Series 66 Regulations
An investment adviser can hold all of its customer securities in a single brokerage account without identifying the individual customers to the brokerage dealer: A. in an omnibus account B. in a joint account - tenants in common C. in a prime brokerage account D. under no circumstances
The best answer is A. Investment advisers that take custody will typically open a brokerage account to hold all customer securities positions. If the investment adviser opens an "omnibus account," then the clients' funds and securities are held together in 1 account, where the broker-dealer does not know the identity of the IA's clients. In such an arrangement, it is the responsibility of the IA to send out customer account statements and trade confirmations, since the broker-dealer does not know who the individual customers are. Prime brokerage is used by hedge funds, where the hedge fund uses a clearing "prime broker" to settle all trades and maintain custody of the positions. However, the prime broker agrees to accept trade executions from a list of broker-dealers given up by the hedge fund. In this way, a hedge fund can route its trade executions to differing brokers in return for getting research and investment insight from those firms.
An agent is soliciting customer orders for a new non-exempt issue that has been registered. The top officers of this company were previously associated with XYZ Company, a highly successful firm in the same industry. That firm's success was attributed to these individuals. Under the Uniform Securities Act, which statements by the agent are permitted? I "The top officers of this new firm were previously at XYZ Company" II "These top officers were responsible for the rapid growth of XYZ Company over the past 3 years" III "The top officers are experts in the field who made XYZ Company, their previous firm, into a gold mine" A. I and II B. II and III C. I, II, III D. None of the above
The best answer is A. The use of flamboyant or exaggerated language to induce a sale is prohibited. It is perfectly acceptable to state that the officers were associated with the other company and were responsible for its growth, as long as the statements are true.
A Registered Investment Adviser plans on offering options strategies as part of his services. For this added investment strategy, he will charge .6% of assets monthly. This information is added to the RIA's disclosure statement and the RIA tells all of his clients of the fees orally in seminars. Each of his clients signs an agreement regarding the options strategies and fees. Which statement is TRUE? A. The actions taken by the RIA are permitted because clients got full disclosure of all strategies and fees and agreed to such in writing B. The actions taken by the RIA are permitted because the fees charged to clients do not exceed 10% annually C. The actions taken by the RIA are prohibited because clients cannot be charged separately for options transactions D. The actions taken by the RIA are prohibited because options strategies are prohibited in managed accounts unless they conform to ERISA standards
The best answer is A. This RIA made full disclosure, both verbally and in writing, to his clients, of the options strategies to be employed and the fees involved. This is the right way to do it!
An investment adviser is a private fund adviser that is not required to register with the SEC. All of the following would be permitted investors in order to retain its exempt pool status EXCEPT: A. an individual who is an accredited investor under Regulation D B. an individual who has at least $5 million of assets available for investment C. an hedge fund with at least $25 million of assets under management D. a trust with at least $5 million of assets available for investment
The best answer is A. Under the Investment Advisers Act of 1940, "private fund advisers" with less than $150 million of assets under management are exempt from registering with the SEC. A "private fund" is defined as one that would require registration with the SEC as an investment company, but it is not required to do so because either:•it does not publicly offer its securities and has 100 or fewer beneficial owners of its securities (this is the typical structure for a hedge fund); or •it does not publicly offer its securities and only limits its owners to qualified purchasers. To be a "qualified purchaser" is tougher than being an accredited investor under Regulation D. A qualified purchaser is an individual or trust with at least $5 million of assets available for investment; or an investment manager or company with at least $25 million of assets available for investment. In contrast, an accredited investor under the Regulation D Private Placement rule is an individual with $200,000 of annual income; a married couple with $300,000 of annual income; and individual with a net worth of $1,000,000; or an investment manager with at least $5,000,000 of assets available for investment.
Which statements are TRUE about the use of testimonials in advertising? I Testimonials are permitted in broker-dealer advertising II Testimonials are prohibited in broker-dealer advertising III Testimonials are permitted in investment adviser advertising IV Testimonials are prohibited in investment adviser advertising A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Broker-dealers are permitted to use testimonials in their advertising. If they are used, it must be disclosed if the maker of the testimonial was paid; and if the maker of the testimonial is presented as an "expert," the maker's qualifications must be stated. Regarding testimonials by investment advisers in advertising, the Investment Advisers Act of 1940 prohibits their use- period. Because of federal supremacy, this prohibition applies at the State level.
A Registered Investment Adviser has discretionary control over 50 accounts that range in value from $200,000 to $1,500,000. She receives a free due diligence trip from a real estate limited partnership sponsor to inspect a property in Florida. She is enthusiastic about the investment potential and purchases a $50,000 real estate limited partnership unit in the property for each of her accounts. The RIA disclosed the fact that she received the free trip to each of her customers before making the purchases. Which statement is TRUE? A. This is unethical because taking the free due diligence trip and then buying the partnership units for her clients is a conflict of interest B. This is unethical because the adviser did not determine the suitability of the investment for each account C. This is unethical because the adviser violated her fiduciary responsibility to her clients D. This is an ethical business practice
The best answer is B. It really does not seem likely that the partnership units were suitable for each and every one of the investment adviser's 50 accounts - the investment appears to have been bought for these accounts without regard to suitability.
Registration of securities in a State by Filing becomes effective: A. 2 business day after the filing with the State is completed B. 5 business days after the filing with the State is completed C. 10 business days after the filing with the State is completed D. when the SEC registration becomes effective
The best answer is B. Registration of securities in a State by filing becomes effective 5 business days after the filing is completed (unless the Administrator allows a shorter time period).
A Federal Covered Adviser can be audited by the State Administrator: A. any time the Administrator believes it is in the public interest B. in the event the Administrator suspects fraud C. no more than once per year after the updated Form ADV is filed D. only if a complaint is lodged against the Adviser by a customer in the State
The best answer is B. While NSMIA (National Securities Markets Improvements Act of 1996) partitioned responsibility for investment adviser supervision between the Federal government (Federal Covered Advisers) and the States (State-registered advisers), it retained State jurisdiction to investigate and enforce any violation of State law with respect to fraud or deceit, covering all advisers, whether State-registered or Federal Covered.
The State Administrator is empowered to require the filing of advertising and sales literature relating to offers of which of the following? I U.S. Government securities II Municipal securities III Agency securities IV Equity securities A. I and III only B. II and IV only C. IV only D. I, II, III, IV
The best answer is C. The Administrator can require filing of advertising and sales literature unless the security involved is exempt; or the security is offered in an exempt transaction; or the security involved is a federal covered security. An equity security, such as common stock or preferred stock in a corporation, is non-exempt. U.S. Governments municipals and agencies are exempt securities, so the Administrator cannot require the filing of advertising related to these issues.
Which of the following is a federal covered adviser? A. An investment adviser with $10,000,000 of assets B. An investment adviser with $50,000,000 or less of assets C. An investment adviser with $100,000,000 of international assets D. An investment adviser to individuals that are accredited investors under Regulation D
The best answer is C. A "Federal covered investment adviser" is one that must register with the SEC only; and that is not required to register with the State (though the State can still require a notice filing). These are the larger investment advisers and include any adviser to an investment company; and any adviser with $100,000,000 or more of assets under management. In this question, the best choice offered is the adviser with $100,000,000 of assets under management must register with the SEC. It makes no difference if the assets are international securities - if the adviser is based in the U.S., which we must assume, and meets the minimum asset test, then it must register with the SEC.
A trainee that has not yet been registered as an agent of a broker-dealer would: A. be permitted to accept unsolicited orders from customers B. be permitted to make "cold calls" to prospective customers C. be permitted to report completed trades to customers D. not be permitted to have any contact with either existing or prospective customers
The best answer is C. Individuals that are not registered as agents in the State cannot recommend securities to customers, nor can they accept customer orders - either solicited or unsolicited. They may perform clerical functions, such as reporting completed transactions to customers.
Management companies are permitted to: A. buy securities on margin B. sell securities short C. borrow from banks D. lend monies to shareholders
The best answer is C. Management companies may borrow up to 1/3 of their total net assets from a bank. However, they cannot buy securities on margin; cannot lend monies to shareholders; and cannot sell securities short (which requires margin to do so)
Management companies are permitted to: A. buy securities on margin B. sell securities short C. borrow from banks D. lend monies to shareholders
The best answer is C. Management companies may borrow up to 1/3 of their total net assets from a bank. However, they cannot buy securities on margin; cannot lend monies to shareholders; and cannot sell securities short (which requires margin to do so).
Which State-registered investment advisers MUST report that they take custody on Form ADV? I An adviser that is affiliated with a parent bank or trust company II An adviser that directly deducts management fees each quarter from client accounts III An adviser that has discretionary authority over client accounts under a limited power of attorney IV An adviser that acts as a trustee for a client where the grantor of the trust is the client A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Taking custody means that the adviser is holding customer funds or securities or has the ability to access customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition. Securities must either be held in customer name, or held in adviser name, with the adviser being the trustee for the customer. Thus, if the adviser is appointed as trustee over the customer's account, custody has been taken. A limited power of attorney limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody.
Under the Uniform Securities Act, a person could give advice about all of the following securities without having to register in the State as an investment adviser EXCEPT: A. Treasury Bonds B. Ginnie Mae Pass-Through Certificates C. Fannie Mae Debentures D. State General Obligation Bonds
The best answer is D. A person who gives investment advice relating solely to U.S. Government securities (including Agency securities), is excluded from Federal registration under the Investment Advisers Act of 1940. Any person excluded from registration with the SEC under the Investment Advisers Act of 1940 is a "federal covered adviser" and cannot be required to register in the State. Note that if the person gives advice about municipal bonds (Choice D), that person is not excluded and must register.
If an adviser is suspicious about a customer's account activity and believes that there may be illegal activity, then the adviser: I must file a CTR report with FinCEN II must file an SAR report with FinCEN III in 15 days IV in 30 days A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. If an adviser is suspicious about a customer opening an account, then a "Suspicious Activities Report" must be filed with FinCEN (Financial Crimes Enforcement Network - part of the Department of Treasury) within 30 days. The customer cannot be told that the report is being filed.
The Administrator, in regards to the registration of securities, may: I impound the proceeds from the sale of the securities until the issuer receives a specified dollar amount II require the filing of original copies of confirmed subscription agreements III require the delivery of a prospectus IV require that the issuer file quarterly reports of sales of the issue A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is D. Regarding registration of securities in a State, the Administrator is empowered to impound the proceeds of the sale of the securities until a specified dollar amount is sold (this is typical for so-called "all or none" underwritings, where, if the entire issue is not sold, the deal is canceled). The Administrator can require the filing of original copies of confirmed subscription agreements (these are completed by customers who wish to "subscribe" to the new offering of securities); and can require that a disclosure document (prospectus) be provided to customers. Finally, the Administrator can require that the issuer file quarterly progress reports regarding the sale of the issue.
Which of the following is EXEMPT from the requirement to register as an investment adviser in a State? A. Federal covered adviser B. Investment adviser representative C. Trust company D. Person with no place of business in the State who renders advice solely to Federal covered advisers
The best answer is D. This is a very picky question that sees if you know the difference between an exclusion and an exemption. Excluded from the definition of an investment adviser are investment adviser representatives; depository institutions; broker-dealers; professionals who only give incidental advice; publishers of general circulation periodicals that do not give investment advice about specific client situations; and federal covered advisers. Exempt from registration as an investment adviser (meaning these are defined as investment advisers but they do not have to register in the State) is any person with no place of business in the State whose only clients are: •other advisers; •federal covered advisers; •broker-dealers; •deposit taking institutions; •insurance companies; •investment companies; •employee benefit plans with assets of at least $1,000,000; and •governmental agencies. Also exempt from registration as an investment adviser is any person that has no place of business in the State that has 5 or fewer clients in the State in the past 12 months.
Under the Investment Advisers Act of 1940, a person is "in the business" of giving investment advice if he or she is compensated for which of the following? I Recommendations of securities II Analyses of securities III Reports about specific securities A. I only B. I and III only C. II and III only D. I, II, III
The best answer is D. To be "in the business" of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice. Investment advice includes recommendations, analyses, or reports about specific securities or specific categories.
To be defined as a diversified management company, a fund must have at least what percentage of its assets invested in securities? A. 5% B. 10% C. 25% D. 75%
The best answer is D. To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.
Violations of the Investment Advisers Act of 1940 are punishable by: I Fine of $5,000 II Fine of $10,000 III 3 years in jail IV 5 years in jail A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Violations of the Investment Advisers Act of 1940 are punishable by fines of up to $10,000; and up to 5 years in jail. (Note that this differs from Uniform State Law, which imposes fines of $5,000 and jail for up to 3 years for violations.)
