maintain custody of client funds and securities whereas an IAR may not. be required to be bonded whereas an IAR may not. be required to maintain a minimum net worth whereas an IAR may not. A)II, III, and IV. B)I and II. C)I and IV. D)II and III.

A)II, III, and IV. Registered investment advisers, but not their representatives, are permitted to maintain custody of client assets (if not prohibited by the Administrator). There is no minimum net worth standard for IARs as there is for IAs. Both may be granted written discretionary powers, and if so, only the IA may be required to be bonded (although adequate net worth will suffice).

Under the Uniform Securities Act, which of the following statements regarding Form ADV Part 2 is TRUE? A)It must be delivered to clients annually unless there are no material changes. B)It must always accompany the investment adviser's brochure. C)It must be delivered no later than 48 hours prior to entering into an investment advisory contract. D)It must be delivered no later than receipt of the client's funds.

A)It must be delivered to clients annually unless there are no material changes. Under the USA, ADV Part 2, or brochure, must be delivered to clients on an annual basis unless there have been no material changes. If it is not delivered 48 hours in advance of the initial contract, the client has a 5-day termination clause. It does not accompany the brochure-it is the brochure.

In which of the following situations has the investment adviser NOT violated the antifraud provisions of the Investment Advisers Act of 1940? A)Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. B)Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known. C)Jane is affiliated with a broker-dealer but doesn't tell clients that the investment advice she renders is outside the scope of her employment with that broker-dealer. D)George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client.

A)Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. If advisers intend to implement a plan using only products available from a broker-dealer with which they are affiliated, this fact must be disclosed to clients. If advisers will act as an agent of a broker-dealer with which they are affiliated in implementing any part of a plan, this fact must be disclosed. If the investment advice provided is outside the scope of their employment with the broker-dealer with which they are affiliated, this fact must be disclosed. However, advisers are required to disclose trades made for their own account only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. In this case, the transaction made for the adviser's own account is consistent with her advice.

According to the Uniform Securities Act, which of the following would NOT be an unlawful activity for an investment adviser? A)Notifying clients within a reasonable amount of time of the departure of a minority partner of the firm. B)Entering into an investment advisory contract that provides specifically for compensation based on a share of capital appreciation of the customer's funds. C)Taking custody of a customer's securities or funds without notifying the Administrator, even though the Administrator has no rule that prohibits such custody. D)Entering into an investment advisory contract that does not mention the compensation arrangements.

A)Notifying clients within a reasonable amount of time of the departure of a minority partner of the firm. When an IA organized as a partnership has a change involving a minority of the partners, notification to all clients must be sent within a reasonable amount of time. NASAA does not define reasonable, but that is the correct term to use. Although there are cases where performance-based compensation is permitted, unless the question specifically refers to that exception, the action is prohibited.

What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A)Proceed with the account, but make a supervisory person aware of this. B)Proceed with the account; the signature is not required. C)Only unsolicited orders may be accepted until the signed receipt is received. D)Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received.

A)Proceed with the account, but make a supervisory person aware of this. Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person.

The federal law dealing with privacy matters for financial institutions is A)Regulation S-P B)HIPAA C)Regulation FD D)The ACA

A)Regulation S-P Regulation S-P deals with privacy of customer information for financial institutions. Regulation FD requires public companies to make full disclosure of material information to all investors at the same time. HIPAA deals with privacy regarding health matters, and the ACA is the Affordable Care Act—better known as Obamacare.

Which of the following statements regarding advisers who maintain custody over client accounts is NOT true? A)The adviser must arrange for the audit of client accounts by an independent public accountant on a systematic basis at least once a year. B)Advisers must send clients quarterly statements that itemize the funds and securities in the adviser's possession. C)If customer funds and securities are deposited in a bank, the bank account must only contain customer funds and identify the adviser who is acting as an agent for the customers. D)The adviser must maintain complete and accurate records of all acco

A)The adviser must arrange for the audit of client accounts by an independent public accountant on a systematic basis at least once a year. The adviser must arrange for the audit of client accounts by an independent public accountant without prior notice to the adviser, and not on a systematic basis (hence the surprise audit). The adviser must send quarterly statements to clients itemizing the funds, securities, and transactions that have occurred. The adviser must maintain accurate records of all accounts and ensure that the funds and securities are segregated by client.

Jim Thomas contracts with XYZ Advisory Services for the design of a financial plan and investment advice. He pays an up-front fee when the contract is signed and receives XYZ's disclosure brochure at that time. After three days, Jim decides to cancel the investment advisory service with XYZ. According to the Uniform Securities Act, which of the following statements is TRUE? A)The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date. B)The contract is binding, and XYZ has no obligation to return any fees collected. C)The advisory firm must cancel the contract and return all fees collected. D)The advisory firm must cancel the contract but may keep all fees collected.

A)The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date. Because the brochure was delivered at the time of the signing of the contract, the client may cancel without penalty within five business days. The firm must return all of the up-front fees collected except for an amount that is proportionate to the time advisory services were rendered. This is commonly known as the 48-hour rule because any time the client does not receive the adviser's brochure at least 48 hours prior to entering into the contract, this refund right is in effect.

Which of the following statements is TRUE about the compensation of an investment adviser? A)The investment adviser may be compensated on the basis of the total assets of the portfolio over a period of time. B)The investment adviser's compensation is not taxed. C)It is not necessary to disclose compensation received from the sale of non-securities products to advisory clients. D)The investment adviser may be compensated on the basis of a share in the capital appreciation of the funds of the client.

A)The investment adviser may be compensated on the basis of the total assets of the portfolio over a period of time. The Investment Advisers Act of 1940 (as well as the Uniform Securities Act) permits the adviser to be compensated on the basis of the average total value of the client's funds between specified dates. It may not be based on portfolio appreciation or capital gains. The most common way to compensate the adviser is based on a percentage of average assets under management each month. As with any rule, there are exceptions. Because this question does not address the exceptions, it should be answered from the basic premise that performance-based fees are prohibited. All compensation, even when from non-securities products, must be disclosed.

If a client solicitor acts on behalf of an investment adviser, which of the following conditions is NOT required by the Investment Advisers Act of 1940 for the adviser to pay the solicitor a fee for this service? A)The solicitor must be registered as an investment adviser. B)There must be a written agreement between the solicitor and the investment adviser. C)The adviser must be registered as an investment adviser. D)There can be no outstanding SEC order barring the solicitor's activities.

A)The solicitor must be registered as an investment adviser. A client solicitor is usually not required to register as an investment adviser under the Investment Advisers Act of 1940. The solicitor is not under the control of the SEC. There must be a written agreement between the solicitor and the investment adviser for whom he solicits clients. The solicitor cannot have a disciplinary item in his background that would prohibit that solicitor from registering as an adviser or adviser representative.

An investment adviser wishes to advertise a proprietary charting system used to time the market. In order to be in compliance with the Investment Advisers Act of 1940: A)a statement reflecting the limitations and difficulties of using the system must be included in the ad. B)results obtained by using the system must be shown using a time period of no less than 12 months. C)authorship of the system must be prominently disclosed. D)the advertisement must be filed with the appropriate SRO within 10 business days of first use.

A)a statement reflecting the limitations and difficulties of using the system must be included in the ad. An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using said system.

An agency cross transaction can be described as: A)a transaction where a person acts as both an investment adviser and broker-dealer in the same transaction. B)a transaction between an issuer and a broker-dealer. C)a sale of securities between different agencies of the federal government. D)a sale of a security owned by a broker-dealer to the general public.

A)a transaction where a person acts as both an investment adviser and broker-dealer in the same transaction. An agency cross transaction occurs when an investment adviser acts as both adviser and broker-dealer and requires prior written approval from the client and special reporting requirements. The adviser cannot recommend the transaction to both parties, only one side or the other.

When referring to a federal covered investment adviser, all of the following are supervised persons EXCEPT: A)an investment adviser solicitor. B)the chief analyst. C)the receptionist who works for the investment adviser and analyzes client financial profiles. D)an investment adviser representative.

A)an investment adviser solicitor. All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Solicitors are not employees of the adviser and, therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the solicitor complies with the solicitor agreement. Please be careful because this is not so under the USA. That act considers solicitors supervised persons, whether employed by the adviser or not, and requires IAR registration.

Under the USA, an investment adviser's current clients must be delivered a brochure A)annually whether or not the adviser has custody or discretion B)quarterly if the adviser has both discretion and custody C)within 48 hours of renewal D)annually​, but only​ if the adviser has neither custody nor discretion

A)annually whether or not the adviser has custody or discretion Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients,(except those who are exempt from the brochure delivery requirements {impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940}), within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.

A client with a net worth of $5 million is compensating an investment adviser with a performance-based fee. According to the Investment Advisers Act of 1940, this arrangement must be based on: A)capital gains minus capital losses, including both realized and unrealized gains and losses. B)a period of no less than six months. C)the S&P 500 index performance. D)This arrangement is not permitted because the client has not met the minimum invested assets requirements.

A)capital gains minus capital losses, including both realized and unrealized gains and losses. A performance-based fee must be based on capital gains minus capital losses, include both realized and unrealized gains and losses and must reflect a time period of no less than 12 months. This client is well above the minimum net worth requirements of $2 million. The rule requires that the performance be measured against a recognized benchmark but does not specify one.

Unless done under a specific exemption described in the law, it would generally be prohibited for an investment adviser to: A)charge fees based on performance. B)have discretion over a clients assets. C)charge fees in advance of services performed. D)charge commissions.

A)charge fees based on performance. Section 102(c)(1) of the Uniform Securities Act states that, except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.

Under rule 206(4)-7 of the Investment Advisers Act of 1940, each investment adviser registered with the SEC is required to adopt and implement written policies and procedures designed to prevent violation of the federal securities laws. Ensuring that this is done is the role of the​ A)chief compliance officer (CCO) B)chief financial officer (CFO) C)chief operating officer (COO) D)chief executive officer (CEO)

A)chief compliance officer (CCO) Although all of these "C" level officers have an important role to play, it is the CCO who is responsible for administering the policies and procedures designed to prevent violation of the federal securities laws and review those policies and procedures annually for their adequacy and the effectiveness of their implementation.

The most common purpose of a Business Continuity Plan is to have processes and procedures in place to ensure that A)critical business functions can continue during and after a significant business interruption B)the advisory firm is able to continue to earn its fees C)all employees will be able to arrive at their work location on time D)the securities in an advisory client's portfolios are protected against market interruption

A)critical business functions can continue during and after a significant business interruption Keeping the business operating is the most common purpose of a BCP. The firm is unable to offer any protection against a stock market closing (such as on September 11, 2001), and earning fees is of minor importance when there is a significant business interruption.

According to the Uniform Securities Act, the investment adviser brochure must include the business backgrounds of: A)each member of the investment committee or group that determines general investment advice to be given to clients. B)all employees of the adviser. C)institutional clients. D)an affiliated broker-dealer.

A)each member of the investment committee or group that determines general investment advice to be given to clients. The business background of these key individuals must be included in Part 2B of Form ADV and in the disclosure brochure. The business background of other employees, affiliated broker-dealers, and institutional clients need not be included in the brochure.

Once an investment adviser's registration has been granted by the state Administrator, he may advertise that he is: A)eligible to engage in selling securities advice to the public. B)able to give advice and execute securities transactions. C)approved by state authorities to analyze securities. D)an RIA.

A)eligible to engage in selling securities advice to the public. Passing the Series 66 exam and obtaining registration by the Administrator makes an individual eligible to provide securities advice to the public. Only individuals registered as agents may execute transactions and the initials RIA may not be used, only the phrase" registered investment adviser."

The Administrator may, by rule: A)forbid investment advisers registered in that state from taking custody of client funds. B)suspend the registration of a federal covered adviser because the contract did not meet the requirements for a state-sanctioned investment advisory contract. C)allow an agent to waive provisions of the USA. D)suspend federal law if the Administrator believes it to be in the public interest.

A)forbid investment advisers registered in that state from taking custody of client funds. The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes.

An adviser has custody of a client's securities or funds if the adviser: A)has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees. B)uses a broker-dealer to hold the customer's funds and securities and has limited trading authority over the account. C)maintains the customer's funds and securities in an account as JTWROS with the registered investment adviser. D)accepts prepayment of advisory fees or has discretion over a customer's account.

A)has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees. Custody is the physical possession of the asset. Discretion is the authority to make decisions independent of the authorization of the account holder on a trade-by-trade basis. Authorization is in a blanket form in the existence of either a limited trading authority or full trading authority. Acceptance of prepayment of adviser's fees or discretionary authority does not constitute custody. The ability to withdraw funds for the purpose of paying quarterly advisory fees from a customer's accounts is deemed to be custody of the funds. A broker-dealer holding a customer's funds and securities would have custody, but the adviser who has trading authority over the account would only have discretion. If the funds and securities of the client are held with the funds and securities of the adviser in a joint account, the adviser would be involved in commingling (or theft), not custody.

Foster Advisers operates as an investment adviser that is registered in a state where the Administrator, by rule, prohibits investment advisers from holding custody of client funds and securities. This means that Foster Advisers may not: A)have physical custody over its clients' monies and certificates. B)examine customers' stock certificates. C)refer clients to an affiliated broker-dealer. D)manage client accounts on a discretionary basis.

A)have physical custody over its clients' monies and certificates. Under the Uniform Securities Act, custody indicates that the adviser has physical possession over its clients' certificates and monies. A prohibition against custody in a given state does not prohibit the adviser from holding investment discretion over clients' accounts, provided such discretion is granted under a suitable authorization or power of attorney. Merely examining customers' stock certificates is certainly not the same as holding custody or possession of such certificates. As long as the affiliation is disclosed, there is nothing improper about an IA referring advisory clients to that BD.

Recent rule changes to the Investment Advisers Act of 1940 require all of the following EXCEPT: A)independent review of an advisory firm's compliance procedures. B)annual compliance review. C)written compliance policies and procedures. D)appointment of a chief compliance officer (CCO).

A)independent review of an advisory firm's compliance procedures. Although new rules require annual compliance reviews, such reviews may be conducted internally by the firm's appointed chief compliance officer. The new rules require written policies and procedures, an annual compliance review, and the appointment of a chief compliance officer (CCO).

Under the Uniform Securities Act, investment advisory contracts: A)must contain a description of fees. B)cannot be assigned without the Administrator's approval. C)must list each state in which the adviser is registered. D)are cancelable without penalty for 48 hours after the customer signs.

A)must contain a description of fees. Under the USA, all advisory contracts must be in writing and contain descriptions of how fees are determined. Contracts are valid upon signing, need not list all states in which an adviser is registered, and cannot be assigned without the client's approval. However, if the brochure is not delivered at least 48 hours before the signing of the contract, the client has the right to withdraw without penalty for five business days. Administrator approval is not required.

A famous tennis player offers to record a testimonial for an investment adviser for use in a television commercial. Under the Uniform Securities Act, the investment adviser may: A)not use the testimonial. B)use the testimonial and pay the athlete. C)use the testimonial provided the athlete receives no compensation. D)use the testimonial with the approval of the state Administrator.

A)not use the testimonial. Testimonials promoting investment advisers' services are prohibited under both state and federal law, regardless of whether a spokesperson receives compensation. This is in contrast to FINRA (NASD) rules, which do permit testimonials as part of advertising as long as proper disclaimers are made.

Under the Uniform Securities Act, an investment adviser would be permitted to maintain custody of customer cash and/or securities if: A)notification was given to the Administrator and custody was not prohibited by that state's rules. B)customer permission was obtained prior to entering into the contract. C)the IA maintained net worth or a surety bond of at least $10,000. D)permission was obtained from the Administrator and custody was not prohibited by that state's rules.

A)notification was given to the Administrator and custody was not prohibited by that state's rules. In order to maintain custody, notification must be given to the Administrator and, obviously, the state must not have a rule forbidding custody. Does the customer have to approve of the custody arrangement? Yes, but that is done AT the time of entering into the contract, not before. What about bonding or net worth? Under the USA, in order to maintain custody, an IA must have net worth of no less than $35,000, or provide a suitable surety bond.

Under the Uniform Securities Act, an investment adviser would be permitted to maintain custody of customer cash and/or securities if: A)notification was given to the Administrator and custody was not prohibited by that state's rules. B)permission was obtained from the Administrator and custody was not prohibited by that state's rules. C)the IA maintained net worth of at least $10,000. D)customer permission was obtained prior to entering into the contract.

A)notification was given to the Administrator and custody was not prohibited by that state's rules. In order to maintain custody, notification must be given to the Administrator and, obviously, the state must not have a rule forbidding custody. Does the customer have to approve of the custody arrangement? Yes, but that is done AT the time of entering into the contract, not before. What about net worth? Under the USA, in order to maintain custody, an IA must have net worth of no less than $35,000.

Gibraltar Investment Advisers is organized as an investment advisory partnership. If Jack, a partner with a minority interest, retires, Gibraltar is required to: A)notify its clients as soon as reasonably possible of Jack's retirement. B)notify its clients immediately that Jack is no longer with the firm. C)do nothing; notification is not required. D)notify its clients within 30 days of Jack's retirement that he is no longer with the firm.

A)notify its clients as soon as reasonably possible of Jack's retirement. When a partner with a minority interest leaves an advisory firm for any reason, client notification must be made within a reasonable period. However, if Jack were a majority partner, the law would consider that the clients' accounts were assigned and client consent would then be required to maintain those contracts, as opposed to notification.

Under the Investment Advisers Act of 1940, cash payment to a broker-dealer from an investment adviser in return for client referrals is A)permitted if the investment adviser makes certain disclosures to the clients and meets other requirements. B)permitted with no restrictions. C)permitted if the investment adviser and broker-dealer are affiliated. D)not permitted under any circumstances.

A)permitted if the investment adviser makes certain disclosures to the clients and meets other requirements. Cash payments for referrals are permitted. All such compensation must be disclosed to affected clients.

Matt, a registered investment adviser, operates an office down the hall from Jane, a CPA. Because Jane has no interest in portfolio management, she frequently refers her clients to Matt for investment advice. When one of Jane's client signs a letter of engagement with Matt, Matt sends Jane a $200 referral fee. This occurred 5 times in the previous year. This situation is: A)permitted if the referral fee is disclosed to the appropriate clients. B)permitted because there were fewer than 6 occurrences involving referral fees. C)permitted without restriction. D)prohibited.

A)permitted if the referral fee is disclosed to the appropriate clients. Although neither the Investment Advisers Act nor the Uniform Securities Act specifically prohibits investment advisers from paying referral fees, both acts require that such fees be appropriately disclosed.

Greater Wealth Managers, (GWM) is an investment adviser registered in States A, B, C, and D. They have recently hired an individual to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act, A)registration as an investment adviser representative is required for this individual B)no registration is required, because this individual is not rendering investment advice C)registration as an investment adviser representative and as an agent is required for this individual D)no registration is required, because this individual is not rendering investment advice and is being closely supervised

A)registration as an investment adviser representative is required for this individual Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs.

Under provisions of the Investment Advisers Act of 1940, investment advisers that maintain custody of client securities are required to do all of the following EXCEPT: A)send an itemized statement to clients at least monthly. B)keep copies of all confirmations sent to clients. C)arrange for a surprise audit by an independent public accounting firm at least annually and subsequently file a report of the examination with the SEC. D)maintain a separate ledger for each client showing all purchases and sales.

A)send an itemized statement to clients at least monthly. Investment advisers that maintain custody of customer securities and/or cash are required to send statements to customers on a quarterly basis, not monthly. All of the other choices are correct statements and therefore not exceptions to the requirements.

When it comes to safeguarding confidential information pertaining to the account(s) of an individual customer or family, the rules deal primarily with what is called a covered account. A key factor in determining if an account meets the definition is A)the ability of the customer to move funds out of the account on multiple occasions B)if the customer owns the underlying security on which the call option is sold C)that the account is in the name of an institutional customer D)the ability of the customer to make a one-time wire to a foreign bank account owned by a family member

A)the ability of the customer to move funds out of the account on multiple occasions A covered account is an account, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions. Where the money goes is less of a factor than the frequency of transactions. The only time when a single transaction account might be covered is if there is reason to believe that the identity of the customer is at risk—not likely when wiring to a family member. Institutions are not included in the definition and owning the stock underlying the sale of a call option means the option is covered—totally different from the topic here.

Under the USA, every investment adviser organized as a partnership, must include in its contracts an agreement to notify clients within a reasonable period of time: A)the addition or removal of any of the partners. B)a change in the location of securities held in custody. C)a change in the method of computing fees. D)the decision to charge fees in advance rather than arrears.

A)the addition or removal of any of the partners. Investment advisers organized as partnerships must include in their advisory contracts a statement that they will notify all clients of a change to the composition of the partnership within a reasonable period of time. All of the other choices mentioned here would require prompt notification, which, although not quantified in the USA, is much sooner than a reasonable period of time.

he SEC has enumerated specific items that must be included in Investment Adviser written compliance manuals, required as of October 5, 2004, EXCEPT: A)the advisory firm should indicate the educational requirements necessary for employment. B)the advisory firm must review policies and procedures at least on an annual basis. C)the advisory firm should implement procedures for allocating investment opportunities such as best executions among clients. D)the advisory firm must monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements.

A)the advisory firm should indicate the educational requirements necessary for employment. Guidelines under SEC rules require (at minimum) that the chief compliance officer of each federal covered investment adviser conduct an annual review of its compliance procedures. Among the duties of the compliance officer is to monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements. The firm should implement procedures for allocating investment opportunities such as best executions among clients. If the firm does have internal educational requirements, that would be found in its HR manual, not in its compliance manual.

All of the following statements regarding the role of the chief compliance officer of an investment adviser are correct EXCEPT: A)the chief compliance officer should have a minimum of five years of experience in securities compliance in matters involving public customers or accounts. B)the identity of an investment adviser's chief compliance officer must be disclosed on the Form ADV. C)the chief compliance officer should be competent and knowledgeable regarding the applicable federal securities laws. D)the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser.

A)the chief compliance officer should have a minimum of five years of experience in securities compliance in matters involving public customers or accounts. There is no specific experience requirement for the chief compliance officer of an investment adviser; he should be competent and knowledgeable regarding the applicable federal securities laws. Additionally, the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser.

An IAR with a state covered adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, all of the following must be complied with EXCEPT: A)the client must sign the contract at the same time as he receives the IA brochure and the solicitor disclosure document. B)the solicitor must be registered as an IAR in order to receive compensation based upon advice. C)the terms of the compensation must be spelled out. D)disclosure of the arrangement must be made to the client

A)the client must sign the contract at the same time as he receives the IA brochure and the solicitor disclosure document. There are no requirements under the USA that the contract be signed at the same time as receipt of the brochure. There is a requirement that the brochure, or, as in this case, brochures, be received no later than entering into the contract, but, in most cases it is delivered at least 48 hours prior to the signing.

All of the following statements regarding investment advisory contracts under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers are true EXCEPT: A)the contract's term may not exceed 1 year. B)the contract must be renewed in writing. C)the contract must not permit assignment without the client's consent. D)the contract must detail any prepaid fees to be refunded to the client upon termination.

A)the contract's term may not exceed 1 year. The contract must set forth the term of the contract, which need not be for only 1 year. Any renewals or extensions of the contract at the end of the term must be in writing. The contract must describe any refunds upon termination and may not permit assignment without the client's consent.

Twenty-five individuals have formed an investment company. They have heard wonderful things about you as an investment adviser and ask if you would be interested in managing their portfolio. You reply that you would be interested, but you will only take the account if you can structure a compensation arrangement that calls for you to receive a base fee plus 18% of the profits to the extent that the account's performance exceeds a standard benchmark. Under the Uniform Securities Act, this type of agreement is allowable if: A)the investment company has net worth of at least $2 million or will place at least $1 million in assets under management with the IA. B)a majority of the shareholders in the investment company are qualified investors. C)the individual in charge of the investment company is a qualified investor. D)the contract is signed by one of the investors who is an accredited investor.

A)the investment company has net worth of at least $2 million or will place at least $1 million in assets under management with the IA. An investment adviser may enter into, extend or renew an investment advisory contract which provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client if the client entering into the contract is: a natural person or a company who, immediately after entering into the contract, has at least $1 million under the management of the investment adviser; or a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds $2,000,000. Do not be confused by thinking this is an institutional client (a registered investment company) - they need at least 100 investors and registration with the SEC.

An investment adviser is approached by an investment company that has 25 investors. The company would like to employ the adviser to manage their account. The IA is willing to do so, but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable: A)the investment company must have net worth of at least $2 million or at least $1 million in assets under management with the IA. B)all of the shareholders in the investment company must be qualified investors. C)the individual in charge of the investment company must be a qualified investor. D)a majority of the shareholders in the investment company must be qualified investors.

A)the investment company must have net worth of at least $2 million or at least $1 million in assets under management with the IA. In 1987, NASAA followed the lead of the SEC and permitted performance-based compensation when the investor (or company) had at least $500,000 in AUM with the IA, or had a net worth of $1 million. In 1998, the SEC raised the threshold to $750k and $1.5 million respectively. Then, in July, 2011, the bar was raised again by the SEC to $1 million and $2 million. On April 15, 2013, NASAA caught up and the numbers are now unified. By the way, this is not a registered investment company under the Investment Company Act of 1940 - those need at least 100 investors.

Strategic Investment Managers Company (SIMCO), is an investment adviser registered with the SEC. They have over 1,000 clients, about 53% of whom have granted SIMCO discretionary authority. From time to time, SIMCO feels the same security is appropriate for a number of their accounts and turns in a bunched order. When the order is filled at different prices, the shares are allocated: A)to all accounts proportionately, regardless of the size of the individual account. B)to the $1,000,000+ accounts first. C)on a FIFO basis. D)through a formula developed by SIMCO and used on a consistent basis.

A)to all accounts proportionately, regardless of the size of the individual account. The nature of handling discretionary advisory accounts is that from time to time, it is appropriate to trade the same security at the same time in a number of these accounts. When that occurs, it is likely that there will be several trades and they won't all be at the same price. The only fair allocation method is to take the average price and use that for all clients showing preference to none of them over any other.

LinkedIn is a popular social media tool for business people. The nature of the information posted poses risks for investment advisers because of the prohibition against testimonials. A step that advisers should consider taking to minimize the risk of an improper endorsement appearing on their page is A)to select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile B)only allow unsolicited recommendations from clients to be shown on the page C)only allow clients to endorse an adviser for a skill that is already listed on his profile D)only allow clients to endorse an adviser for a new skill that does not already appear on the adviser's profile

A)to select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile If you do a good job, it is only natural that your clients want to say good things about you. Unfortunately, that can lead to a violation of the rule against testimonials for IAs and IARs. The LinkedIn service allows people to either endorse a listed individual's skills (or add new ones) or post recommendations. Either of these would not be acceptable. The safest thing to do is turn off the ability to endorse skills.

An adviser wishes to use in its advertising the testimonial of a client who is a famous sports figure. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this action is permitted: A)under no circumstances. B)if the information in the testimonial is correct. C)if the client is compensated for the testimonial. D)if the client is not compensated for the testimonial.

A)under no circumstances. NASAA's Model Rule requires compliance with SEC Rule 206(4) under the Investment Advisers Act of 1940. Under SEC Rule 206(4), advertisements may not contain (1) untrue statements of material fact; (2) testimonials; (3) references only to specific past recommendations; (4) references to charts, tables, formulas, or other devices used to forecast securities prices without setting forth the difficulties or limitations in their use; (5) offerings of free service without the intent or ability to perform; or (6) guarantees of future performance.

An investment adviser's advertising is permitted to state that: A)we are offering our monthly stock market report free of charge for the next 6 months to the first 100 people who email us their name and address. B)the Administrator has approved of the adviser's qualifications. C)we have developed a charting system for timing the market that makes investing simple for anyone. D)all of our employees who render advice are RIAs.

A)we are offering our monthly stock market report free of charge for the next 6 months to the first 100 people who email us their name and address. If, in fact, the offer is free, this is a permitted statement. The initials RIA are prohibited as is making any kind of statement relating to approval of qualifications by the Administrator. Any advertisement mentioning a chart or formula must always describe the limitations and difficulties of using that chart or formula.

Under the Investment Advisers Act of 1940, a cash referral fee may be paid by an IA: A)when a written agreement providing certain disclosures has been entered into between the IA and the third party. B)under no circumstances. C)with no restrictions. D)only if the referring party is registered as an IAR.

A)when a written agreement providing certain disclosures has been entered into between the IA and the third party. Please note that the question refers to the Investment Advises Act of 1940; this answer would not be appropriate under the Uniform Securities Act. A cash referral fee may be paid under the terms of a written agreement spelling out the terms and conditions of the arrangement and making the required disclosures.

An agent opening a wrap account for a wealthy client may tell the customer that: A)wrap fees may result in higher costs than separate charges for advice, management, and transactions. B)wrap fees generally result in higher costs than separate charges for advice, management, and transactions. C)wrap account managers will generally outperform index funds. D)wrap fees always result in lower costs than separate charges for advice, management, and transactions.

A)wrap fees may result in higher costs than separate charges for advice, management, and transactions. When prospecting for new wrap accounts, agents are required to disclose to customers that wrap fees may result in higher costs than separate charges for advice, management, and transactions if the client is not able to use all of the services included. For those clients that are able to make use of all of the services provided, the costs will generally be lower than the cost of buying them piecemeal. Future performance of managed accounts may not be stated or implied.

Under the Uniform Securities Act, when may an investment adviser legally have custody of money or securities belonging to a client? When the adviser has a net worth of at least $25,000. When the Administrator has not prohibited custodial arrangements. When the adviser does not have discretionary authority over the account. When the adviser has notified the Administrator that he has custody. A)I and IV. B)II and IV. C)II and III. D)I and III.

B)II and IV. The Administrator may prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a surety bond or sufficient net worth ($35,000) is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody.

An IA hires a third-party solicitor to recruit new clients. Which of the following records is the IA required to keep? A)Copies of all investment recommendations made by the solicitor B)A statement, signed by the client, that both the IA's and solicitor's brochures were received C)A copy of the written agreement between the IA and the solicitor, signed by the client D)A receipt for any fee charged by the solicitor, signed by the client

B)A statement, signed by the client, that both the IA's and solicitor's brochures were received When a third party solicitor engaged by an investment adviser makes contact with a potential client, that client must acknowledge, in writing, the receipt of the brochures of both the adviser and the solicitor. There must be a written agreement between the adviser and the solicitor, but the client has nothing to do with that. Solicitors don't recommend investments.

elen, a registered investment adviser, recommended a stock to many of her clients when that stock was trading at $35 per share. The stock is currently trading at $70 per share. From the choices below, which statement best reflects her situation? A)This stock has even more upside potential than previously thought. B)Although this stock has enjoyed an excellent performance, future performance cannot be predicted. C)She is prohibited from commenting about the performance of a stock that she recommended in the past. D)Her stock recommendations often result in 100% returns.

B)Although this stock has enjoyed an excellent performance, future performance cannot be predicted. Although an adviser is not prohibited from discussing a profitable past recommendation with clients and prospects, the adviser must point out that past performance is not an indication of future return.

he NASAA Model Rule on Custody of Customer Funds and Securities requires that an adviser with custody of client funds or securities do all of the following EXCEPT: A)submit an audited balance sheet with Part 2 of Form ADV each year. B)send monthly account statements to clients. C)deposit client funds into separate accounts and provide written notice to clients about the location of their assets. D)submit to an annual surprise audit conducted by an independent accountant.

B)send monthly account statements to clients. Investment advisers with custody must send statements to clients on a quarterly, not monthly, basis.

Which of the following statements regarding the Investment Advisers Act of 1940 and the adviser's brochure are CORRECT? A)Each client must receive the brochure no later than 48 hours after entering into the advisory contract. B)Each client must receive the brochure no later than the entering into the advisory contract. C)Annual delivery of a summary of material changes relieves the adviser of the obligation to deliver a brochure. D)Advisers must deliver the brochure to clients for whom they offer impersonal advisory service only when the annual charge does not reach $500.

B)Each client must receive the brochure no later than the entering into the advisory contract. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The summary includes an offer to provide a copy of the updated brochure and information on how the client may obtain it. There is no 48-hour rule under federal law as there is for state law and, in any event, that law has a 48-hour in advance requirement. Only when the charge for the impersonal advice is $500 per annum or more is there a requirement to deliver the brochure.

Unless qualifying for an exemption, which of the following advisory fee structures is NOT allowed under the USA? A)Fees based on an hourly rate. B)Fees based on a percentage of the change in value of funds from quarter to quarter. C)Fees based on a fixed dollar schedule tied to the value of funds under management. D)Fees based on a percentage of the aggregate value of funds under management.

B)Fees based on a percentage of the change in value of funds from quarter to quarter. Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures.

In lieu of a separately prepared brochure, an investment adviser is permitted to deliver potential clients a copy of its: A)Form ADV Part 1. B)Form ADV Part 2. C)Form ADV-W. D)Form ADV Schedule I.

B)Form ADV Part 2. Part 2 of the Form ADV may be used to meet the IA's brochure delivery requirements.

A federal covered investment adviser employs the services of a third-party solicitor. The Investment Advisers Act of 1940 would require the solicitor to deliver: a copy of the IA's brochure. a copy of the solicitor's brochure. a copy of the solicitor's script. a copy of the IA's Form ADV Part 1. A)I, II and IV. B)I and II. C)I and III. D)II and IV.

B)I and II. Third-party solicitors must provide a copy of the investment adviser's brochure (Form ADV Part 2), as well as a copy of the solicitor's brochure. The solicitor's script must be approved by the IA, and only the SEC receives a copy of the Form ADV Part 1.

Which of the following could be a red flag regarding identity theft? Receipt of a credit card for which no application was made Receipt of a replacement credit card 2 months prior to the expiration date of the current card Receipt of a notice of a change of address on a credit card account that was not made by the account holder Receipt of a notice from the credit card company of an offer for a 0% balance transfer A)III and IV B)I and III C)I and II D)II and IV

B)I and III When a credit card is received (and the recipient did not file an application), or a notice is received of a change of address (and the account holder's address has not been changed), a red flag should go up indicating possible identity theft. Replacement cards are expected prior to the current card's expiration date, and credit card companies often send offers for balance transfers at low rates.

Under the NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, advisory contracts must: prohibit assignment of the contract without the client's consent. contain information on the adviser's performance for at least the most recent 12-month period. describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. A)I, II and III. B)I and III. C)II and III. D)I and II.

B)I and III. An advisory contract must prohibit assignment without the client's consent and must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated. In addition, it must describe the fee or the formula for computing the fee. Contracts would never contain information regarding the adviser's past performance.

The Uniform Securities Act mandates that contracts between investment advisers and their clients: be in writing. provide that no assignment of the contract may take place without prompt notification to the client. disclose the method of compensation. include steps the adviser plans to take to reach the client's objectives. A)III and IV. B)I and III. C)I and II. D)II and IV.

B)I and III. Any contract must disclose the method of compensation. The USA requires that initial and renewal contracts be in writing. If the contract is to be assigned, it requires prior consent of the client. The contract does not necessarily describe any of the adviser's plans for reaching the client's goals.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it would be considered an unethical business practice for an investment adviser to charge an unreasonable advisory fee. In which of the following cases would it be likely that the Administrator would find the adviser's compensation to be unreasonable? An adviser's fee schedule is not competitive with other advisers in the same general area offering essentially the same services. In addition to charging a fee based on assets under management, the adviser also charges commissions on any securities transactions he effects. The adviser charges the same hourly fee, regardless of the amount of the specific client's assets under management. The fee is projected to consistently be more than the expected return in the portfolio. A)I and II. B)I and IV. C)III and IV. D)II and III.

B)I and IV. The Model Rule specifically refers to the authority of the Administrator to determine whether an adviser's fee schedule is competitive. Logic would dictate that fees that consistently exceed the return earned on the portfolio should not be acceptable. Investment advisers, upon making proper disclosure, are permitted to charge both fees and commissions, and there is no requirement to discount one's hourly fee, regardless of the size of the client's portfolio.

Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser who has custody of clients' securities or funds must: keep funds deposited in accounts containing only client funds. be subject to a surprise audit performed at least annually by an independent accountant. send clients' statements at least once every three months showing balances. A)II and III. B)I, II and III. C)I and III. D)I and II.

B)I, II and III. When advisers have custody of clients' securities or funds, they must abide by the following rules: (1) securities must be segregated and identified by clients and kept safe; (2) client funds must be deposited into bank accounts that contain only the client funds, and the adviser must be named trustee; (3) records of all funds, securities, and transactions affecting clients' accounts must be kept; (4) clients must be sent notice of the location of funds and securities and any changes that take place there; (5) clients must receive a quarterly statement showing all funds and securities in the adviser's possession and any transactions that have taken place; (6) the adviser must arrange for a surprise audit by an independent public accountant of all securities and funds in the adviser's custody each year.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an advisory contract? Whether the contract grants discretionary power to the adviser. The term of the contract. A clause preventing assignment without consent. The formula used for computing the fee. A)I and II. B)I, II, III and IV. C)II only. D)I, II and IV.

B)I, II, III and IV. Written advisory contracts must disclose services provided; the term of the contract; the amount of the fee or the formula used to compute it; the amount of fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; provisions as to whether the adviser has discretionary authority and to what extent; and provisions requiring consent of the client to assign the contract.

An annual wrap fee includes the cost of which of the following? Trades executed. Investment management. Performance reporting. Custody of securities. A)I and IV. B)I, II, III, and IV. C)I and II. D)II and III.

B)I, II, III, and IV. The wrap fee combines the costs of commissions, investment management, performance evaluation, and the reporting and custody of securities into an annual fee, expressed as a percentage of the assets under management.

Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees? The client must initially have $1 million under management or a net worth of $2 million. Compensation paid in this way must be for gains reduced by losses. Disclosure must be made that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. A)I only. B)I, II, and III. C)I and II. D)II and III.

B)I, II, and III. The NASAA Model Rule permits performance-based fees if the client has at least $1 million in assets under management or a net worth of $2 million provided the compensation is based on gains and losses. Unlike the Investment Advisers Act of 1940, under the NASAA Model Rule, state covered advisers must make additional disclosures, including the incentive to take additional risk.

n order to be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with solicitors? An individual who is subject to statutory disqualification from registration as an investment adviser representative may solicit clients for the adviser as an employee of a third party solicitor. There must be a written agreement between the investment adviser and the solicitor. While the sales script used may be written by the solicitor, its content is the responsibility of the adviser. Cash referral fees to solicitors may only be paid in the case of impersonal advisory services. A)III and IV. B)II and III. C)I and II. D)I and IV.

B)II and III. All relationships between registered investment advisers and solicitors must be in writing. Any scripts are the responsibility of the adviser, regardless of who prepared them. Those subject to statutory disqualification may not be used as solicitors. Cash referral fees are not restricted to impersonal advisory services.

If the registration of an investment adviser (registered under the Investment Advisers Act of 1940) is revoked or suspended by the SEC, which of the following statements are TRUE? An appeal may be filed with the state Administrator. An appeal may be filed in federal court. An appeal may be filed within 60 days. An appeal may be filed within 90 days. A)I and IV. B)II and III. C)I and III. D)II and IV.

B)II and III. As the SEC has jurisdiction, an appeal may be filed in federal court but must be made within 60 days of the revocation or suspension order.

If a federal covered investment adviser intends to pay a third party solicitor to solicit clients for investment advisory services, which of the following must be TRUE? The solicitor must be a registered investment adviser representative with the state. The registered investment adviser must be properly registered as an investment adviser under the Investment Advisers Act of 1940. There must be a separate written agreement between the solicitor and the registered investment adviser. The agreement between the solicitor and the registered investment adviser is contained as part of the investment adviser's brochure. A)I and IV. B)II and III. C)II and IV. D)I and III.

B)II and III. Under federal regulations, if an investment adviser intends to pay a third party (non-employee) solicitor to solicit clients for investment advisory services, the adviser must be properly registered, there must be a written agreement between the adviser and the solicitor, and there can be no outstanding or pending orders or disciplinary actions against the solicitor involving finance or dishonesty. The solicitor does not have to be registered as a registered investment adviser representative because he is not representing the registered investment adviser in the giving of investment advice, in the management of accounts, or in the supervision of anyone else working for the registered investment adviser in these areas. The solicitor is being paid a fee for the solicitation of business for the registered investment adviser with a requirement of full disclosure to the client of the relationship with the adviser.

Which of the following investment adviser compensation arrangements is (are) permitted under the Uniform Securities Act? The value of a client's account at the start of the year is subtracted from the value at the end of the year. The adviser's compensation is 5% of the difference. The adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. The adviser charges a fee of 1% of the average value of the account portfolio during the year. The adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more. A)III only B)III and IV C)I and II D)I and IV

B)III and IV Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the adviser or $2 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted Please Note: Effective August 15, 2016, the net worth requirement has been increased to $2.1 million (the AUM with the adviser is still $1 million). As far as the exam, they will never have both the old and the new number in the question (if they have any number at all). So, if presented with a net worth requirement, choose whichever of the two ($2 million or $2.1 million) is presented. p>

If an investment adviser places an advertisement in a newspaper offering a free brochure to those who call, under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, what may the adviser require from callers as a condition of receiving the brochure? A)A financial profile. B)No obligation may be placed on the callers. C)A purchase. D)The names of 3 friends who might be interested.

B)No obligation may be placed on the callers. It is unethical to offer free services unless the offer is free of any obligation, monetary or otherwise.

An investment advisory firm is organized as a partnership and there are five equal partners. During the year, one of the partners passes away and two others leave to start their own firm. Which of the following is required by the Uniform Securities Act? A)The successor firm must pay the required fees. B)Permission of the clients to have their contracts assigned to the surviving entity. C)Notification to all clients as to the change in the partnership's majority interest. D)Cancellation of the registration of the firm.

B)Permission of the clients to have their contracts assigned to the surviving entity. Because three of the five partners are no longer with the firm, that represents a majority interest and the partnership must be re-formed as a new entity. The state does not require fees from successor firms, as they will be paid the fee at annual renewal time. Since this represents a new firm, the USA considers this as if the contracts are assigned so permission is required; not merely notification (as would be the case if only two of the partners had left or died).

A client delivers a stock certificate to the broker-dealer through whom that stock was recently sold. Which of the following would be the most appropriate action for the broker-dealer to take? A)Refuse the delivery unless it is in the name of the broker-dealer. B)Provide a receipt to the client at the time of delivery. C)Mail a receipt to the client within 24 hours. D)Thank the client, but no paperwork is necessary.

B)Provide a receipt to the client at the time of delivery. When a customer delivers cash or securities, the broker-dealer must provide a receipt at the time of delivery.

Under the Uniform Securities Act, if an investment adviser has custody of customer funds and securities, how often must the adviser send the customer a statement of account activity? A)Monthly. B)Quarterly. C)Within three business days after any transaction. D)Annually.

B)Quarterly. An investment adviser in possession of customer assets must send a statement to the customer every three months (quarterly). The statement must list the customer's securities and all account transactions since the last statement date.

Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is NOT allowable under the safe harbor provisions of Section 28(e)? A)Registration fees to attend an investment seminar. B)Reimbursement for travel expenses to attend an investment seminar. C)Financial planning software. D)Research reports.

B)Reimbursement for travel expenses to attend an investment seminar. Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934. Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).

Under the Investment Adviser's Act of 1940, which of the following is NOT true with regard to advertising? A)The advertisement may not refer to any formula, charting device, or graphing method without disclosing the difficulties or limitations in their use. B)The advertisement may not make offers of free service. C)The advertisement may not refer to specific past recommendations. D)The advertisement may not use testimonials from clients.

B)The advertisement may not make offers of free service. There is no prohibition against offers of free service, except that such offers must have absolutely no strings attached. Advertisements used by investment advisers may not use testimonials, specific past recommendations (though it may refer to all recommendations within a given period of time, provided a disclaimer is included stating there is no assurance that the same results will be obtained), or any formula, charting, or graphing device without disclosing the difficulties or limitations in their use; make offers of free service unless there is no obligation imposed on those who request it; or make false or misleading statements.

Under the Investment Advisers Act of 1940, which of the following statements is NOT true regarding custody of a client's funds or securities? A)The adviser must be named as agent or trustee for a client's account or else use a qualified custodian. B)The adviser must report the location of funds or securities at 6-month intervals. C)The adviser must arrange for an audit of the client's accounts at least once annually and arrange for the results to be forwarded to the SEC. D)Client securities must be segregated and kept safe.

B)The adviser must report the location of funds or securities at 6-month intervals. Advisers who have custody must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client's funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account. Annually, the adviser must arrange for an independent audit of the client's account and the results must be forwarded to the SEC. Thus, the adviser reports every three months, not every six months.

Under the rules of the Investment Advisers Act of 1940, which of the following need NOT be included in an investment advisory contract? A)A description of the services to be provided. B)The past performance record of the investment adviser. C)Amount of prepaid fees to be returned to a client if the contract is terminated. D)The advisory fee.

B)The past performance record of the investment adviser. Written advisory contracts must contain the services to be provided; the term of the contract; the amount of the advisory fee or the formula used to compute it; provisions for refunds, if any, if the advisory fee is prepaid and the contract is terminated; provisions as to whether discretionary authority is given and to what extent; and provisions requiring the consent of the client to assign the contract. There is no requirement for including the past performance record of the adviser.

An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require: A)past performance since inception of the system must be shown. B)a statement as to the limitations of and difficulties involved in using this system. C)disclosure of the length of time the charting system has been employed. D)if the system is indeed foolproof, verification of that fact.

B)a statement as to the limitations of and difficulties involved in using this system. Anytime an adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use.

As an investment adviser, you feel that RAN common stock is an appropriate addition to the portfolio for several of your clients. You enter an order to purchase 1,000 shares and receive two 500 share confirmations, but they are not at the same price. Which of the following is the proper procedure for you to follow: A)allocate the lowest price shares to those clients who have been with you the longest. B)allocate using the average of the two prices. C)allocate the lowest price shares to those clients with the greatest amount of assets under management. D)allocate using the random selection method.

B)allocate using the average of the two prices. This is the only fair thing to do.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT: A)whether or not the contract grants discretionary authority. B)any record of securities industry violations by the investment adviser. C)that assignment of the contract cannot occur without client consent. D)the amount of prepaid fee to be returned if the contract is terminated.

B)any record of securities industry violations by the investment adviser. An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. The investment advisory contract must include the amount of prepaid fee to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the contract between an investment adviser and its clients shall A)project expected performance B)be in writing C)call for annual renewal D)charge a fixed fee for the length of the contract

B)be in writing Under the NASAA Model Rule, all contracts, both initial and renewal, must be in writing. There is no standard renewal term and the fee can vary based on assets under management. There is no way to project performance.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT: A)compensation is based on gains, less losses, for a period of no less than 1 year. B)disclosure that the performance compensation may create an incentive for the adviser to take greater risks. C)the formula used to calculate compensation includes realized capital losses and unrealized depreciation. D)the client must meet certain minimum financial standards.

B)disclosure that the performance compensation may create an incentive for the adviser to take greater risks. Since these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is $2 million, or a client is qualified if he has at least $1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than one year.

Under the brochure rule of the Investment Advisers Act of 1940: A)each client must be offered a written disclosure statement at the time of signing the contract. B)each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services. C)each client must be delivered a written disclosure statement no later than 48 hours after signing the contract. D)each client must be offered a written disclosure statement at least 48 hours before signing a contract.

B)each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services. No agreement between an investment adviser and a client may commence without delivery of the adviser's brochure. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent.

Richard Alan is a longtime customer of yours and usually calls in orders identifying himself as Dick. Today, you receive a call requesting that half of the available funds in his account be wired to an offshore bank. When you say that his voice sounds different, he replies that he has a sore throat and that is why he doesn't sound like himself. Then you recall, when you answered the phone, he said that this is Mr. Richard Alan calling. At first you thought he was having fun, but now you might suspect A)he is having financial difficulties he wishes to hide from you B)identity theft C)his illness is more serious than a sore throat D)this is a different Richard Alan who is a client of the firm

B)identity theft In many cases, the individual agent is the first line of defense against identity fraud. Spotting red flags like those posed in this question are critical to preventing losses to the company and the client.

One way to make money is to buy low and sell high. If an investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms, any advertisement about the system must: A)provide customer testimonials evidencing their satisfaction with the system. B)indicate that there are limitations and difficulties to using the system. C)indicate the length of time the system has been in play. D)show performance for at least the past 12 months including both winners and losers.

B)indicate that there are limitations and difficulties to using the system. Anytime you see a question dealing with advertising a charting system (or investment formula, etc), always look for limitations and difficulties in the answer.

With respect to third-party solicitors, the Investment Advisers Act of 1940 states that an investment adviser representative: A)is not required to disclose that the solicitor is a partner, officer, or director of the registered investment adviser. B)must disclose that the solicitor is working on behalf of a registered investment adviser in soliciting accounts in accordance with a written agreement with the investment adviser unless the solicitation is only for impersonal advisory services. C)must not disclose to clients the relationship and affiliation with the investment adviser. D)is not required to disclose that the solicitor is compensated for soliciting business on behalf of the registered investment adviser.

B)must disclose that the solicitor is working on behalf of a registered investment adviser in soliciting accounts in accordance with a written agreement with the investment adviser unless the solicitation is only for impersonal advisory services. A written agreement between the registered investment adviser and the solicitor must contain the name of the solicitor, the name of the investment adviser, the nature of the relationship, and the affiliation between the two parties. A statement that the solicitor is compensated for solicitation services, the terms of the compensation arrangement, and any amount the client will be charged, in addition to the advisory fee used to cover the costs of soliciting his account, must be disclosed to clients.

An investment adviser representative, who also receives commissions as an agent at a brokerage firm, has opened an account with a client whose net worth is $200,000. The customer wants the account aggressively traded and wishes the investment adviser to be compensated based on the account's performance. In this account, payment on a performance basis is: A)permissible with approval from the principal of the brokerage firm and written permission from the customer at the time the account is opened. B)not permissible. C)permissible. D)permissible if the customer's net worth is a minimum of $1 million.

B)not permissible. It is not permissible to trade this account on a performance basis; the investment adviser representative must be paid on commission or through a fixed fee arrangement. Under the Investment Advisers Act of 1940, performance fees are allowed only for clients with a minimum of $1 million invested or a minimum net worth of $2 million.

First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts. First Securities Advisers, Inc., has: A)violated the prohibition against charging performance fees. B)not violated the prohibition against performance fees. C)violated the Uniform Securities Act by charging excessive advisory fees. D)violated the Uniform Securities Act by charging commissions in addition to advisory fees.

B)not violated the prohibition against performance fees. First Securities Advisers, Inc., has not violated the prohibition against charging performance fees because it did not base its fees on a share of capital gains or losses in their clients' accounts. First Securities charged on the basis of assets under management. The 1% in advisory fees charged appears reasonable. The commissions charged by the affiliated broker-dealer have nothing to do with the question. The client would have to pay commissions wherever the transactions were executed.

An investment advisory contract is considered assigned if an adviser formed as a: A)corporation with 2 officers and adds 5 officers. B)partnership with 2 partners and adds 5 partners. C)corporation with 5 officers and adds 2 officers. D)partnership with 5 partners and adds 2 partners.

B)partnership with 2 partners and adds 5 partners. If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required.

Alice is a financial planner who is properly registered as an investment adviser and occasionally meets with clients with negative cash flow and substantial indebtedness. Alice refers such clients to Norman, a bankruptcy attorney. Likewise, when Norman encounters clients who need help managing their assets, he refers them to Alice. This activity is: A)permissible without disclosure if it occurs on an incidental basis. B)permissible if the referral arrangement is disclosed to clients. C)permissible without restriction. D)prohibited.

B)permissible if the referral arrangement is disclosed to clients. Referrals to other professionals may be made as long as the reciprocal nature of the arrangement is disclosed.

A customer of an investment adviser inadvertently mails some stock certificates to the IA. The IA does not maintain custody of customer assets. If the certificates were received on a Monday, NASAA rules would requires that the certificates must be: A)returned the same day. B)returned no later than Thursday. C)forwarded to the broker-dealer promptly. D)returned no later than Tuesday.

B)returned no later than Thursday. NASAA's custody rules require that an investment adviser who does NOT maintain custody must return certificates that are mistakenly sent within 3 business days. When it comes to checks, it depends on how the check is drawn. If made out to the investment adviser, it must be returned; if made out to a third party (usually the executing broker-dealer), it must be forwarded to that third party. In either case, the time limit is 3 business days (might be shown as 72 hours on the exam).

Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must A)send a copy of its brochure within 7 days of receiving a request from a client B)send a copy of its brochure to all clients within 120 days of the end of its fiscal year C)send a copy of its brochure to all clients within 90 days of the end of its fiscal year D)send a copy of its brochure to all clients within 60 days of the end of its fiscal year

B)send a copy of its brochure to all clients within 120 days of the end of its fiscal year Whether a state or federal covered investment advisers, a copy of the IA's brochure, assuming there have been material changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.

Although the regulations permit a number of different methods of investment adviser compensation, it would not be considered proper for an IA to: A)charge an annual fee equal to 1% of the first $250,000 in assets under management and 1/2% for all assets above that amount. B)tell clients that the fee will be 5% of the profits that exceed a stated benchmark, but nothing if the benchmark is not reached. C)charge $2,500 for developing a financial plan for a client. D)charge an annual fee equal to 1% of assets under management.

B)tell clients that the fee will be 5% of the profits that exceed a stated benchmark, but nothing if the benchmark is not reached. Performance-based fees are not allowed except under certain specified conditions, none of which exist in this question.

A contract between an investment adviser and a customer may be assigned to another investment adviser provided A)the assignment is done 1 year after the initial contract B)the client consents to the assignment C)the client is notified in writing within a reasonable period of time D)the broker-dealer handling the account's transaction is notified in writing

B)the client consents to the assignment Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that no assignment of the contract may be made by the investment adviser without the consent of the other party to the contract.

A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if: A)There are no exceptions. B)the solicitations are for impersonal advisory services. C)the friend is an employee of the advisory firm. D)the friend is a client of the adviser's firm.

B)the solicitations are for impersonal advisory services. Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.

An investment adviser (IA) has a number of clients who need high-quality estate planning. These clients are referred to the Rox Law Firm and, in exchange, Mr. Rox sends those of his clients needing investment advice to the IA. The IA pays a referral fee to Mr. Rox of $300 for each referral who becomes a client. Under the NASAA Model Rule on Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers: A)this type of arrangement is never permitted. B)this is permissible, but only if disclosed to clients. C)this is permissible, but does not need to be disclosed to clients because Mr. Rox is an attorney and this would be a violation of attorney/client privilege. D)this is permissible, but only if disclosed to the Administrator.

B)this is permissible, but only if disclosed to clients. Actually, NASAA doesn't say anything at all about referral fees, but you have to pick an answer. It is the Investment Advisers Act of 1940 that deals with the topic and permits them as long as proper disclosures are made and the fee is not related to the size of the account. Since it is a flat $300, it would be the same for a $100,000 account as a $10 million account.

Following the advice of its portfolio managers, The Rising Tide hedge fund executes most of its securities transactions through Momentum Securities, a registered full-service broker-dealer. In order to compensate for the commissions charged, Momentum Securities allows employees of Rising Tide to use its furniture and facility at a discounted rate. Under the soft-dollar provisions of Section 28(e) A)this would not fall under the safe harbor provisions unless the employees were those who directed the transactions to Momentum Securities B)this would not fall under the safe harbor C)this would fall under the safe harbor D)as long as the discounted rate reflected the volume of business done by Rising Tide, this would be permitted

B)this would not fall under the safe harbor The use of furniture or office facilities is not included in the list of safe harbor items, regardless of the roles employees of the fund play.

Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? An adviser who exercises discretion in client accounts. An adviser who maintains custody over client funds and securities. An adviser who maintains less than $35,000 in net worth. An adviser who, 6 or more months in advance, collects prepaid fees of more than $500. A)II and III. B)I and II. C)II and IV. D)I and IV.

C)II and IV. The Uniform Securities Act requires that a balance sheet accompany an adviser's brochure when the adviser maintains custody of client assets or accepts substantial prepayments of fees.

One business succession issue that applies to virtually all investment advisers is A)death of the sole proprietor B)permanent disability of a member of the board of directors C)loss of the designated regulatory contact person D)departure of a partner holding a majority interest

C)loss of the designated regulatory contact person All investment advisers must have a designated regulatory contact person. Only sole proprietorships are affected by the death of that sole person. Disability or death of a member of the board of directors will probably have no effect on succession, and only partnerships are concerned with a partner (of any size) leaving.

Which of the following statements regarding an investment adviser's use of a full service broker for an account over which the adviser has investment discretion is TRUE? A)A full service broker may be used only if the broker is not affiliated with the adviser. B)A full service broker may not be used for any transaction that could be done by a discount broker. C)A full service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided. D)Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full service broker.

C)A full service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided. Use of a full-service broker to effect transactions, for an account over which an adviser has investment discretion, is not a breach of fiduciary duty provided the full-service broker's commission is reasonable in view of the services he provides. Services include advice, analyses, research, and custodial services, but not sales incentives offered to the adviser; investment advisers are required to disclose this fact on the ADV Part 2.

Which of the following fee arrangements is legal under the Investment Advisers Act of 1940? A)Adviser C charges an annual fee of .05% to be waived if the account does not grow by at least 5% during the year. B)Adviser D guarantees the annual fee will be waived if the account decreases in value while under his management. C)Adviser A charges an annual fee of .05% of the value of the client's account, due on the first day of the client's fiscal year. D)Adviser B charges an annual fee of .075%, guaranteed to be waived if the value of the account does not increase during the year.

C)Adviser A charges an annual fee of .05% of the value of the client's account, due on the first day of the client's fiscal year. An adviser's fee may not be based on portfolio appreciation or capital gains, except under certain circumstances that are not detailed in the question. Advisory fees may be based on a percentage of assets under management.

Which of the following would be least likely to meet the cyber security definition of a covered account? A)A customer with an automobile loan at a bank B)An account with a registered investment company that permits the owner to wire funds to a third party C)An account held by a company listed on the NYSE D)A customer with a margin account at a broker-dealer

C)An account held by a company listed on the NYSE In general, business accounts are not included in the term covered account. There could be an exception for a sole proprietorship or other small business where there is a reasonably foreseeable risk to customers due to the inability of the customer to provide adequate internal safeguards. That is unlikely to be the case with a listed company.

Under which of the following circumstances does the USA permit performance-based compensation? A)Only when the IAR has made a financial contribution to the account, has the permission of the client, and approval of a supervisory person of the advisory firm. B)An agent of a broker-dealer has a client with a net worth in excess of $5 million who agrees to let the agent share in the profits in the account in proportion to the agent's financial investment in the account. C)An investment adviser has a client with a net worth in excess of $5 million with a contract that calls for additional compensation if the account should outperform the S&P 500 by more than 2%. D)An agent of a broker-dealer has a compensation arrangement with a client where the agent will receive 10% of all net profits generated in the account in lieu of commissions.

C)An investment adviser has a client with a net worth in excess of $5 million with a contract that calls for additional compensation if the account should outperform the S&P 500 by more than 2%. The concept of performance-based compensation only applies to investment advisers. It is permissible for individual clients with a net worth of at least $2 million, or at least $1 million in assets under management in an account with that adviser. In most cases, the performance bonus kicks in when the account in question outperforms a stated benchmark.

Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must: notify a client when the client's funds are moved to another location. segregate clients' funds and keep them identified by client. not move the client's funds without prior notification and specific written authority from the client. A)I and III. B)I, II and III. C)I and II. D)II and III.

C)I and II. Advisers who have custody must segregate a client's securities and keep them in a safe place, deposit client funds in bank accounts which contain only client funds (may be combined in one account, but complete records must be kept), report to clients at least every three months with a statement, and annually arrange for an unannounced audit by an independent accountant that will report the audit results to the SEC. All clients must be notified in writing of the location of their securities or funds and of any changes to the location. It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser.

Under the Uniform Securities Act, an adviser who has custody of client securities or funds must: submit to a surprise audit of client accounts by an independent accountant each year. provide an audited balance sheet to the Administrator each year and include a balance sheet with his disclosure statement (brochure) to all prospective clients. send monthly statements to clients on the status of their accounts. A)I, II and III. B)II and III. C)I and II. D)I and III.

C)I and II. An adviser who has custody must submit to an annual surprise audit by an independent accountant and include an audited balance sheet with Part 2 of Form ADV, which must be filed with the Administrator and also forms the basis of the information that must be contained in the disclosure brochure. Other requirements include segregation of client securities, deposit of client funds into separate bank accounts, written notification to clients of the location of their property, and quarterly (not monthly) reports to clients on their accounts.

Brandywine Investment Advisers has several clients whose contracts call for performance-based fees. These fees may be based on a performance comparison with which of the following? S&P 500 index. Russell 2000. Previous year's performance. Performance of related accounts. A)I and IV. B)II and III. C)I and II. D)III and IV.

C)I and II. If an investment adviser charges performance-based fees to qualified clients, the fees may be based on the accounts' actual performance relative to a benchmark such as the S&P 500 Index or the Russell 2000. The previous years' performance or the performance of other accounts is not a valid basis for the calculation of performance-based fees.

Which of the following activities would violate the Uniform Securities Act? An investment advisory partnership admits a renowned securities analyst to the partnership without informing its clients of this highly desirable addition. An investment adviser incorporated in California fails to inform its clients of the departure of the chief financial officer who did not have an equity position in the firm. An investment advisory firm incorporated in Illinois charges clients a share of the capital gains on the basis of a guaranteed performance level above a designated benchmark. An investment advisory firm assigns those accounts that fall to a low level to other firms willing to accept them with the consent of the account holder. A)I and II. B)I, III and IV. C)I and III. D)II and III.

C)I and III. Investment advisers who are partnerships must inform their clients of any change in the membership of the partnership within a reasonable period. Unless the question refers to a specific exemption, it is a violation of the USA for an advisory firm to charge on the basis of performance. An investment advisory firm may assign accounts to another firm with the consent of the client.

Under the Uniform Securities Act, an investment adviser who has custody of client securities or funds must do which of the following? Notify the Administrator in writing. Have client funds and securities examined at least once a year by an independent public accountant on a surprise basis. If not held by a qualified custodian, deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. Send clients semiannual, itemized statements detailing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. A)I, II, III and IV. B)I, III and IV. C)I, II and III. D)I only.

C)I, II and III. The adviser must send clients quarterly, itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. Unless using a qualified custodian, the adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds.

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if: results do not reflect the deduction of fees. actual market conditions during the referenced period are not disclosed. the advertisement did not reflect performance for a minimum period of three years. the advertisement did not disclose that it applied to only a specific group of clients. A)I, II, III and IV. B)I and II. C)I, II and IV. D)II and IV.

C)I, II and IV. Advertising that reflects past performance must show a minimum period of one year, not three. All investment advisers advertising must reflect deduction of fees, disclose the specific group of clients to which it applies if applicable, and state actual market conditions during the referenced period.

NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. Because of this, when performing an examination of the IA, the Administrator will look for disclosure-related items not only in the disclosure document, but may also check the adviser's: advertising. contracts. seminar materials. websites. A)III and IV. B)I and II. C)I, II, III and IV. D)I, III and IV.

C)I, II, III and IV. Improper disclosures in any form of communication with the client is a prohibited business practice.

Which of the following statements is (are) TRUE regarding investment advisory contracts under the Uniform Securities Act? The adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. The advisory contract may not be assigned without the consent of the client. If the adviser is a partnership, the adviser must notify clients with whom the adviser has contracts of any changes in the partnership within a reasonable time. An adviser may be compensated based on the total value of a client's account averaged over a specific period. A)I only. B)II only. C)I, II, III and IV. D)II, III and IV.

C)I, II, III and IV. Under the Uniform Securities Act, the basic rule is that an adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. Although there are exceptions to the basic rule, the question does not address the exceptions. An adviser may be compensated based on the total value of a client's account averaged over a specific period. An adviser that is a partnership must notify its clients of changes in a minority of the partners within a reasonable period of time. If it is a majority or material change in partners, it is treated as an assignment and would require consent of the clients.

The industry is concerned about the protection of both firm and customer data. It would be acceptable to store this information on a cloud-based server in paper form on computer disks on microfishe A)II and III B)III and IV C)I, II, III, and IV D)I and IV

C)I, II, III, and IV As long as the proper protections are taken, any of these are acceptable as a storage medium for customer and firm records.

Under the Uniform Securities Act, if an investment adviser takes custody of client assets, which of the following statements are TRUE? Clients must receive monthly statements. Clients must receive quarterly statements. The adviser must be audited at least annually. The adviser must be audited at least semiannually. A)I and IV. B)II and IV. C)II and III. D)I and III.

C)II and III. If an adviser takes custody of client assets, those assets must be segregated from those of the adviser. Clients must be sent statements quarterly and the adviser must be audited at least annually. In addition, the adviser may be required by the state Administrator to maintain a higher level of net worth.

According to the Uniform Securities Act's rules for an investment adviser with custody of customer assets, which of the following statements are TRUE? The Administrator must give written approval before the adviser may hold customer assets in custody. Customer assets must not be commingled with assets of the investment adviser. An adviser who has discretion over customer accounts faces a higher net worth requirement than an adviser who has custody. Every 3 months, the adviser must send an itemized account statement to each customer whose assets are held in custody. A)I and II. B)I and III. C)II and IV. D)III and IV.

C)II and IV. Customer assets held in custody by an investment adviser must be segregated, and the adviser must send a statement every three months. The Administrator does not approve custodial accounts. If there is no rule prohibiting custody, the Administrator must be notified that the adviser has custody. Advisers with custody of customer assets have a higher net worth requirement than advisers with discretionary authority, not the other way around.

Under the Investment Advisers Act of 1940, if an investment adviser's sales literature describes an investment system, the description must include: the length of time the system has been used. the difficulties and limitations of using the system. the performance history of the system. A)II and III. B)I, II and III. C)II only. D)I and III.

C)II only. References to charts, tables, formulas, or other devices used to forecast securities prices without setting forth difficulties or limitations in their use is prohibited. It is not necessary to indicate how long the system has been used or its performance history. However, nothing prevents this information from being included. The question asks only what must be included.

Which of the following would be causes for concern about cyber security? A broker-dealer keeps all of the firm's financial records in a ledger book A broker-dealer stores some of the firm's financial records electronically A broker-dealer's agents operate as independent contractors and maintain devices that access personally identifiable information about clients A broker-dealer's bookkeeper prefers to do the books from home on a personal computer A)I and III B)II and IV C)II, III, and IV D)I, II, III, and IV

C)II, III, and IV Anytime that a broker-dealer's financial records are being handled electronically, there is the possibility of cyber fraud. By definition, cyber fraud could not occur with something that exists on paper only. There are also concerns when there is possible access to personally identifiable information about clients (Social Security number, date of birth, etc.).

Jake Aaron is registered as an agent with ABC Securities, a broker-dealer registered with the SEC doing business in 34 states. In addition, Mr. Aaron has his own investment advisory business, Jake's Money Advisers, and is registered with the SEC. To comply with all appropriate regulations, which of the following would have to be stated on the business card for Jake's Money Advisers? Jake Aaron, RIA. Jake's Money Advisers, RIA. Jake's Money Advisers, registered investment adviser. Securities offered through ABC Securities. A)I and III. B)I, III and IV. C)III and IV. D)II and IV.

C)III and IV. It is not permissible to use the initials RIA, but one would properly describe the fact that the firm is a registered investment adviser. If one is registered as an agent with a broker-dealer, that fact always must be stated on your business card.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding investment advisory fees is (are) TRUE? Advisory fees may be any amount, provided the client has agreed in writing to the fees, and disclosure has been made that the fees may be much higher than those charged by other advisers for the same service. Advisory fees are not regulated for sophisticated clients. Advisory fees must bear a relationship to the amount of time the adviser devotes to the client's account. Advisory fees may be considered unreasonable if they are not comparable to fees charged by other advisers for the same advisory services. A)I and II. B)I, II and III. C)IV only. D)II and III.

C)IV only. Advisory fees may be considered unreasonable if they are not comparable to fees charged by other advisers for the same advisory services. NASAA's Model Rule states it is unethical to charge excessive fees, even if the client has agreed to the fees or is sophisticated. However, advisory fees need bear no relationship to the amount of time the adviser spends on the client's account.

Which of the following statements would NOT be allowable under the rules regarding an investment adviser's contract? A)My hourly charge is $300. B)I charge a flat fee of $1,500 per year. C)If you make money, I make money because my compensation is based on how well your account performs. D)I charge 1% per year on the value of your assets, plus any commissions I earn on sales done through me.

C)If you make money, I make money because my compensation is based on how well your account performs. Unless an exception is stated in the question, performance-based fees are never permitted. As long as disclosed, fees plus commissions on transactions is an allowable form of compensation.

According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? A)These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. B)Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received. C)Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. D)Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.

C)Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.

If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is TRUE? A)The sale must be approved by the Administrator. B)The sale must be approved by each customer of the selling adviser. C)No approvals are required. D)The sale must be approved by the SEC.

C)No approvals are required. An investment adviser does not need the approval of clients to sell the business. However, technically, the sale means that the advisory contracts will be assigned and that cannot be done without client consent. In an event such as this, the clients would be given the choice of having the new firm manage their assets or taking their accounts elsewhere.

Which of the following types of compensation is an investment adviser prohibited from accepting? A)Annual fee based on a percentage of assets under management. B)Commissions on trades effected for clients. C)Quarterly fee based on account performance. D)Annual fee as a fixed dollar amount.

C)Quarterly fee based on account performance. Fixed annual fees, wrap fees, fees based on a percentage of assets under management, and commissions from trades effected for clients are acceptable forms of compensation. Unless the client has at least $1 million under management or a personal net worth of at least $2 million, performance-based fees are not permitted.

Malcolm Munger CLU, is an insurance agent catering to highly successful business executives. During a routine servicing call, one of those clients asks Malcolm if he knows anyone who is sharp enough to handle his $50 million investment portfolio. Malcolm refers the client to Superb Asset Managers Company (SAMCO), an investment adviser doing business in this state. The CEO of SAMCO meets with Malcolm's client and an advisory contract is signed. To show their appreciation, Malcolm receives a $500 finder's fee from Superb Asset Management Company (SAMCO). Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers: A)no disclosure is necessary unless it will result in the IA's fee being higher than it would have been without the finder's fee. B)the finders fee would be disallowed if the IA did not have an insurance license. C)SAMCO must disclose the existence and circumstances of the finder's fee to the client. D)SAMCO must make sure that Malcolm discloses the fee to his client.

C)SAMCO must disclose the existence and circumstances of the finder's fee to the client. Finder's fees are permitted, but it is the obligation of the IA to make full disclosure to the client. Since nothing here indicates that Mr. Munger is registered, he does not have any responsibility under NASAA regulations to make disclosure to his client. There really is a lot more required here, but there are no alternative choices (and it may be like that on the exam).

An investment adviser may state which of the following in the advisory contract? A)The adviser may be compensated on the basis of a reasonable share of the capital gains. B)The advisory contract may only be assigned to another party after adequate compensation. C)The advisory contract may only be assigned to another party with the consent of the client. D)The investment adviser may be compensated on the basis of capital gains, providing assets in the account are below $250,000.

C)The advisory contract may only be assigned to another party with the consent of the client. An investment advisory contract may only be assigned to another adviser with the client's consent. Advisers are not allowed to be compensated solely on the basis of capital gains, regardless of how reasonable the share appears to be. Performance-based compensation is not generally allowed unless the client has a minimum under management (currently $1 million) or a substantial net worth (currently $2 million).

An adviser buys a substantial block of stock for its clients. The order was filled at several prices. Which of the following would dictate how stock is to be allocated among the clients? A)The firm may allocate best executions in any manner it chooses as long as best executions are not routinely allocated to proprietary (house) accounts. B)The clients holding the largest accounts would be entitled to the highest priced executions. C)The allocation among clients would be made according to a fair method disclosed in the advisory firm's written policies and procedures manual. D)The clients holding the largest accounts would be entitled to the lowest executions.

C)The allocation among clients would be made according to a fair method disclosed in the advisory firm's written policies and procedures manual. The allocation of order executions among clients should be made according to a fair method disclosed in the advisory firm's written policies and procedures manual. The most common method is the average cost basis.

Which of the following circumstances would require an investment adviser to notify all clients of the firm? A)The investment adviser opens a branch office in another state. B)A partner of the firm was disciplined by the firm. C)The investment adviser hires another partner for the firm. D)The investment adviser acquires the accounts of another firm.

C)The investment adviser hires another partner for the firm. The investment adviser must disclose to the client any change in the members of a partnership. The adviser must notify only those clients whose accounts were obtained. The adviser does not need to notify existing clients of the new accounts. Internal disciplinary actions generally do not have to be reported to clients.

Which types of accounts are billed a single fee which includes a group of services such as execution of transactions and advice? A)Discretionary accounts B)Option accounts C)Wrap fee accounts D)Margin accounts

C)Wrap fee accounts Wrap fee accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap fee accounts are generally considered investment advisory accounts.

A registered investment adviser advertises that it is offering a free 6-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A)Your free subscription will start upon receipt of your completed financial profile. B)Your free subscription will start once you have furnished us with the names and addresses of three of your friends. C)Your free subscription will start once we have received your name and mailing or email address. D)Your free subscription will start after your 3rd trade with our affiliated broker-dealer.

C)Your free subscription will start once we have received your name and mailing or email address. A free offer must not only be free of financial cost, it must be free of any other burden or commitment.

Under the NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, investment advisers who advertise must comply with the rules of the Investment Advisers Act of 1940, which include: A)a prohibition against reduced-fee introductory offers. B)a prohibition against showing the adviser's past performance. C)a prohibition against testimonials from clients. D)the requirement that advertisements must be sent to the SEC for approval before dissemination to the public.

C)a prohibition against testimonials from clients. Advertisements may not include testimonials from clients or others, refer selectively to past recommendations, or refer to a chart or device for evaluating securities without explaining its limitations and difficulties. There is no requirement for filing of advertising with the SEC, or anyone else for that matter. Introductory reduced-fee offers, while rare, are not prohibited as long as they are not discriminatory. Past performance may be used in advertising as long as it meets the requirements of the Rule.

The NASAA Model Rule on Business Continuity and Succession Planning suggests that all BCPs should include A)alternative email addresses B)fiduciary duties C)succession plans D)storage of MREs

C)succession plans Succession plans should be part of the firm's BCP, especially if the investment adviser is a sole proprietor or run by a single key individual. MREs are "Meals Ready to Eat" and are nice for survivalists, but are not part of the NASAA Model Rule.

All of the following are examples of investment adviser fraud under the Investment Advisers Act of 1940 EXCEPT: A)an adviser who is exempt from registration under the act and fails to state a material fact. B)an adviser exercising discretion over client accounts who has liabilities that exceed his assets and does not disclose this fact to clients. C)an adviser who has custody of client assets and deposits them into separate bank accounts. D)an adviser who has been found in violation of the act and does not disclose this fact to clients.

C)an adviser who has custody of client assets and deposits them into separate bank accounts. The adviser who has custody of a client's assets must deposit them into separate accounts at the custodial bank as required by the Investment Advisers Act of 1940. An adviser exercising discretion or maintaining custody must disclose the fact that he has liabilities that exceed his assets. Advisers, whether or not they are exempt from the act, are subject to the antifraud provisions. Failing to disclose material facts to clients is considered fraud under the act.

Review of an SEC registered investment adviser's policies and procedures designed to prevent violation of the federal securities laws must take place no less frequently than A)semiannually B)quarterly C)annually D)monthly

C)annually It is the job of the adviser's chief compliance officer (CCO) to review those policies and procedures annually for their adequacy and the effectiveness of their implementation.

In general, the Business Continuity Plan of an investment adviser should provide for all of the following EXCEPT A)assignment of duties to qualified responsible persons in the event of unavailability of key personnel B)protection, backup, and recovery of books and records C)assuring that the securities in client portfolios will not decrease in value D)office relocation in the event of a temporary (or permanent) loss of a principal place of business

C)assuring that the securities in client portfolios will not decrease in value There are no circumstances under which a securities professional can guarantee a client that an investment portfolio's value will not fluctuate.

An investment adviser (IA) is deemed to be maintaining custody under the USA when: A)client funds are kept by a broker-dealer affiliated with the investment adviser. B)the adviser maintains a net worth of not less than $35,000 or has a surety bond in an amount specified by the Administrator. C)client securities are held at the investment adviser's principal office. D)the adviser has been granted discretion over the account.

C)client securities are held at the investment adviser's principal office. Possession of a client's securities is considered custody. Although an IA must maintain a minimum net worth of $35,000 (or a surety bond) if custody is maintained, the mere fact that the IA has that level of net worth does not mean that custody is involved. The USA considers that funds and securities held at an affiliated broker-dealer are not under the custody of the IA.

A Business Continuity Plan should be designed to provide an investment advisory firm policies to be followed in the event of any of the following EXCEPT A)a disruption caused by a tornado striking the firm's principal office B)a terrorist attack that leads to a lockdown and prevents the principal office from opening C)embezzlement by the firm's CFO D)an overload at the local public utility that causes a lack of power at the firm's principal office for at least 2 days

C)embezzlement by the firm's CFO Although embezzlement is certainly not pleasant for the firm, it is not something that would normally lead to an interruption in the ability of the firm to service its clients.

The practice of stealing an individual's personal information for criminal activity is generally referred to as A)felonious assault B)credit monitoring C)identity theft D)an unethical business practice

C)identity theft This is the standard definition of identity theft.

Automated Performance Advisers (APA), a registered investment adviser in 3 states, has spent several years and in excess of $1 million developing the software for a computerized program that APA believes will allow the model portfolios it designs for its clients to consistently outperform the market. In the first year of beta testing the program, returns have ranged from 40% to 60% above the relevant benchmarks. Because of this success, and in an effort to recoup some of the development costs, APA is now charging, in addition to their standard 25 basis points per quarter, a performance-based fee of 10% of the increase of value in a client's portfolio. In so doing, APA would be A)in violation of the Investment Advisers Act of 1940 B)permitted to charge performance-based fees C)in violation of the Uniform Securities Act D)subject to disciplinary action by the SEC

C)in violation of the Uniform Securities Act First of all, this is a state-registered investment adviser, so the Investment Advisers Act of 1940 and the SEC have no jurisdiction. Then, we look at this quote from the USA: "Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client." Even though we know that there are conditions under which performance-based compensation is permitted, unless the question specifically refers to that exception, the answer is that it is not permitted.

A wrap fee account would be most suitable for a customer who: A)buys and holds bonds. B)buys and holds stocks. C)is a frequent trader. D)is affluent.

C)is a frequent trader. Frequent traders would most likely benefit from a wrap account fee structure as the commissions are included in the fee; those who buy and hold would be paying for services they were not using.

The written disclosure document (brochure), that a state covered investment adviser is required to deliver to prospects and clients, must contain all of the following information EXCEPT: A)methods of analysis, sources of information, and investment strategies. B)balance sheet if the firm maintains custody of client funds and/or securities. C)location of the records required to be retained under the Uniform Securities Act. D)method of compensation.

C)location of the records required to be retained under the Uniform Securities Act. The location of the records that must be retained need not be disclosed in the brochure because that is an issue for the regulators, not the clients. The purpose of the brochure is to provide existing clients and prospective clients with information about the adviser's business, including methods of compensation and analytical strategies employed. When a state covered investment adviser maintains custody of client funds, securities, or both, a balance sheet must be included in the brochure.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser's fee: A)must reflect the amount of time the adviser spends managing a client's account. B)is not subject to regulatory oversight by the Administrator if the client may be considered financially sophisticated. C)may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services. D)may not be based on a percentage of the client's assets under management.

C)may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services. A fee could be considered excessive if it were substantially higher than that charged by other advisers for performing similar services. The Administrator may research fees charged by various investment advisers for purposes of comparison. Whether clients have agreed to the fee or done their own price-shopping is irrelevant in determining if an adviser's fee is unreasonable.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser's fee: A)may not be based on a percentage of the client's assets under management. B)is not subject to regulatory oversight by the Administrator if the client is considered financially sophisticated. C)may be considered unreasonable if it is not in line with fees charged by other advisers for similar services. D)must reflect the amount of time the adviser spends managing the client's account.

C)may be considered unreasonable if it is not in line with fees charged by other advisers for similar services. An investment adviser may not charge any client an unreasonable fee. A fee may be considered excessive that is substantially higher than that charged by other advisers for performing similar services. The Administrator may research the fees charged by various investment advisers for the purposes of comparison. Whether clients have agreed to the fee or have done their own price-shopping is irrelevant in determining if a particular adviser's fee is unreasonable. The exam sometimes phrases this as stating that fees must be competitive.

Hugh Clark, a partner with a minority interest in ABC Investment Partners, a registered investment adviser, withdraws from the partnership to form his own separate partnership, Clark Advisers. ABC Investment Partners: A)must notify Clark Advisers of Clark's withdrawal from ABC Investment Partners within a reasonable period. B)must notify its clients of Clark's departure within a reasonable period. C)must change its name because the partnership has a new mix of partners as a result of Clark's departure. D)need not notify its clients of Clark's departure because Clark was only a minority partner.

C)must change its name because the partnership has a new mix of partners as a result of Clark's departure. ABC Investment Partners must promptly notify its clients of Clark's departure. Under the Uniform Securities Act, a change to a minority interest in the membership of a partnership requires the partnership to notify all investors of the change within a reasonable period. ABC has no obligation to notify Clark Advisers of Clark's new employment.

Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions EXCEPT: A)no assignment of the investment advisory contract may be made without the client's consent. B)the investment adviser's compensation shall not be based on capital gains in client accounts. C)on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account. D)the adviser, if a partnership, must notify the client of any change in the partnership's membership.

C)on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account. Investment advisers organized as corporations are under no obligation to inform their clients of changes to shareholders. However, if an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership. Keep in mind the distinction between notification and assignment. Investment partnerships must notify clients of any change in the partnership's membership, no matter how insignificant the partner's position in the firm. However, the death of a minority partner does not constitute an assignment (transfer) of the account although the information must be communicated to clients. A change in a majority interest in the partnership would be an assignment of the account that requires client consent.

Under the Uniform Securities Act, all of the following must be disclosed in an investment advisory contract EXCEPT: A)the manner in which the advisory fee will be computed. B)a provision prohibiting the adviser from being compensated based on a share of capital gains. C)other states in which the adviser is registered. D)a provision prohibiting the adviser to assign the contract without client consent.

C)other states in which the adviser is registered. There is no requirement to advise clients of any other states in which the adviser is represented. Assignment may never occur without client consent. Unless the question specifically refers to the rare cases when performance fees are permitted, always read the question as if they are prohibited.

Under the Investment Advisers Act of 1940, a registered investment adviser who provides investment advisory services to individuals must: A)sell only listed securities. B)avoid the control or custody of client funds and securities. C)provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement. D)have a net worth of $100,000.

C)provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement. The brochure rule requires that each client be given a written disclosure statement by the adviser no later than the time of entering into the advisory agreement. It may consist of a copy of Part 2A and 2B of Form ADV or another document providing similar information. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent.

An investment adviser with custody of customer funds and securities must send the customer a statement of account activity no less frequently than: A)with every transaction. B)annually. C)quarterly. D)monthly.

C)quarterly. An investment adviser in possession of customer assets must send a statement to the customer at least every three months. The statement must list the securities and funds held by the adviser, their location, and must show all transactions in the account since the last statement date.

The Uniform Securities Act requires client consent for assignment of the investment advisory contract. It would be considered that contracts were assigned in all of the following situations EXCEPT: A)the sole stockholder of the investment advisory firm pledges all of the stock in the firm as collateral for a bank loan. B)two investment advisory firms intend to merge, causing a change in the majority interest of the partners. C)the death of a partner holding a minority interest with the remaining partners acquiring that share equally. D)the sole proprietor of an investment advisory firm sells the firm to another adviser.

C)the death of a partner holding a minority interest with the remaining partners acquiring that share equally. Written consent for assignment is required of clients whenever there is a change in a majority interest in an investment management partnership. The death of a partner with a minority interest does not require consent because it is not considered to be an assignment. All that is necessary is notification of the change in the partnership within a reasonable period. The sole owner of the advisory firm cannot pledge the firm's stock as collateral without client consent. The merger of partnerships involves a change in majority interest which requires consent.

An investment adviser may not have custody of a customer's funds and securities under the Uniform Securities Act if: A)the customer fails to tell the adviser that he has custody. B)the adviser is not a registered broker-dealer. C)there is a rule in the state barring such custody. D)the customer has not received a wrap fee brochure.

C)there is a rule in the state barring such custody. If there is a rule barring custody, under no circumstances may the adviser have custody of customer funds or securities. It is the adviser who must notify the customer that custody is being maintained, not the reverse.

The revocation or suspension of a federal covered investment adviser's registration under the Investment Advisers Act of 1940 may be appealed: A)through arbitration with the Financial Industry Regulatory Authority (FINRA). B)to the United States Supreme Court because the Investment Advisers Act of 1940 is federal legislation, unlike the Uniform Securities Act, which is a model for state securities legislation. C)to the U.S. Court of Appeals serving the district where the order was issued within 60 days of its issuance. D)by petition to the appropriate state securities Administrator.

C)to the U.S. Court of Appeals serving the district where the order was issued within 60 days of its issuance. The revocation or suspension of an investment adviser's registration under the Investment Advisers Act of 1940 may be appealed to the Court of Appeals for the appropriate U.S. district within 60 days of the revocation or suspension order. Advisers covered under federal legislation do not make appeals to state securities Administrators. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminates dual regulation of investment advisers. FINRA does not have regulatory authority over the registration of federal covered investment advisers.

If an investment adviser has engaged a website designer, what may the designer include on the website? A)Client testimonials. B)Recommendations on specific managed investments such as mutual funds. C)Recommendations on specific stocks. D)A general description of the types of investment advisory programs offered by the firm.

D)A general description of the types of investment advisory programs offered by the firm. It is permissible to post general information about an investment adviser on a public website, which comes under the SEC definition of advertising. Advertising implies that the publisher of the material has no control over who may view it. Thus, recommendations of specific securities, including managed products, are prohibited because it is not possible to determine the suitability of specific investments for unknown viewers. The SEC prohibits client testimonials in investment adviser advertising.

Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation? A)Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers B)Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements C)Rent-free use of unused space in the broker-dealer's office D)Clearance and settlement services provided by the broker-dealer

D)Clearance and settlement services provided by the broker-dealer Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.

Which of the following statements regarding investment adviser compliance rules is TRUE? A)The CCO must have at least three years of experience in securities industry compliance. B)If the chief compliance officer (CCO) conducts appropriate annual compliance reviews, interim review is generally not necessary. C)Compliance procedures should review the accuracy of disclosures made to clients and investors, although it is not necessary that they review disclosures made to regulators. D)Compliance procedures should be designed to prevent violations as well as detect existing violations.

D)Compliance procedures should be designed to prevent violations as well as detect existing violations. Although the CCO should conduct annual compliance reviews, he should also recognize the necessity for interim reviews in light of such events including changes in business arrangements and regulatory developments. There is no specific experience requirement that the CCO must fulfill, however, the CCO should be knowledgeable in securities law. Compliance procedures should review the accuracy of disclosures made to regulators, clients, and investors.

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following would be a prohibited practice? A)Entering into a written advisory contract. B)Disclosing that the IA will earn commissions on securities transactions in addition to the fees charged for advice. C)An investment adviser organized as a partnership giving written notice to all clients within a reasonable period of time that tells about the retirement of one of the partners. D)Failing to obtain written consent from a client to engage in an agency cross transaction.

D)Failing to obtain written consent from a client to engage in an agency cross transaction. Agency cross transactions always require client consent.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? They must be renewed on an annual basis. They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. They must prohibit assignment of the contract without the client's consent. A)I and III. B)I and II. C)I, II and III. D)II and III.

D)II and III. There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent.

Under which of the following circumstances would it most likely be presumed that an adviser holds custody of client property? A)Carol gives her investment adviser associate a check made payable to the custodian of Carol's IRA. B)Ellen engages Sam, a representative of a registered investment adviser, to prepare a financial plan. In conjunction with the plan preparation, Ellen provides Sam with access to all her brokerage account statements and tax returns. C)Paul is a client of Gibraltar Advisers. Although he makes deposits to his investment accounts by checks payable to Delta Securities, checks for his semiannual financial planning fees are made payable to Gibraltar Advisers. D)Harold, a client, makes a check intended for his investment account payable to Gibraltar Advisers, which is dually registered as investment adviser and broker-dealer. Harold's fee is automatically withdrawn from his account on a semiannual basis.

D)Harold, a client, makes a check intended for his investment account payable to Gibraltar Advisers, which is dually registered as investment adviser and broker-dealer. Harold's fee is automatically withdrawn from his account on a semiannual basis. When fees are automatically withdrawn from the client's account, custody of client funds can be presumed. Merely handing an adviser a check payable to a third party, such as a retirement account custodian, does not represent custody, nor are direct payments of advisory fees to the adviser considered custody. In the context of this question, account statements are considered to be information rather than property. Stock and bond certificates, as well as cash, are examples of client property.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements about an investment adviser's fees is (are) TRUE? Fees that are excessive compared to fees charged by other advisers for comparable services are unethical. The Administrator may investigate excessive fees by a comparison of services offered and fees charged. If a client agrees to a certain fee, the adviser may not be held for unethical conduct. A)III only. B)II only. C)I only. D)I and II.

D)I and II. An adviser is entitled to charge reasonable fees for services provided, but unreasonable fees are unethical. The Administrator may survey the market to establish fees charged against services provided in determining whether an adviser's fees are excessive. Fees that are determined to be excessive are unethical, even if the client agrees to them in the contract.

Which of the following are prohibited practices? An investment adviser transferred a client's account to a brokerage house because the account went below the firm's minimum size and then informed the client. An investment adviser organized as a partnership did not inform its clients of the departure of a partner who had only a very small interest in the firm. An investment adviser subsidiary of a publicly traded bank holding company failed to inform its clients of the departure of the firm's chairman and major stockholder. An investment adviser firm organized as a general partnership sends prompt notification to all clients after the addition of a new partner. A)III and IV. B)II and III. C)I and IV. D)I and II.

D)I and II. Transfer or assignment of an advisory account without prior client consent is always prohibited. An investment adviser need not inform clients of departures of employees, senior or otherwise, from investment advisory firms that are incorporated. Clients must, however, be informed of the departure or addition of any partner if the firm is organized as a partnership. The legal requirement for this notification is "within a reasonable period of time", but there is nothing prohibited about doing it promptly.

Under the Investment Advisers Act of 1940, the requirements that must be met in order for an investment adviser to make cash payments to solicitors include which of the following? There must be a written agreement between the adviser and the solicitor. Adequate disclosures must be made to the client about any affiliation between the adviser and the solicitor if the solicitation involves anything other than impersonal advisory services. The investment adviser must earn a majority of its income from conducting an investment advisory business. A)I, II and III. B)I and III. C)II and III. D)I and II.

D)I and II. Under federal law, to make payments to solicitors, there must be a written agreement between the investment adviser and the solicitor. If the advice is other than impersonal advisory services, any affiliation between the adviser and the solicitor must be disclosed. If the solicitor is not affiliated with the adviser, the solicitor's compensation must be disclosed, and the adviser must make an effort to assure that the solicitor complies with SEC rules.

Creative Wealth Management (CWM), an investment adviser registered in five states, has a preferred brokerage arrangement with Bullish Bobbie Brown Securities (BBBS), a FINRA member broker-dealer. If one of CWM's clients chooses to use a broker-dealer other than BBBS, CWM must disclose that in a client-directed brokerage account, the client may pay higher brokerage commissions because the IA may not be able to aggregate orders to reduce transaction costs the advisory contract is in danger of not being renewed if the client insists on using anyone other than BBBS for trade execution the client may receive less favorable prices because the IA has arranged a preferred commission rate with a preferred broker-dealer using BBBS assures the client of receiving research ahead of those clients who trade elsewhere A)II and IV B)III and IV C)I and II D)I and III

D)I and III Because of preferred arrangements between the IA and the BD, it is likely that larger orders will be combined (with a concurrent cost saving) and there may be a better commission schedule available for the adviser's clients. This would not be a cause for the adviser to refuse to renew the contract and it would be an unfair business practice to make research available to certain clients ahead of others.

f a party is acting as a solicitor for a federal covered investment adviser, which of the following statements are TRUE? If the solicitation is for impersonal services, a solicitor is required to provide a disclosure statement to the client. If the solicitation is for other than impersonal services, then the solicitor must give the client a disclosure document. If the solicitation is for impersonal services, the solicitor must receive a signed statement from the client that the investment adviser's brochure and the disclosure document have been received. If the solicitation is for other than impersonal services, the solicitor must receive a signed statement from the client that the investment adviser's brochure and the disclosure document have been received. A)I and IV. B)II and III. C)I and III. D)II and IV.

D)II and IV. If a solicitation is made for something other than impersonal advisory services, the solicitor must receive a signed statement from the client verifying receipt of both the adviser's brochure and solicitor's disclosure document at the time of, or before, entering into a contract and ascertain whether the solicitor has complied with the agreement.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following actions comply with an adviser's obligations to clients if the adviser has custody of client assets? An adviser permits an independent CPA access to all of the IA's financial information and to conduct an annual audit of the client's accounts. An adviser deposits all client funds immediately into the adviser's bank account and maintains a separate record for each client, indicating balances, deposits, withdrawals, and the location of the funds. An adviser gives client files under a court order to police investigators who are secretly investigating the client. The adviser does not inform the client of the act. An adviser sends each client an annual statement that reflects the client securities and funds positions over which the adviser maintains custody. A)I and II. B)II and IV. C)I, II, III and IV. D)I and III.

D)I and III. An adviser who has custody of client assets must provide for a surprise audit by an independent public accountant annually. An adviser may be required by law to reveal confidential client information without notifying the client. An adviser may not deposit client funds into the adviser's account. At the very least, a separate omnibus account must be maintained for all client funds. An adviser must provide custody clients with quarterly reports as to their assets, not annual reports.

Which of the following statements relating to Form ADV-E are CORRECT? The form is completed by an investment adviser who maintains custody of customer funds and/or securities. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form may be used to amend the IA's registration. A)I, II and IV. B)I, III and IV. C)I and II. D)I and III.

D)I and III. The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this Form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser. The independent public accountant performing the surprise examination must submit this Form within 120 days of the time chosen by the accountant for the surprise examination.

An investment adviser maintains custody of customer's funds and securities. In order to comply with the Uniform Securities Act, the adviser must, at least quarterly, send written notice to each custodial client stating the: location of the assets under custody. changes to the location of the assets under custody. amount of prepaid fee to be refunded upon early termination of the contract. value of the assets under custody. A)II and III. B)I and II. C)III and IV. D)I and IV.

D)I and IV. Under both state and federal law, investment advisers maintaining custody of customers' funds and securities must notify their clients no less frequently than quarterly of the location of the assets and their value. If there should be a change to their location, it must be communicated promptly.

Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE? The brochure must be updated each time Part 1A of Form ADV is updated. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. A)I, II and III. B)I and III. C)I and II. D)II and III.

D)II and III. Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year.

Under the Investment Advisers Act of 1940, which of the following statements is TRUE regarding jurisdiction for offenses? Generally, federal courts have no jurisdiction if a civil lawsuit based on the Advisers Act is filed in a state court. If the SEC wished to obtain an injunction or seek a civil penalty against an adviser, it would file a case in the federal court having jurisdiction over the place where the violation occurred. An adviser that wished to appeal an SEC order would file a motion in the US Court of Appeals. A)I and II. B)I and III. C)I, II and III. D)II and III.

D)II and III. Jurisdiction for violations of the Advisers Act lies with the federal courts. Federal courts have concurrent jurisdiction with any state court in which a case involving a violation of the Advisers Act is filed. Persons who wish to appeal SEC orders must do so in the US Court of Appeals serving the district in which the original case was tried.

Under the Investment Advisers Act of 1940, the SEC is empowered to: set bail. take evidence. subpoena witnesses. A)I and II. B)I and III. C)I, II and III. D)II and III.

D)II and III. Setting bail is the function of a court. The SEC is empowered to take evidence, subpoena witnesses, administer oaths, and require the production of books and records in conducting a formal investigation.

An investment advisory firm advertises a stock picking system that helps investors choose the timing and selection of securities for purchase. Under the Investment Advisers Act of 1940, which of the following must be disclosed in the advertisement? The number of years the system has been used successfully. The difficulty of using the system. The limitations of the system. A)I and III. B)I and II. C)I only. D)II and III.

D)II and III. The act prohibits reference to any formula, charting, or graphing device without disclosing the difficulties or limitations in their use. The number of years used is not required.

The Investment Advisers Act of 1940 requires an investment advisory contract to include which of the following terms? Performance guarantee. Duration of contract. Events that will lead to automatic assignment of the contract. Refunding of prepaid fees in the event of early termination. A)I and IV. B)II and III. C)I and III. D)II and IV.

D)II and IV. Investment advisory contracts must disclose the duration of the contract and the terms by which prepaid fees are refunded to clients who cancel their contracts. Automatic assignment is never permitted.

Investment advisers who have custody of funds and securities of a client must do which of the following? Receive prior permission from the SEC or the state securities Administrator to have custody of the funds and securities of a client. Notify the SEC or the state securities Administrator that they have or will have custody of the client's funds and securities. Continue custody of client's funds and securities even after the SEC or the state securities Administrator has told them that custody is not permitted because there is no place else to hold the funds or securities. Notify the customer where his funds or securities are being held. A)II and III. B)I and III. C)I and IV. D)II and IV.

D)II and IV. The general rule on custody is to take custody, notify the Administrator or the SEC that you have taken or will be taking custody, and, unless you are informed that you cannot have custody, continue maintaining custody. Customer funds and securities held in custody by the adviser must be clearly marked and segregated from the funds and securities of the adviser. Each client must receive written notification of the location and method in which securities are held and be promptly notified of any changes.

An investment adviser is preparing an advertisement. Which of the following would be acceptable? An endorsement on radio or TV from a celebrity who is a client of the firm. Identifying his best investment recommendations for the past 6 months. Offering to provide his investment recommendations for the past 12 months. Promoting his system of charts and formulas while mentioning their limitations and difficulties. A)II and III. B)I and II. C)I and IV. D)III and IV.

D)III and IV. Any mention of investment recommendations in any adviser advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. No outside endorsements are ever allowable on the exam.

Which of the following statements about wrap fee arrangements is NOT true? Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. Non-material changes to wrap fee disclosure must be disclosed to the Administrator within 90 days of fiscal year end. Material changes must be filed promptly with the Administrator. Wrap fee disclosure statements need not be filed with the Administrator. A)I only. B)I and III. C)I, II and III. D)IV only.

D)IV only. Wrap fee disclosure statements must be filed with the Administrator; all of the other statements listed are correct regarding wrap fee program regulations.

Which of the following would NOT be unlawful for an investment adviser under the Uniform Securities Act? A)Without client consent, an owner of a majority of the stock in the IA pledging that stock as collateral to a bank for a personal loan. B)Failing to notify the Administrator that the adviser has custody of a client's securities or funds even though the Administrator has no rule that prohibits such custody. C)Signing an investment advisory contract that did not outline the compensation arrangements. D)Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees

D)Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The Uniform Securities Act also requires investment advisers to notify the Administrator if they have or will have custody of customers' funds. In addition, investment advisers' fees cannot be based on a share of capital appreciation of clients' funds. The USA considers that a pledge of a majority interest in an IA is considered to be an assignment of the IA's contracts and, as long as consent is obtained from the clients, there is nothing prohibited with doing so.

Mark is a client of Gibraltar Investment Advisers. Gibraltar sells its investment advisory business to Alpha advisers. Which of the following best describes Mark's relationship to Alpha? A)Mark may not become a client of Alpha. B)Mark is automatically a client of Alpha. C)The investment advisory contract Mark made with Gibraltar continues with Alpha. D)Mark may become a client of Alpha if he chooses to do so.

D)Mark may become a client of Alpha if he chooses to do so. An investment advisory relationship may not be assigned without the consent of the client. The client may choose to enter into a contract with the new firm. The contract with the old firm becomes void when it sells its business.

Which of the following is a method of compensation available to investment advisers under contract to registered investment companies that is not normally available to those who advise individual investors? A)Percentage of assets under management. B)Commissions. C)Hourly rate. D)Performance fees.

D)Performance fees. Advisers under contract to registered investment companies may be compensated on a performance-fee basis. This form of compensation is only permissible when managing the accounts of certain qualified individual investors.

Tim, Jim, and Kim are equal partners in TJK Investment Advisers, a general partnership. Tim decides to sever his relationship with the other partners and work for a different firm. When, if at all, must the clients of TJK be notified of Tim's departure? A)TJK must notify its clients of Tim's departure within 30 days of Tim's severance from the firm. B)TJK must notify its clients of Tim's departure within 15 days of Tim's severance from the firm. C)It is not necessary to notify TJK's clients of Tim's departure, because the advisory will continue to serve its clients as before. D)TJK must notify its clients of Tim's departure within a reasonable period following his severance from the firm.

D)TJK must notify its clients of Tim's departure within a reasonable period following his severance from the firm. An investment adviser firm organized as a general partnership must notify its clients as to the departure of a general partner within a reasonable time period.

An investment adviser's model portfolio has returned 20% for 10 consecutive years. Which of the following statements regarding this adviser's advertisements is CORRECT? A)They may state that the portfolio will likely continue its past performance 20%. B)They may state that an investor will not lose money. C)No statement may be made about the performance. D)They may state the rate of return and that past performance does not guarantee future performance.

D)They may state the rate of return and that past performance does not guarantee future performance. Guarantees of performance are prohibited. Past performance may be shown, provided proper disclaimers regarding future performance are made.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the contract between an investment adviser and its clients shall include all of the following EXCEPT A)the services to be provided B)the formula for computing the fee C)whether the contract grants discretionary power to the adviser D)a provision to reduce or waive fees in the case of underperformance

D)a provision to reduce or waive fees in the case of underperformance There is never any case where waivers of this nature would ever be permitted.

Regarding the use of testimonials in advertising, all of the following are true EXCEPT: A)an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated principal of the firm. B)a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial. C)divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial. D)an investment adviser representative may only use a testimonial from an existing client.

D)an investment adviser representative may only use a testimonial from an existing client. Testimonials are prohibited under any circumstances for investment advisers and their representatives. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards.

An investment adviser compensated for a client's participation in a wrap fee program must provide the client with a written disclosure statement containing: A)only the services and fees of the program. B)at least the information in Form ADV Part 2A. C)at least the information required by Appendix 1 of Form ADV Part 2A, even if another adviser has already furnished such a statement on the program to the client. D)at least the information required by Appendix 1 of Form ADV Part 2A, but not if another adviser has already furnished such a statement on the program to the client.

D)at least the information required by Appendix 1 of Form ADV Part 2A, but not if another adviser has already furnished such a statement on the program to the client. The required disclosure statement for wrap fee programs must contain at least the information in Appendix 1 of Form ADV Part 2A, but duplicates need not be provided to clients who have already received the required disclosure on that program from another adviser.

Kapco Advisers is registered with the SEC. They wish to employ the services of a third-party firm to solicit for their new asset management program. All of the following statements about this arrangement are true EXCEPT: A)scripts used to present the program must be under Kapco's supervision to ensure compliance with all appropriate regulations. B)if the use of these solicitors increases the cost to the client, the expense must be disclosed. C)parties requesting further information must be furnished with Kapco's brochure as well as the solicitor's brochure. D)employees of the solicitor firm must be registered as investment adviser representatives of Kapco Advisers.

D)employees of the solicitor firm must be registered as investment adviser representatives of Kapco Advisers. The Investment Company Act of 1940 does not require registration of third-party solicitors. However, for those advisers who are not federal covered, under most conditions, the USA would require that solicitors be registered as IARs.

An investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market highs when they are most attractive to short sellers. When advertising this system, the IA must: A)provide customer testimonials evidencing their satisfaction with the system. B)indicate the length of time the system has been in play. C)show performance for at least the past 12 months. D)indicate that there are limitations and difficulties to using the system.

D)indicate that there are limitations and difficulties to using the system. Anytime there is a question about advertising a "system" for picking stocks, whether it uses charts or some other formula, the words limitations and difficulties must be in the correct answer. Although it is true that advertisements containing performance must reflect at least the past 12 months, there is no requirement to include performance in any ad.

With regard to a state registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that A)it must be delivered to all new clients B)it must be delivered not later than 48 hours after entering into an advisory agreement with a new client C)if requested by a client, it must be sent within 5 days of the request D)it is filed through the IARD system

D)it is filed through the IARD system The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before, (not after), the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year, (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state registered.

One of the major differences between identity theft and physical theft is that in the case of identity theft, A)the victim can usually correct the problem much more quickly than with physical theft B)unless hospitalization is required, law enforcement is generally unconcerned about identity theft C)the cost of the damages is generally much less D)it might not be discovered for some time

D)it might not be discovered for some time With identity theft, it might be months before you are aware that your identity has been stolen. This is unlike physical theft, where you are there at the time of the mugging or see the results when returning home to find your place has been burgled. Clearing up cases of identity theft can take a very long time, and the amount of money involved can be staggering.

Regarding performance-based fees charged by ​covered ​investment advisers, all of the following statements are correct EXCEPT A)to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark B)performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE C)performance-based fees are generally prohibited D)it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods

D)it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods ​Covered advisers are those under federal jurisdiction rather than state. ​ The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. ​ Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure.​

Under the Investment Advisers Act of 1940, an investment adviser who has custody of clients' funds and securities must: A)annually provide each client with an itemized list of the securities and funds and their location. B)maintain a surety bond in an amount determined by the SEC. C)annually perform a physical inventory of all clients' funds and securities and file an affidavit with the SEC. D)keep the clients' securities and funds segregated and identified.

D)keep the clients' securities and funds segregated and identified. An adviser who has custody must (1) segregate client securities by client and keep them in a safe place (all clients must be notified in writing of the location of their securities and of any location changes), (2) deposit client funds in bank accounts that contain only the client's funds, naming the adviser as agent or trustee for the client (the funds of all clients may be combined in one account, but complete records must be kept by the adviser; all clients must be notified in writing of the location of their funds and of any location changes), (3) report to clients at least every 3 months with a written, itemized statement indicating the funds and/or securities in the possession of the adviser and all transaction for the period, and (4) arrange for an unannounced examination (audit) by an independent public accountant at least annually, who will report the audit results to the SEC. The Investment Advisers Act of 1940 does not require surety bonds. The Uniform Securities Act requires surety bonds.

The agreement between an investment adviser and client is the advisory contract. In order to be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they: A)typically are renewed on an annual basis. B)must disclose the amount or method of calculation of the adviser's fee. C)generally do not provide for discretion. D)must be in writing.

D)must be in writing. While not the general practice, the federal law does permit oral contracts while the USA requires that all initial and renewal contracts be in writing.

A succession plan under a Business Continuity Plan would likely be most important for an investment adviser A)that is a subsidiary of a multinational corporation B)with locations in several states C)that is registered in only 1 state D)organized as a sole proprietorship

D)organized as a sole proprietorship When an investment adviser is organized as a sole proprietorship, frequently the only contact clients have is with that individual. The death or permanent disability of that individual could cause a host of legal problems, such as termination of the entity, cancellation of all powers of attorney, and termination of the advisory client. Without a succession plan in place, things could be very difficult for those clients.

It would not be considered a prohibited or unethical business practice for an investment adviser to A)charge a performance-based fee to an individual who meets the SEC's accredited investor standard detailed in Rule 501 of Regulation D B)use a testimonial from a bona fide client with the proper caveat that this individual's results may not be typical and it is possible they may not be reproduced in the future C)pay a nominal fee, based on account size, to certain professionals as a form of thanking them for client referrals D)pay a nominal fixed fee to certain professionals as a form of thanking them for client referrals

D)pay a nominal fixed fee to certain professionals as a form of thanking them for client referrals Referral fees (not cash fees for full time soliciting) may be paid to certain professionals (lawyers, accountants, insurance agents, and so forth) as long as the fee is both a nominal amount (up to several hundred dollars) and is the same amount for any referral. That is, it is not based on the size of the account. In order to charge a performance-based fee, investors must have a net worth in excess of $2 million while they can meet the accredited investor standard when their net worth exceeds only $1 million. Finally, under both state and federal law, investment advisers may never use testimonials from clients, even with disclaimers.

An investment adviser has a new client with $100,000 under management who was referred to the firm based on its reputation for regularly outperforming the S&P 500. Because of adverse market conditions, current portfolio performance does not meet the expectations of the client, who would like to discontinue the relationship with the firm. In response, the adviser offers to waive his normal fee of 1% of the managed assets. According to the Investment Advisers Act of 1940, this is: A)permissible in unique situations, but only with permission of the SEC. B)permissible if done for all clients. C)permissible if the advisory contract listed exact conditions under which this procedure would apply. D)prohibited under the act.

D)prohibited under the act. The Investment Advisers Act of 1940 Act prohibits waiving or refunding a client's advisory fee if the account does not meet expectations.

An IAR has received several referrals from a prominent estate-planning attorney. Under the USA, the IAR would be permitted to: A)compensate the attorney with a fee based on the assets placed under management as a result of these referrals. B)open a managed account for the attorney and offer a discounted fee structure based on the frequency of referrals. C)send a thank you note and nothing else. D)refer advisory clients who need estate planning to this attorney.

D)refer advisory clients who need estate planning to this attorney. We can show our appreciation for the referrals by referring our clients to qualified professionals. A flat fee may be paid to other professionals for their referrals, but must be disclosed to the client.

Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must A)send a copy of its brochure, or a summary of the changes, to all clients within 60 days of the end of its fiscal year B)send a copy of its brochure, or a summary of the changes, to all clients within 90 days of the end of its fiscal year C)send a copy of its brochure, or a summary of the changes, within 7 days of receiving a request from a client D)send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year

D)send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year Whether the firm is a state- or federal-covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan and, after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral A)both Susan and Mary would have to disclose the cash payment to Amanda B)only Susan would have to make disclosure to Amanda C)she would have to obtain Mary's permission first D)she would be engaging in an prohibited practice

D)she would be engaging in an prohibited practice Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. A formal written agreement must be in effect, not just a one-time reward.

Under the Investment Advisers Act of 1940, an investment adviser that becomes registered may: A)place the initials RIA after its name on their business card. B)state in a brochure that its registration is approved by the SEC. C)tell a client its qualifications have been approved by the SEC. D)state on its stationery that it is registered with the SEC.

D)state on its stationery that it is registered with the SEC It is illegal to imply in any way that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. However, a statement that the adviser is registered with the SEC is appropriate. Initials after a person's name must be used to recognize educational designations only.

According to the Uniform Securities Act, an investment adviser may have custody of a customer's funds and securities if: A)it does not share in the capital gains of the account. B)it has received the permission of the Administrator. C)it has received permission from the SEC. D)the Administrator has been informed of the custody.

D)the Administrator has been informed of the custody. As long as retaining custody of funds is not prohibited, an investment adviser may have custody of a customer's account after providing notice to the Administrator.

NASAA has released a Model Rule dealing with suggested procedures to follow in the event that forces beyond the control of the investment adviser cause an interruption to its ability to conduct business. This is A)the SIPC B)the SRO C)the CIP D)the BCP

D)the BCP The Model Rule referred to in the question deals with an investment adviser preparing a Business Continuity Plan. CIP is the customer identification program (new accounts); SIPC is in the event a broker-dealer is forced to financially liquidate; and SRO stands for a self-regulatory organization, such as FINRA.

A federal covered adviser has entered into a relationship with a solicitor. In order to be in compliance with the Investment Advisers Act of 1940: A)the solicitor must be registered as an investment adviser representative. B)compensation must be limited to actual funds brought under management. C)cash referral fees may not be paid to solicitors. D)the relationship must be disclosed through the delivery of a separate solicitor's brochure along with the adviser's brochure.

D)the relationship must be disclosed through the delivery of a separate solicitor's brochure along with the adviser's brochure In all cases, other than regarding impersonal advisory services, delivery must be made of both the adviser's brochure and some type of document describing the role of the solicitor. While some states do require solicitors to be registered as adviser representatives, that is not a requirement of the federal law. Solicitors may be compensated in a number of different manners, one of which is cash referral fees.

A client of an investment adviser is thrilled with her portfolio's results and posts a note on her bridge club's cork board suggesting that some of the other members would probably benefit from the adviser's skills. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A)cork boards are not considered social media and that is the only place where testimonials are prohibited B)this would not be permissible because it is clearly a testimonial C)if the investment adviser learns of the posting, it is not necessary to ask the client to remove it D)this would be permissible because it was done without the knowledge of the adviser

D)this would be permissible because it was done without the knowledge of the adviser There is a limit as to how far an investment adviser or IAR can go to prevent clients from giving testimonials. After all, as in so many businesses, referrals are a key to growth. As long as this note was posted without any knowledge of the IA (or IAR), there is no problem. However, once the IA (or IAR) finds out about it, a request must be made to remove it. The prohibition on testimonials is not limited to social media.

As a result of an SEC hearing, an investment adviser's penalty is $5,000 and a 50-day suspension. If the IA wishes to appeal this verdict, a request for review must be filed: A)with the SEC within 45 days of the order. B)with the Administrator within 60 days of the order. C)with the U.S. Court of Appeals within 45 days of the order. D)with the U.S. Court of Appeals within 60 days of the order.

D)with the U.S. Court of Appeals within 60 days of the order. Under both federal and state laws, appeals must be filed within 60 days of the order. In the case of an SEC hearing, the appeal is filed with the U.S. Court of Appeals for the district in which the original hearing was held.