S66 C4 | Chapter Questions
Under the Investment Advisors Act of 1940, which of the following must register as an investment advisor? I.an investment advisor whose only clients are insurance companies II.an investment advisor whose only clients are accredited investors III.an investment advisor whose only clients are banks, savings and loans and trust companies [A] II only [B] I, II [C] II, III [D] I, II, III
EXPLANATION Under the Investment Advisors Act of 1940, one of the exceptions to registration requirements is an investment advisor whose only clients are insurance companies.
According to the Investment Advisors Act of 1940, investment advisors must: I.have at least $25,000 in capital. II.comply with certain rules to safeguard clients' assets if they have custody of clients' funds or securities. III.disclose their business background and experience to clients. [A] III [B] I, II [C] II, III [D] I, II, III
EXPLANATION = The IIA of '40 applies to federally covered RIAs, not state covered RIAs. Neither the '40 Act, nor the SEC specifies a minimum net worth/capital for federally covered RIAs. Investment Advisory Firms are required to safegaurd client funds and securities and also to disclose their business background and experience.
According to the Investment Adviser's Act of 1940, when is it acceptable for an IA to pay a referral fee in cash to a solicitor? [A] It is acceptable only when the client has agreed to waive the receipt of a disclosure document from the IA. [B] It is acceptable only when such a fee is paid according to a written contract or written agreement to which the IA is a party. [C] It is acceptable only if there is an association between the registered broker-dealer and the solicitor. [D] It is acceptable only if the services offered are impersonal advisory services.
EXPLANATION = A solicitor is a person: 1. Who attempts to sell advisory services or 2. Refers clients to an IA for a fee. To pay the solicitor, there must be a written agreement between the IA and the solicitor. (Also, the IA must be registered with the SEC and the solicitor must have a clean record.)
Under the Investment Advisors Act of 1940, which of the following persons would be considered to be in the business of providing "investment advice": [A] An individual is paid for giving advice about purchasing futures contracts. [B] A firm which is paid to render advice only to banks regarding stocks. [C] A firm which is paid to advise individuals about purchasing precious metals. [D] An individual who regularly gives advice about purchasing stocks but receives no compensation for it.
EXPLANATION = According to SEC Release IA-1092, the definition of an Investment Advisor is a person who is "in the business" of giving advice about securities and is required to register. Specifically in this question the Bank is considered a client.
Which one of the following must register as an investment advisor under the Investment Advisors Act of 1940, assuming that they all give investment advice only incidental to the practice of their profession and are not directly compensated for such advice? [A] a stockbroker with NYSE firm [B] a principal in a broker/dealer firm associated with an insurance company [C] a financial planning firm which advertises as an investment advisory firm which does no-fee financial planning [D] a Certified Public Accountant, with one of the Big Eight accountant's firms
EXPLANATION = According to the Investment Advisors Act of 1940, a financial planner who "holds themselves out" (advertising) as offering services of giving advice with regard to securities would need to be registered as an investment advisor.
An investment advisor charges a fee for an overall financial plan. Which of the following facts must be disclosed to the customer? 0.The advisor will receive a commission on recommended municipal securities transactions. 0.The advisor will receive a commission on recommended equity securities transactions. 0.The advisor will receive a commission on recommended life insurance products. 0.The advisor will receive a commission on recommended real estate transactions. [A] II only [B] I and II [C] III and IV [D] I, II, III, IV
EXPLANATION = All choices are correct regarding facts which must disclosed to customers. Investment Advisors are required to disclose compensation received from anywhere.
In which of the following cases would an individual generally not be considered to be called "in the business" of providing investment advice according to the Investment Advisors Act of 1940? [A] The individual advertises the availability of investment advice but does not charge a fee for the advice. [B] The individual person provides financial planning in specific securities to clients but is compensated only in the form of commissions on securities transactions. [C] An individual regularly provides investment advice for compensation but not as a primary business activity. [D] The individual provides specific investment advice only on rare and isolated instances.
EXPLANATION = An individual generally would not be considered "in the business" of providing investment advice if the individual provides specific investment advice only on "rare and isolated instances".
An Investment Advisor pays a cash fee to a solicitor. The disclosure statement which is given to the client must include all of the following except: [A] the affiliation between the solicitor and the investment advisor [B] a description of the compensation to be paid to the solicitor by the advisor [C] the business background of the solicitor [D] the amount of any charges to the client which relate to the solicitors activities
EXPLANATION = Choices 'A', 'B', and 'D' represent information which must be disclosed. Choice 'C' does not have to be included in the disclosure statement.
When a performance based fee is charged to a client, which of the following must be disclosed in writing? [A] fees that the advisor charges may increase in the future [B] fees the advisor may charge may vary depending upon the investment return produced [C] that the advisor may charge more than 20% on the assets under management [D] that the advisor will not charge fees higher than the average of other advisor fees
EXPLANATION = Clients must be made to understand that with Performance Based Fees that the amount of fee charged to the client may change depending on the actual investment return on the portfolio.
Which of the following is NOT required to be contained in written disclosure documents provided to clients by solicitors under the 1940 Act? [A] The name of the broker/dealer firm that will be executing trades for the account [B] Details as to how the solicitor will be compensated [C] The name of the IA firm placed in charge of providing advisory services for the account [D] Details as to how the IA firm and the solicitor are affiliated
EXPLANATION = Each of the items listed must be provided in the details of the written disclosure document provided by the solicitor to clients other than the name of the broker/dealer firm that will be executing trades for the account.
Which of the following advertisements used by an Investment Advisor would be acceptable? [A] "Good Guy Advisors has out-performed all other investment advisors for the past two years as measured by its investments in ABC and DEF common stock. So come invest with us!" [B] "Good Guy Advisors has out-performed other investment advisors in the family planning sector for the last year and your family should invest with us. We are offering you a free evaluation of your financial condition if you deposit at least $100,000 in a new account" Disclosure: Past performance is not indicative of future results. [C] "Good Guy Advisors offers investment advisory services catered to each individual investor, so come in for a consultation. Disclosure: Any past performance figures shown are not indicative of future results. [D] "Good Guy Advisors offers will double your investment in 6 months or less. Invest with us!" Disclosure: Past performance is not indicative of future results.
EXPLANATION = In no way can an investment related business guarantee results or offer any report analysis free unless such is free and without condition.
A small investment company is owned by its own employees. The employees of the investment company have decided to focus on marketing and decide to hire an investment advisor with a good reputation to manage the investment company's portfolio. The investment manager charges a set percentage of the increased value in the portfolio on a semi-annual basis. The contract entered into between the IA and the investment company would be acceptable if: [A] The investment company has at least $750,000 under management or a net worth of $1,500,000. [B] The employees of the investment company are all qualified clients under the 1940 Act. [C] The investment advisor becomes an employee of the investment company and receives a salary that would be equal to the IA's required set percentage. [D] The investment company would not be allowed to employ any outside investment advisor.
EXPLANATION = In order for an Investment Advisor to charge a performance based fee to a client, the client would have to be a Qualified Client. This would be a natural person or company that has at least $750,000 under management or has a net worth of more than $1,500,000.
Amendments to Form ADV Part II must be provided to clients by advisers when? The Form must [A] be provided to clients when the adviser receives the client's funds. [B] be provided to clients annually. [C] be provided to the clients one full day (24 hours) before the client enters into a contract with the adviser. [D] be provided to the client when the contract is presented and signed and the client has a 5-day grace period during which the client can rescind the contract at any time for any reason.
EXPLANATION = Part II of Form ADV must be sent to or offered to existing clients on an annual basis.
According to the Investment Advisers Act of 1940, which of the following statements are true regarding the acceptance of prepaid advisory fees by an investment advisor? 0.The fees must be disclosed in writing in the advisory contract. 0.The fees cannot exceed more than 6 months' payment in advance. 0.Prepaid fees in excess of $500 six months in advanced require that the advisor's balance sheet be disclosed to the client. 0.Acceptance of a prepaid fee would be deemed "custody" of client funds. [A] I and III only [B] II and IV only [C] I, II, III [D] I, II, III, IV
EXPLANATION = Prepaid advisory fees in excess of $500, six months in advanced require the advisor to disclose their Balance Sheet. All fees must be disclosed in writing in the advisory contract. Fees could be prepaid for more than six months if disclosure requirements are met. Prepayment of an advisory fee would not be considered "custody" of client funds.
Under the Investment Advisors Act of 1940, publishers of market newsletters with a general circulation that do not render specific investment advice are: [A] Excluded from the definition of an investment advisor. [B] Included in the definition of an investment advisor. [C] Are excluded from the definition of an investment advisor if their advice is limited only to Government Securities. [D] Excluded from the definition of an investment advisor, as there is no cost involved.
EXPLANATION = Since publishers of market newsletters with GENERAL circulation do not make specific recommendations, they would be excluded from the definition of an investment advisor.
In working as an investment adviser (IA), you see opportunity to benefit your clients holding nondiscretionary accounts by gaining access to initial public offerings. In order to have more choices as to the initial public offerings, you decide to hire a person, who is unaffiliated with your firm and not registered with the SEC or in any state. This person charges a finder's fee of a quarter of the value of any investment secured through the use of the service. According to the Investment Advisor's Act of 1940, the person charging the finder's fee cannot accept such payments because [A] There has been no interest expressed in the investments by the nondiscretionary account holders. [B] The IA has gone outside of their normal broker-dealer research groups who could have performed the same services for less cost. [C] In soliciting information from the offering companies, the unaffiliated person would be then acting on behalf of the IA as a solicitor. [D] The unaffiliated person would be acting as a broker-dealer because they would be receiving commissions based on their finding the securities.
EXPLANATION = The activities of non-registered persons working together with registered investment advisers are very limited. They are basically limited to clerical work which must be closely supervised by the IA. They are usually paid either hourly or a salary, but never on commission.
A current and updated amendment to an Investment Advisor's registration must be electronically filed with the SEC according to the Investment Advisers Act of 1940 how often? [A] within 90 days from the close of the Investment Adviser's fiscal year [B] within 30 days from the beginning of the Investment Adviser's fiscal year [C] within 90 days from the close of the Investment Adviser's calendar year [D] within 30 days from the beginning of the Investment Adviser's calendar year
EXPLANATION = Under the Investment Advisers Act of 1940 investment advisers are required to send an electronic filing of an annual updated registration amendment within 90 days after the close of its fiscal year.
A pension consultant receives compensation for advising an employee pension fund. Under the Investment Advisers Act of 1940, which of the following advice on securities would require the pension consultant to register as an investment adviser (IA)? [A] Investing the assets of the plan in real property [B] The allocation of the assets of the plan between securities and other securities-related investments [C] Hiring a labor law firm to advise the plan [D] Hiring an outside accountancy firm for auditing and consulting services regarding the plan
EXPLANATION = Under the Investment Advisers Act of 1940, a person is an "investment adviser" if the person advises about securities for compensation.
In order for a Solicitor to be paid a cash fee by an Investment Advisor, which of the following requirements must be met? 0.There must be a written agreement between the advisor and solicitor 0.Such solicitor must not be subject to SEC suspensions or limitations 0.The investment advisor must be registered with the SEC 0.The investment advisor must be registered as an Investment Advisor Representative [A] I & II only [B] II & III only [C] I, II, & III only [D] All of the above
EXPLANATION = Under the Investment Advisors Act of 1940 solicitors are required to comply with state laws which typically require registration, they must not be subject to SEC suspensions or limitations, and there must be a written agreement in place. Choice IV is not true because not all IARs (Investment Adviser Representatives) are registered with the SEC. Some are registered with the State. Also, the federal statutes do not specifically require registration, but do require compliance with state laws, which do require registration.
Which of the following are true regarding persons who engage in the business of advising clients relating to securities under the Investment Advisors Act of 1940? 0.They must be registered as investment advisors unless their advice is general in nature. 0.They must be registered as investment advisors unless they are registered as broker/dealers under state securities laws 0.They must be registered as investment advisors unless they do not charge commissions or other fees for doing so. 0.They must be registered as investment advisors unless they are accountants or engineers whose performance or advisory service is only incidental to the practice of their profession. [A] II, III [B] I, IV [C] I, III, IV [D] I, II, III, IV
EXPLANATION = Under the Investment Advisors Act of 1940, persons must be registered as an investment advisor unless their advice is general in nature and/or they do not charge a commission or other fee for doing so. Please refer to the study material for a list of all the exclusions from the definition of an investment advisor.
Under the Investment Advisors Act of 1940, when a contract has provisions which state that services may be provided by means of written material, oral statements, statistical information which expresses no opinion, and that such statements do not purport to meet the needs of any specific individuals and accounts of the firm, this would be defined as: [A] Trustee relationship [B] Impersonal advisory service [C] Custodian relationship [D] Management relationship
EXPLANATION = Under the Investment Advisors Act of 1940, when a contract has provisions which state that services may be provided by means of written material, oral statements, statistical information which expresses no opinion, and that such statements do not purport to meet the needs of any specific individuals and accounts of the firm, this would be defined as "Impersonal Advisory Services" or general information and therefore delivery of a Brochure would not be required.
Under the SEC Release IA-1092, which of the following would be required to register as an investment advisor? 0.A certified Financial Planner who provides general financial planning for a fee. 0.An attorney who manages the financial affairs of athletes for a fee. 0.An accountant who manages the financial affairs of entertainers for a fee. 0.An economist who gives advice to pension plans for a fee on the outlook for the securities markets. [A] II and III only [B] I and IV only [C] II, III, IV [D] I, II, III, IV
EXPLANATION = Under the SEC Release IA-1092, any persons that give advice with regard to securities and/or hold themselves out as offering such services would be deemed an investment advisor and would be required to register. Therefore, all of the listed options would be required to register.
Under the Investment Advisers Act of 1940, who would not be defined to be "a person associated with" an investment advisory firm? [A] a partner of the firm [B] an account executive of the firm [C] the head word processor for the firm [D] the Vice President of Administration of the firm
EXPLANATION Clerical workers, such as word processors, are excluded from the definition.
All of the following are not required to register under the Investment Adviser Act of 1940, EXCEPT: [A] An accountant who incidentally provides financial planning services in the course of his work as an accountant [B] An attorney who regularly publishes advertisements stating that he offers investment advisory services and financial planning for a fee [C] A banking institution which, on occasion, provides advisory services to bank customers [D] An agent of a broker/dealer who in the course of providing brokerage services provides some investment advisor services as well
EXPLANATION A lawyer who advertises investment advisory services and charges a separate fee for such services loses his or her exemptions from registration. The other alternatives are statutory exemptions under the 1940 Act since they are solely incidental to another business service and since no separate or additional fee is charged for such services.
According to the Investment Advisers Act of 1940, "person associated with an investment adviser" does not include [A] Outside directors [B] Non-managing partners [C] Clerks [D] Any of the above
EXPLANATION A person associated with an investment advisor would not include receptionist or clerks.
Under the Investment Advisors Act of 1940, which of the following persons would be considered to be in the business of providing "investment advice": [A] An individual is paid for giving advice about purchasing futures contracts. [B] A firm which is paid to render advice only to banks regarding stocks. [C] A firm which is paid to advise individuals about purchasing precious metals. [D] An individual who regularly gives advice about purchasing stocks but receives no compensation for it.
EXPLANATION According to SEC Release IA-1092, the definition of an Investment Advisor is a person who is "in the business" of giving advice about securities and is required to register. Specifically in this question the Bank is considered a client.
According to the Investment Advisers Act of 1940, investment advisers must include a current audited balance sheet with Part II of Form ADV if they [A] Have custody of client funds or securities [B] Require prepayment of over $500 in advisory fees more than six months in advance [C] Both A and B are correct [D] Neither A nor B is correct
EXPLANATION According to the Investment Advisers Act of 1940, if an investment adviser changes its fees or requires prepayment of over $500.00 (note: In the "real world" the $500 fee has been raised to $1200) of fees six months in advance, they must provide clients and the SEC with a current audited Balance Sheet and Part II of form ADV. IA's are no longer required to file Part II of Form ADV simply because they have custody. (SEC Release IA - 2711)
A registered representative employed by ACE Investments, a broker/dealer which charges its clients separately for investment advice, offers investment advice to his clients even though it is not part of his job at ACE. According to the Investment Advisors Act of 1940, all of the following statements are true except: [A] The registered representative must register as an investment advisor even if his only compensation is the commission he receives from the securities transactions he recommends. [B] The registered representative must be registered as an investment advisor even if his firm is already registered as such. [C] ACE Investments must be registered as an investment advisor. [D] ACE Investments does not have to register as an investment advisor if only brokerage clients are charged for investment advice.
EXPLANATION According to the Investment Advisor Act of 1940, an investment advisor is an individual who receives compensation for advising others about securities or about the advisability of investing in securities. If a broker/dealer's advisory services are incidental and they receive no compensation, then they could qualify for an exclusion from the definition. However, example "D" receives compensation and would not qualify
According to the Investment Advisors Act of 1940, which of the following are true regarding persons who engage in the business of giving investment advice to clients? 0.Federal registration is not required if the person is registered in the state where they live. 0.Persons must be registered if they receive any economic benefit for providing investment advice directly or indirectly. 0.Accountants and attorneys do not have to register if any investment advice they give is solely incidental to practice their professions. [A] I, II [B] I, III [C] II, III [D] I, II, III
EXPLANATION According to the Investment Advisors Act of 1940, an individual who falls under the definition of an investment advisor must be registered either with the state or with the SEC depending upon the amount of money that they manage. There are some exclusions, but answer "I" is not one of them.
According to the Investment Advisors Act of 1940, which of the following are excluded from the definition of "investment advisor"? 0.an insurance company formed under the laws of the state 0.a bank which is not an investment company 0.a person whose investment advice relates solely to securities issued by the U.S. Government [A] I, II [B] I, III [C] II, III [D] I, II, III
EXPLANATION According to the Investment Advisors Act of 1940, an investment advisor is an individual who receives compensation for investment advice. The exclusions from this definition include any bank or bank holding company and any person whose advice or services is related only to U.S. Government securities. When looking at the exclusions from the definition of an Investment Advisor, according to the Investment Advisors Act of 1940, choices II and III are specifically listed. There is not an exclusion listed for an insurance company formed under the laws of a state.
According to the Investment Advisors Act of 1940, which of the following are excluded from the definition of "investment advisor"? an insurance company formed under the laws of the state a bank which is not an investment company a person whose investment advice relates solely to securities issued by the U.S. Government [A] I, II [B] I, III [C] II, III [D] I, II, III
EXPLANATION According to the Investment Advisors Act of 1940, an investment advisor is an individual who receives compensation for investment advice. The exclusions from this definition include any bank or bank holding company and any person whose advice or services is related only to U.S. Government securities. When looking at the exclusions from the definition of an Investment Advisor, according to the Investment Advisors Act of 1940, choices II and III are specifically listed. There is not an exclusion listed for an insurance company formed under the laws of a state.
According to the Investment Advisors Act of 1940, which of the following statements is false regarding compensation of an investment advisor: [A] An investment advisor is considered to be compensated if the advisor receives any economic benefit. [B] The advisor is considered to be compensated if any fee has been charged for a variety of financial services including specific advice on securities. [C] An advisor is considered to be compensated only if the advisor is paid directly by the person who receives investment advisory services. [D] An advisor is considered to be compensated if the advisor provides a variety of services including investment advice and only receives compensation on an insurance sale.
EXPLANATION According to the Investment Advisors Act of 1940, compensation would include Management Fees, Wrap Fees, Commissions, Hourly Rates and any other form of economic benefit. Compensation does not have to be paid directly from the person receiving the services.
Willful violations of the Investment Advisors Act of 1940 are punishable by: 0.a fine up to $10,000 0.imprisonment for up to 5 years 0.a bar from associating with any investment advisor [A] I, II [B] I, III [C] II, III [D] I, II, III
EXPLANATION According to the Investment Advisors Act of 1940, willful violations of the act can be punished by a fine of up to $10,000 and imprisonment for up to 5 years or both. The Act does not address the barring of an investment advisor.
Under the Investment Advisors Act of 1940 which of the following persons would have been considered to have received compensation for the giving of advice? 0.An annual management fee based on assets under management 0.A commission charge for transactions executed based on securities recommendations made 0.A fee charged to a family for the establishment of family trust funds 0.An hourly rate charged to client while meeting with the client and providing the client with investment advice [A] I & II [B] II & III [C] I, II & IV [D] I, II, III, IV
EXPLANATION All choices except for III would be considered to be forms by which compensation could be paid for providing investment advice. Charging a fee for establishment of trust funds for a family has nothing directly to do with giving advice about investing in securities and would not be considered compensation as an IA. Be careful about commissions. An agent receiving commissions in day to day activities would not need to be registered as an IAR.
Under the Investment Advisors Act of 1940, disclosure of which of the following is required to be made to customers? I.Compensation paid to the advisor by the issuer for recommending their security. II.Compensation paid to the advisor by a broker/dealer. III.Compensation paid to the advisor by an insurance company. IV.The ability of the customer to use any broker/dealer to execute recommended portfolio transactions. [A] I and III only [B] II and IV only [C] I, II, III [D] I, II, III, IV
EXPLANATION All four choices represent information which must be disclosed to customers of an Investment Advisor.
According to the Investment Advisors Act of 1940, a person who provides investment advice may be considered to be compensated for that advice if the person receives: 0.a commission on securities transactions 0.a commission on the sale of a life insurance policy 0.a referral fee from a broker when the client of the person placed an order to purchase securities [A] III [B] I, II [C] II, III [D] I, II, III
EXPLANATION All of the examples listed would be considered to be some form of compensation under this definition.
Each of the following would not have to register with the SEC according to the Investment Advisers Act of 1940, EXCEPT [A] An investment adviser with clients residing in 13 states [B] An investment adviser whose client's portfolios invest solely in federal covered securities. [C] An investment adviser who manages over $50,000,000 in assets [D] An investment adviser who only takes clients with more than $1,500,000 in assets
EXPLANATION An investment adviser managing $25,000,000 or more would have to register with the SEC only (not the states), and would then be a federal covered adviser. In the real world this number has been increased to $110,000,00 or more, however the new number is not yet being tested.
According to the Investment Advisers Act of 1940, which of the following is considered to be providing advice related to securities? [A] Someone who issues reports about securities in general without mentioning specific securities [B] Someone who advises clients on the desirability of investing in securities as opposed to non-securities financial instruments [C] Both A and B [D] Neither A nor B
EXPLANATION An investment advisor is an individual who receives compensation for advising others about securities or about the advisability of investing in securities including: providing advice or issuing reports or analyses with regard to securities, engages in the business of providing such advice, and/or receives compensation for these services. The exclusions from the definition include newspapers, new magazines and other financial publications - NOT reports.
All of the following sources of compensation must be disclosed by an IA to a client except: [A] As part of the promotion of a new issue, the issuer pays the IA with airline tickets to Hawaii [B] Market quotation systems paid for by a fund sponsor [C] Commissions from trades implementing investment advice [D] Monthly lease payments from an attorney who subleases part of the IAs office space
EXPLANATION Any compensation from sources other than client advisory fees that may be a potential conflict of interest must be disclosed. Lease payments are not a form of compensation.
A person is considered to be engaged in the business of giving investment advice under the Investment Advisors Act of 1940 if such person does which of the following: receives special compensation advertises as an investment advisor spends a small part of total business activities giving investment advice gives general advice on securities incidental to a primary business as an insurance agent [A] III, IV [B] I, II, III [C] I, II, IV [D] I, II, III, and IV
EXPLANATION Choices I, II, and III would be considered to be engaged in the business of giving investment advice. However, an individual who gives general advice on securities which are incidental to his primary business as an insurance agent would not be included in this definition.
According to the Investment Advisors Act of 1940, registration as an investment advisor is required for a person whose advice relates to which of the following securities? I.bonds issued by a local bank II.bonds issued by a corporation listed on NYSE III.U.S. Treasury bonds IV.revenue bonds issued by a state [A] I, II, III [B] II, III [C] I, II, IV [D] I, II, III, IV
EXPLANATION Choices I, II, and IV represent securities which would require registration as an Investment Advisor. Registration as an investment advisor would not be required for persons who offer only U.S. Government (Treasury) securities.
An investment adviser representative (IAR) is engaged in options trading. The IAR decides that a fair charge for his services would be 7% per month of the assets under management. In order to do so, the IAR will disclose all fees and charges in both the advisory contract, signed by clients, and Form ADV. The IAR thinks that by the dual disclosure, he is acting appropriately. Is the IAR acting appropriately? [A] Yes. As long as clients are provided with the disclosure documents and they sign the documents, the IAR has acted appropriately. [B] No. Even with proper disclosure, the IAR is in violation of the Investment Advisers Act of 1940. [C] Yes. Disclosure was complete, so the IAR has acted appropriately. [D] No. Advisory fees cannot be charged monthly. They can only be charged quarterly or semi-annually.
EXPLANATION Even when disclosure has taken place, IARs can act inappropriately or in violation of the Investment Advisers Act of 1940. The fees charged for this IAR's services are excessive and beyond what is acceptable by the Act of 1940. Taking a real-world approach to this question, start with a $10,000 portfolio. After 6 months of managing the account, without gain or loss on securities, the advisory fees will have added up to over $3,500, which is over 35% for six months of asset management.
An investment advisor handles a securities portfolio for a client. While traveling, the client gives the investment advisor authority to write checks on his personal checking account. It is assumed that the advisor will use authority only to pay quarterly fees to the bank which is the custodian of the client's securities. Under the Investment Advisors Act of 1940, which of the following is true? [A] If the advisor used his authority only to pay the custodial fees, it is allowed. [B] The advisor is not subject to additional requirements because the arrangement is entered into for the client's convenience. [C] The advisor will not have custody of the client's funds unless the bank custodian is an affiliated person of the advisor. [D] The advisor is deemed to have custody of client funds under this arrangement and must comply with additional requirements.
EXPLANATION If a client is going to be out of town and gives the Investment Advisor authorization to write checks out of the client's personal checking account only to pay quarterly banking fees, it would be considered custody of client's funds. Under this arrangement the investment advisor must comply with additional requirements.
An elderly client has been a long-time client of Joe, who is an IAR. The elderly client has a trust account for his children and decides to name Joe as the trustee via his will, once he passes away. Joe is to oversee and manage the investments of the trust at his discretion once the elderly client passes away. When the elderly client passes away and Joe is trustee, which of the following are correct? Joe would be considered a fiduciary for the trust account. Joe would be considered an agent who would receive commissions related to trades in the trust account. Joe would be considered a beneficiary of the trust account. Joe would be considered to have a certain level of discretionary authority over the trust account and would have custody of trust account funds as trustee. [A] I and II [B] I and IV [C] II and III [D] III and IV
EXPLANATION In this scenario, the customer decides to name Joe as trustee once the client passes away. When the client does pass away, Joe is charged with managing the trust account. Because Joe has an obligation to put the interests of the beneficiaries of the account ahead of his own, Joe would be considered a fiduciary for the trust account. In this scenario, Joe is also in charge of managing the investments within the trust. This equates to discretionary authority. Trustees have control as to where money goes with relation to the trust, so a trustee also has or can have custody of the client funds. Joe is not listed as an agent and no mention is made of payment to Joe for effecting trades, so Joe is not an agent in this example. Joe also does not receive any direct benefits from the trust that he manages, so Joe is not a beneficiary of the trust. Joe does receive payment for managing the trust, but this does not make Joe a "beneficiary" of the trust account.
According to the Investment Advisers Act of 1940, which of the following statements are true regarding the acceptance of prepaid advisory fees by an investment advisor? 0.The fees must be disclosed in writing in the advisory contract. 0.The fees cannot exceed more than 6 months' payment in advance. 0.Prepaid fees in excess of $500 six months in advancd require that the advisor's balance sheet be disclosed to the client. 0.Acceptance of a prepaid fee would be deemed "custody" of client funds. [A] I and III only [B] II and IV only [C] I, II, III [D] I, II, III, IV
EXPLANATION Prepaid advisory fees in excess of $500, six months in advanced require the advisor to disclose their Balance Sheet. All fees must be disclosed in writing in the advisory contract. Fees could be prepaid for more than six months if disclosure requirements are met. Prepayment of an advisory fee would not be considered "custody" of client funds.
The Investment Advisers Act of 1940 requires solicitors to furnish a separate written disclosure document to clients. Which of the following statements are true regarding disclosure document requirements? I. The document must display the name of the investment adviser for whom the solicitor is soliciting. II. The document must profile the investment adviser's performance history. III. The document must describe the relationship between the IA and the solicitor. IV. The document must include a statement which informs clients of the compensation agreement between the solicitor and IA. [A] II only [B] I and II only [C] I, III, and IV only [D] I, II, III, and IV
EXPLANATION Solicitors must have a separate disclosure that includes the name of the solicitor and services provided, name of the IA for whom the solicitor is working, the nature of the relationship of the IA and solicitor, the compensation arrangement, and the amount, if any, the client will be charged in addition to the advisory fee. The solicitor's disclosure does not have to include the IA's performance history.
Which of the following arrangements that is "the arrangement" would be legal under the Investment Advisors Act of 1940? [A] An advisor charges an annual fee of .5% of the value of the client's account valued on the first day of the client's fiscal year. [B] An advisor charges a fee of .75% of the value of the client's account according to the condition that the account increases in value over the year. [C] An advisor charges a fee of .5% of the value of the client's account with a guarantee that the fee will not be charged unless the account retains a net growth of at least 5% over the year. [D] An advisor offers a guarantee that his advisory fee will be waived if the account decreases in value under his management. Explanation
EXPLANATION Under the Advisors Act investment advisory contracts must not provide for compensation based on capital gains, no assignment may be made without the client's consent, and notification of changes in a partnership must be disclosed.
A federal covered advisor is working with a solicitor. The regulations of the Investment Advisors Act of 1940 require that which of the following be disclosed to potential customers that are contacted by the solicitor? [A] The solicitor must disclose a full business history for themselves as well as any other investment advisory firms for whom they solicit. [B] The solicitor must disclose all compensation, regardless of whether the compensation was derived from soliciting or from outside business activities. [C] The solicitor must disclose to potential clients the name and contact information for the federal covered advisor for whom they are soliciting. [D] The solicitor must disclose the performance history for all clients who have been referred by the solicitor to the federal covered advisor.
EXPLANATION Solicitors will have a separate disclosure from the disclosures provided by the investment advisory firm. This disclosure document must include the name of the solicitor and services provided by the solicitor, the name of the investment advisory firm for whom the solicitor is working, the nature of the relationship/affiliation between the solicitor and the investment advisory firm, and the compensation arrangement and fees to the customer which correspond with the solicitor being involved. The business history and performance history of the solicitor and investment advisory firm need not be included in the solicitor's disclosure. As well, compensation related to outside activities need not be disclosed by the solicitor, however compensation related to the arrangement between the solicitor and investment advisory firm would need to be disclosed.
Under the Investment Advisors Act of 1940, the "brochure" rule requires that investment advisors: [A] offer a disclosure statement to all prospective advisory clients but the advisor does not have to deliver statements if the prospective client declines. [B] offer a disclosure statement to all prospective advisory clients who are not accredited investors. [C] deliver a disclosure statement to all prospective advisory clients. [D] deliver a disclosure statement to all prospective advisory clients who will be required to prepay an advisory fee.
EXPLANATION The "brochure" rule refers to the requirement that Investment Advisors must provide clients with written disclosure statements no less than 48 hours prior to entering into a written or oral advisory contract.
Under the "Brochure" rule, existing customers of an investment advisor must: [A] Receive a "Brochure" at least quarterly only if the advisor takes custody of customer funds. [B] Receive a "Brochure" at least quarterly whether or not the advisor takes custody of the customer funds. [C] Be offered a "Brochure" at least annually only if the advisor takes custody of customer funds. [D] Be offered a "Brochure" at least annually whether or not the advisor takes custody of customer funds.
EXPLANATION The Brochure Rules requires that an investment advisor provide clients with a written disclosure statement (Brochure) no less than 48 hours prior to entering into a written or oral advisory contract and must be offered annually thereafter. Existing clients of an investment advisor must be offered a brochure by an investment advisor at least annually regardless of whether or not the advisor has possession of the client's funds.
The Investment Advisors Act of 1940 prohibits any investment advisory contract which: contains exculpatory clauses fails to provide that the contract will not be assigned without client consent requires pre-payment of advisory fees for more than nine months in advance is not in writing [A] I, II [B] I, IV [C] II, III [D] II, III, IV
EXPLANATION The Investment Advisors Act of 1940 does not require written contracts and requiring payment of fees is allowed if certain disclosure requirements are met. Contracts must not contain any exculpatory (conditions which allow rules to be avoided) clauses and any assignment of contracts requires that clients be advised.
Which of the following statements are true concerning the enforcement of the Investment Advisors Act of 1940: 0.The state court in which the defendant lives or has a primary place of business has primary jurisdiction in both criminal and civil cases brought under the act. 0.The SEC has the power to subpoena witnesses and records, collect evidence, and question witnesses under oath in connection with the conduct of its investigation under this act. 0.Anyone wishing to appeal an order of the SEC under any act may do so by filing such appeal in the U.S. Court of Appeals. [A] I and II [B] I and III [C] II and III [D] All
EXPLANATION The SEC has equal jurisdiction over advisors and if the SEC issues an order against an advisor, and the advisor wants to appeal, an appeal may be filed with the U.S. Court of Appeals.
A solicitor is paid a cash fee for attempting to sell advisory services for a Federal Covered Investment Advisor. Since the solicitor is not directly affiliated with the IA the solicitor is required to provide a separate written disclosure document that must include which of the following? 0.The name of the solicitor and investment advisor 0.The name of the broker-dealer where the IA executes its trades 0.The compensation arrangements between the solicitor and the IA 0.The complete business background and qualifications of the solicitor [A] I & III [B] I & IV [C] I, II & III [D] I, II, III, IV
EXPLANATION The solicitor's written disclosure must disclose the name of solicitor and advisor, the services that will be provided, and the nature of the relationship between the solicitor and advisor. It also must include the compensation arrangements, including any additional charge that the client may be assessed. The solicitor's written disclosure does not have to include the name of the broker-dealer where the IA will execute trades or the complete business background of the solicitor. Disclosures related to solicitors must include the disclosure of affiliation, disclosure related to compensation, and disclosure related to the amount of compensation/charges. Such disclosures do not need to include business background.
An investment advisor representative intends to charge 5% per month based on assets managed. The IAR will disclose the fees in both form ADV and in the advisory contract. Are the advisor's actions appropriate? [A] Yes, if complete disclosure is made. [B] Yes, provided the client signs the contract. [C] No, this is a violation of the Investment Advisors Act of 1940 even with full disclosure. [D] No, advisory fees can only be charged quarterly, not monthly.
EXPLANATION This fee, although disclosed, would be deemed to be excessive and therefore a violation.
Under SEC Rules, a person is defined as an "investment advisor" who is in the business of giving advice about which of the following? Stocks Corporate Bonds Commodities Real Estate [A] I only [B] I and II [C] III and IV [D] I, II, III, IV
EXPLANATION Under SEC rules an Investment Advisor is defined as a person who is "in the business" of giving advice about securities. Therefore, advice about commodities and real estate would not fall under this definition.
