Unit 1 - Practice

The primary responsibility for supervising the activities of an investment adviser representative who is affiliated with a federal covered investment adviser lies with A) the Administrator B) the SEC C) the investment adviser representative D) the investment adviser the IAR represents

The Answer is D. It is the obligation of every registered investment adviser, whether SEC or state-registered, to supervise its representatives.

Under SEC Release IA-1092, the term investment adviser does NOT include which of the following? I. A broker-dealer who charges for investment advice II. A publisher of a financial newspaper III. A person who sells security analysis IV. A CPA who, as an incidental part of his practice, suggests tax-sheltered investments to wealthier clients A) II and III B) I and III C) I and IV D) II and IV

Answer D. A publisher of a financial newspaper and a CPA who, as an incidental part of his practice, suggests tax-sheltered investments to high-tax-bracket clients are not investment advisers.

In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the Release, which of the following would be included in the definition? I. Commercial banks offering comprehensive financial planning for their high-net-worth clients II. Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate III. Persons who receive a nominal fee for assisting employee benefit plan administrators select investment managers for the plan's assets IV. Lawyers who prepare trust agreements for clients with large securities holding with a goal of minimizing estate taxes A) I and II B) I and IV C) II and IV D) II and III

Answer D. Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent now comes under the IA-1092 definition of investment adviser. Similarly, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant and is required to register under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.

Which of the following persons are included in the definition of investment adviser? A) A financial planner or other person that provides investment advisory services to others for compensation B) A bank whose deposits are insured by the FDIC C) Any person that the Administrator excludes by rule or order D) A publisher of a bona fide newspaper, news magazine, or business or financial publication of general and regular circulation

Answer is A. A financial planning firm or other person that, as an integral component of other financially related services, provides investment advisory services for compensation is an investment adviser. A publisher of a bona fide newspaper, news magazine, or business or financial publication of general and regular circulation, a bank, or any other person that the Administrator specifies by rule or order are excluded from the definition of an investment adviser.

Under the Investment Advisers Act of 1940, which of the following is TRUE about the use of the term "investment counsel" by investment advisers? A) Advisers may use the term only if their principal business is acting as an investment adviser and a substantial part of their business consists of providing continuous advice based on a client's individual needs. B) Advisers may use the term only if they are attorneys. C) Advisers may use the term without restriction as long as they are registered. D) The use of the term is prohibited under any circumstances.

Answer is A. Advisers may use the term "investment counsel" only if two conditions are met: rendering investment advice must be their principal business and a substantial part of that business must be providing investment supervisory services—that is, continuous advice based on the individual needs of each client.

Martin holds both the CPA and the CFP designations. Within the previous year, if he has provided portfolio advice to approximately 40 clients, is Martin required to register as an investment adviser? A) Yes, because he provides investment advice on a more than incidental basis. B) No, because he falls under the de minimis exemption having relatively few clients. C) Yes, because he could receive commission income from investment clients. D) No, because he is a CPA.

Answer is A. Although Martin is an accountant, he provides investment advice on a more than incidental basis (typically regarded as more than 10 client contacts per year). Nothing indicates that Martin will be executing commissionable trades; only providing advice.

Under all of the following circumstances, the USA requires investment advisers with no place of business in the state to register EXCEPT A) when an adviser only provides advice to registered investment companies B) when an adviser only provides investment advice to 401(k) plans with assets of $250,000 or more C) when an adviser has maintained assets of $100 million or more for 7 out of the last 10 years D) when an adviser with numerous clients in the state has not been subject to disciplinary action within any state within the last 10 years

Answer is A. An adviser that only provides investment advice to investment companies registered under the Investment Company Act of 1940 is federal covered and does not have to register in a state, regardless of whether or not it has a place of business there. An adviser that provides advice only to 401(k) plans or other tax qualified employee benefit plans with $1 million in assets (not $250,000) is not required to register in a state in which it does not have a place of business. The assets of the adviser is not what determines becoming a federal covered adviser; it is assets under management and the determining factor is the AUM now, not the range over the previous 10 years.

Which of the following statements best describes an investment supervisory service as described by the Investment Advisers Act of 1940? A) An investment adviser provides continuous advice based on the client's individual needs. B) An investment advisory firm offers nondiscretionary services on a non-client-specific basis. C) An investment adviser sends monthly newsletters to 200 clients offering nonspecific advice. D) No actions are taken in client accounts without first being approved by a senior supervisory person.

Answer is A. An investment supervisory service is an individualized service delivered to a specific client on a continual basis. General nonspecific advice given across the board is deemed impersonal advisory services. Only when an investment adviser provides investment supervisory service, and the adviser's principal business activity is the giving of advice, may the term "investment counsel" be used.

Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser EXCEPT A) an individual providing advice on municipal bonds B) a federal covered adviser C) broker-dealers and their agents D) banks

Answer is A. Providing advice on municipal bonds (even though they are exempt securities) does not entitle one to an investment adviser exclusion.

An investment adviser who has custody of customer funds and securities discovers that her net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must I. notify the Administrator by close of business after the day of discovery II. file a report of its financial condition no later than close of business the day after notification III. include in the report of financial condition a statement as to the number of client accounts IV. cease doing business A) I, II, and III B) I and IV C) I, II, III, and IV D) I only

Answer is A. As a condition of the right to continue business, the adviser must notify the Administrator by close of business after the day of discovery. No later than close of business the day after notification, the adviser must file a report of its financial condition, which must include statements regarding the number of client accounts.

A federal covered IA files a petition for bankruptcy. The firm must A) notify the SEC immediately B) do nothing until the court decides the disposition of the firm's assets C) notify all of its clients immediately D) notify the Administrator immediately

Answer is A. As a federal covered investment adviser, the responsible regulatory body is the SEC.

Under the Uniform Securities Act, which of the following is (are) excluded from the definition of an investment adviser when providing investment advice solely incidental to the business? A) I, II, III, and IV B) I and III C) I, II, and IV D) II and IV

Answer is A. Certain professionals are excluded from the definition of an investment adviser if the advice provided is incidental to the practice of their profession and no additional compensation is charged for the advice. Lawyers, accountants, teachers, and engineers are excluded. This is best remembered through the acronym LATE. An Administrator has the power to exclude any person from the definition.

Defalcator Investment Planning (DIP) has $175 million in AUM and has offices in States A, K, and R. DIP would be required to provide a balance sheet as part of its brochure if it charged fees of A) $1,500 for the next year's advisory service. B) $1,200 for the next 6 months of advisory service. C) $1,500 for the next 3 months of advisory service. D) $600 for the next 6 months of advisory service.

Answer is A. Federal covered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $1,200, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $1,200 or more, it is more than $1,200 and it must be for at least 6 months of service to count. Please notice that with $175 million in AUM, DIP must be SEC registered; the location of its offices is irrelevant to the question.

Under the Investment Advisers Act of 1940, the exclusion for providing investment advice that is solely incidental to the practice of a profession is NOT available to A) real estate agents B) teachers C) engineers D) attorneys

Answer is A. In the Investment Advisers Act of 1940 and the subsequent releases explaining the act, there is no specific exemption for real estate agents who give investment advice that is incidental to their practice. Engineers, teachers, accountants, and lawyers are specifically excluded if their advice is incidental to their practice.

John Law is the owner of Mississippi Advisory Services (MAS), an independent financial planning organization. Law is registered as an investment adviser representative of SSC Securities and Investments, registered as a broker-dealer, and an investment adviser with the SEC. Supervision over Law's advisory activities is the responsibility of A) SSC's CCO. B) the SEC. C) John Law. D) MAS's CCO.

Answer is A. It is common for independent financial planners to establish their own business entity and "hang" their registration as an IAR with another firm (as is the case in this question). The rules emphasize that these independent contractors are under the supervision of the carrying firm's CCO in the same way that inhouse IARs are.

Under state law, all of the following investment advisers are exempt from registration except A) advisers whose only clients are insurance companies. B) advisers solely to private funds with less than $150 million in assets under management in the United States. C) advisers solely to venture capital funds. D) foreign private advisers with no place of business in the United States and less than $25 million in assets under management.

Answer is A. It is the federal law, the Investment Advisers Act of 1940, that exempts investment advisers from registration if their only clients are insurance companies. State law does not have that exemption. Among other exemptions, the Uniform Securities Act exempts investment advisers whose only clients are private funds. This would include the foreign private advisers and advisers to venture capital funds. Please note that if the choice had said the investment adviser had no place of business in the state and the adviser's only clients were insurance companies (or several of the other institutional investors where the exemption applies), registration would not be required.

Bulaan Advisory Services, Inc. (BAS), an investment adviser registered in 5 states, was found to have been untruthful in its performance reporting. Once this news was released, most of its clients terminated their advisory contracts. As a result, BAS shuttered its doors on July 18, 2018. Minutes of shareholder meetings must be preserved until at least A) July 18, 2021. B) December 31, 2023. C) December 31, 2018. D) July 18, 2023.

Answer is A. NASAA's Model Rule on record keeping by investment advisers requires that partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they are not registered as investment companies B) they have assets of less than $150 million C) their advisers are exempt from filing reports on Form ADV D) they have no more than 100 investors

Answer is A. Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.

An investment adviser with $20 million under management exercises investment discretion over client portfolios. If the firm's accounting manager were to discover that the firm's net worth was only $8,500, the USA would require the firm to I. cancel all discretionary powers II. immediately raise an additional $1,500 III. send notice to the Administrator before the close of business on the day following discovery IV. send a financial report to the Administrator before the close of business on the day following the sending of notice A) III and IV B) II and III C) I and II D) I and IV

Answer is A. State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of $10,000. Any advisory firm whose net worth falls below required minimums is required to send notice to the Administrator no later than the close of business on the day following discovery. This notice must be followed up no later than the next business day with a complete financial report to the Administrator.

A federal covered registered investment adviser who receives compensation for advice and whose business is primarily as an investment adviser may describe its business as investment counsel if A) a substantial part of his business is providing investment supervisory services B) it maintains its registration by filing an updating amendment to its Form ADV annually C) it receives SEC approval to use the definition D) it maintains custody of customer funds and/or securities

Answer is A. The Investment Advisers Act of 1940 prohibits the use of the term "investment counsel," unless the principal business of the person is as an investment adviser and a substantial part of the business is providing investment supervisory services (i.e., continuous advice for individual client portfolios).

If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than A) January 29, 2018 B) February 28, 2018 C) March 30, 2018 D) December 31, 2017

Answer is A. The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.

Under the Uniform Securities Act, a person whose business model is selling reports on a subscription basis concerning specific securities to investors based on their individual objectives will be defined as A) an investment adviser B) an agent C) a broker-dealer D) a journalist

Answer is A. The definition of investment adviser includes any person who for compensation engages in the business of advising others as to the value of securities or the advisability of buying, selling, or investing in securities or who, as a part of a regular business, publishes securities analyses or securities reports for individual investors on a paid subscription basis.

The purpose of the Investment Advisers Act of 1940 is to provide A) standards at the federal level for the regulation of investment advisers B) minimum standards of performance for those registered as investment advisers C) regulation for investment companies and their operations D) standards among the various states for the regulation of investment advisers

Answer is A. The purpose of the Investment Advisers Act of 1940 is to provide federal standards for the regulation of investment advisers. Providing standards among the various states for the regulation of investment advisers is the purpose of the Uniform Securities Act. Providing regulation for investment companies and their operations is the purpose of the Investment Company Act of 1940.

All of the following information is required on the SEC registration Form ADV EXCEPT A) the personal securities holdings of the principalsof the firm B) the form of business organization C) the name of the adviser's business D) the basis on which the adviser will be compensated

Answer is A. The registration Form ADV does not require the disclosure of the personal securities holdings of the firm's principals. Form ADV requires the name of the adviser's business and form of business organization. In addition, Form ADV specifically requires information on how the adviser will be compensated. The Form ADV does include information about certain control persons (officers, directors, partners), but does not ask for a listing of their personal investment holdings.

An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term A) investment counsel B) pension consultant C) senior adviser D) financial planner

Answer is A. The term investment counsel may only be used by those advisers whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts.

After diligently studying the Kaplan course, Greg Gossett completed the series of exams for the Certified Financial Planner (CFP®) designation. Now, Greg would like to expand his horizons by becoming a registered investment adviser. In order to do so, Greg would have to do all of the following EXCEPT A) pass the Series 65 examination B) submit a Form ADV C) pay a filing fee D) provide a consent to service of process

Answer is A. There are several professional qualifications that qualify for a waiver of the examination. CFP® is one of them (the others are listed in the introduction to the License Exam Manual).

Under both state and federal law, the definition of investment adviser excludes certain publishers. To qualify for that exclusion, the publication must meet which of the following criteria? I. It must be bona fide, containing disinterested commentary without promotional material. II. It must be published on a schedule to coincide with market events. III. It must be of a general and impersonal nature. IV. It must contain enough specific advice to enable the targeted recipient to construct an appropriate portfolio. A) I and III B) I and II C) II and IV D) II and III

Answer is A. Under a decision of the U.S. Supreme Court, for a publisher to qualify for the exclusion, the publication must satisfy the following 3 elements: "(1) the publication must offer only impersonal advice, i.e., advice not tailored to the individual needs of a specific client, group of clients, or portfolio; (2) the publication must be 'bona fide,' containing disinterested commentary and analysis rather than promotional material disseminated by someone touting particular securities, advertised lists of stocks 'sure to go up,' or information distributed as an incident to personalized investment services; and (3) the publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry".

A pension consultant who advises corporate retirement plans with assets of $135 million must register with which of the following? A) The state B) Both the state and the SEC C) Either the state or the SEC D) SEC

Answer is A. Under the Dodd-Frank Bill, until a pension fund manager has at least $200 million in AUM, registration with the states is required. Once the $200 million level is reached, SEC registration becomes an option.

Under the Investment Advisers Act of 1940, which of the following statements regarding an investment adviser's registration is TRUE? A) If the investment adviser ceases to act as an adviser or goes out of business, the SEC will cancel the registration. B) Withdrawal from registration is done on Form ADV-W and takes effect 45 days after filing. C) Registrations expire on December 31 of each year. D) Registrations become effective in 30 days unless delayed by the SEC.

Answer is A. Under the Investment Advisers Act of 1940, registrations become effective 45 days after filing, unless delayed by the SEC, and remain effective until withdrawn by the adviser or canceled, suspended, or revoked by the SEC. The SEC will cancel a registration if the investment adviser is no longer in existence or in the business. Although the ADV-W is the form for withdrawal, it becomes effective upon acceptance by the IARD, provided however that the investment adviser's registration continues for a period of 60 days after acceptance solely for the purpose of commencing a proceeding regarding any violation of the Act. Please note that this question deals with SEC-registered investment advisers. It is state-registered investment advisers who have a renewal date of December 31. Those registered under federal law can operate under a fiscal year with a renewal date other than December 31.

Harrison is a Certified Financial Planner (CFP®) with an office in the state and a telephone directory listing under the category "Financial Planners." Harrison has, for fees, written more than 100 comprehensive financial plans for various individual clients. However, only 20% of the plans' content entails advice regarding securities and investments. Which of the following statements best describes Harrison's status as an investment adviser under the USA? A) Harrison is required to register as an investment adviser because he regularly offers advice and receives compensation for advice concerning securities and investments, and holds himself out as a financial planner. B) Harrison is not required to register as an investment adviser because his securities advice is purely incidental to his overall planning activities. C) Harrison is required to register as an investment adviser because he holds a recognized financial planning credential. D) Harrison is not required to register as an investment adviser because he holds a recognized financial planning credential.

Answer is A. Under the Uniform Securities Act, an investment adviser is a person, corporation, partnership, or sole proprietorship who, in the regular course of business, advises others as to the advisability of selling securities. Harrison holds himself out as a financial planner and normally includes a section on investments in his plans. Furthermore, Harrison is compensated for his services—yet another standard of the definition, investment adviser. Under the USA, certain recognized professional designations are exempt from having to qualify by passing the licensing exam but not from registration.

Emmet opened an investment advisory service 3 years ago and raised $50 million in capital from family, friends, and contacts and then closed to new investors. If Emmet's stock picks expanded assets under management to $110 million, Emmet A) must register with the SEC B) must register for the first time with the state Administrator C) must update his registration with the state Administrator D) is not required to take any action

Answer is A. When the annual updating amendment filed by a state-registered investment advisory firm indicates that the $110 million threshold has been reached, the firm has 90 days to register with the SEC.

A consent to service of process required by an Administrator is A) a formal statement declaring that an investment adviser will comply with all advertising requirements of the USA B) an agreement whereby a registrant will be bound by any legal action or subpoena served on the Administrator as if it had been served on the registrant C) a legal procedure that authorizes the Administrator to issue injunctions D) an agreement to perform all services and duties that the Uniform Securities Act (USA) requires of those individuals covered by the USA

Answer is B. A consent to service is a formal legal agreement whereby a registrant will be bound by a legal action or subpoena served on the Administrator as if it had been served on the registrant. A consent to service is not an authorization to issue an injunction.

According to the Investment Advisers Act of 1940, which of the following statements regarding registration of investment advisers is TRUE? I. State registration is a requirement for federal registration. II. An investment adviser must be registered with the SEC to be registered at the state level. A) Both I and II B) Neither I nor II C) II only D) I only

Answer is B. A critical point to remember about investment advisers is that, if required to register, they register with either the state or the SEC, never with both. This is unlike broker-dealers who invariably register with both the SEC and the state(s) in which they do business.

A federal covered investment adviser is a person A) registered under the Uniform Securities Act B) registered, or excluded from the definition, under the Investment Advisers Act of 1940 C) exempt from regulation under the Securities Exchange Act of 1934 D) registered with North American Securities Administrators Association (NASAA)

Answer is B. A federal covered investment adviser refers to a natural person or firm registered under the Investment Advisers Act of 1940 or excluded from the definition of investment adviser under that act. A person registered under the Investment Advisers Act of 1940 is exempt from state registration or licensing requirements of state securities Administrators under the Uniform Securities Act. Federal covered investment advisers are not exempt from the antifraud provisions of the USA. Investment advisers, whether state or federal registered, do not register with NASAA.

Under the Uniform Securities Act, which of the following is an investment adviser? A) An individual who provides financial advice over the Internet with no recommendations based on specific investment situations of individual clients B) A firm with no office in the state that has provided specific investment advice to 10 noninstitutional clients within the state during the past 12 months C) An investment adviser representative D) A broker-dealer who receives no compensation for investment recommendations

Answer is B. A firm with no office in the state that provides investment advice is an investment adviser in the state if its clients exceed the de minimis level of five noninstitutional (retail) clients within the state in the past 12 months. Providing investment advice to 10 retail clients makes this firm an investment adviser and requires registration in the state. A broker-dealer is not required to register as an investment adviser unless it receives special compensation for providing investment advice. Individuals who publish general advice (no specific recommendations to individual clients) in hard copy form, electronic communications, or otherwise are not required to register as investment advisers. Investment adviser representatives work for investment advisers and are specifically excluded from the definition.

Which of the following is NOT included in Form ADV Part 2A? A) Types of investments made by the adviser B) States in which the investment adviser is registered or intends to register C) A description of how the adviser is compensated D) Investment policy of the adviser

Answer is B. ADV Part 2A is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered are not contained in ADV Part 2A. If the IA is registering with the SEC, on Part 1A, it lists only the largest 5 offices (in terms of numbers of employees). If state-registered, it lists each state it will be registering in or is already registered in.

According to the Investment Advisers Act of 1940, which of the following statements regarding Part 2 of Form ADV are TRUE? I. It must be filed with the state Administrator. II. A balance sheet must be submitted if the adviser collects prepaid fees of more than $1,200, 6 or more months in advance. III. Certain minimum business and education qualifications must be met before an investment adviser can file. IV. It may be used to satisfy the brochure requirements of the act. A) I and IV B) II and IV C) I, II, and III D) I, II, and IV

Answer is B. An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADVs to the SEC. In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement. A balance sheet must be submitted with Part 2 if the adviser receives "substantial" prepayments of fees. Part 2 may be used as an investment adviser's disclosure brochure to clients.

Under the Investment Advisers Act of 1940, which of the following is excluded from the definition of investment adviser? A) Pension consultants B) Attorneys for whom providing investment advice is incidental to the practice of their profession C) Sports or entertainment representatives D) Publishers of investment newsletters distributed based on market events.

Answer is B. Attorneys qualify for a professional exclusion if the advice they render is solely incidental to the practice of their profession. To qualify for the publisher exclusion, the publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry.

Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT A) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM B) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board C) Grand Visions Advisers, a sole proprietorship with $104 million in AUM D) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states

Answer is B. Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for: pension consultants once their AUM reach $200 million; small and mid-size advisers who would be required to register in 15 or more states; and those advisers with at least $100 million in AUM, but not $110 million in AUM. Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.

Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA? A) Both the SEC and State X B) State X only C) Neither the SEC nor State X D) SEC only

Answer is B. Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser. Although advisers dealing solely with institutions, such as insurance companies, are not deemed to be investment advisers in the state, that only applies when there is no place of business in the state. Obviously, with its home office in State X, that does not apply to ABA, so it would have to register in that state.

A broker-dealer is NOT considered an investment adviser if A) the firm is registered under the Investment Advisers Act of 1940 B) the investment advisory services are incidental to the broker-dealer's business and no special compensation is received C) the firm's investment advice is limited to 10 or fewer people D) the firm has less than 15 advisory accounts totaling less than $1 million

Answer is B. Excluded from the definition of investment adviser are financial institutions, publishers, investment adviser representatives, and certain professionals, including broker-dealers, whose advice is incidental to their profession and who are not compensated for it.

A federal covered investment adviser is one who I. has $110 million or more in assets under management II. manages an investment company registered under the Investment Company Act of 1940 III. limits his advice to securities listed on the NYSE IV. is affiliated with a federally chartered bank A) I and III B) I and II C) I, II, III and IV D) II and III

Answer is B. Federal registration is generally required of any investment adviser managing at least $110 million in assets. The NSMIA provides that any investment adviser under contract to a registered investment company under the Investment Company Act of 1940 is required to register with the SEC as a federal covered adviser. Providing advice on federal covered securities listed on the NYSE does not make the adviser a federal covered adviser. Determining if one is a federal covered investment adviser is not based on affiliations; it is generally a function of AUM or managing an investment company.

Under certain conditions, the Uniform Securities Act provides that an Administrator may require a minimum net worth standard be met by an investment adviser. Which of the following would be an allowable asset in the computation of an investment adviser's net worth? A) Copyrights B) Accounts receivable C) Accounts payable D) Advances or loans to partners in the case of an IA organized as a partnership

Answer is B. For purposes of the USA, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles. Accounts receivable are a current asset, while accounts payable are a current liability. The USA specifically disallows intangibles, such as copyrights and goodwill, and advances or loans to partners (or officers if a corporation) are excluded as well.

What is the official designation of the person or agency that enforces the USA in each state? A) Registrar B) Administrator C) Transfer agent D) Issuer

Answer is B. The USA specifies that a state's securities Administrator has the authority to enforce the act in that state. A transfer agent is the person or corporation responsible for recording the names and holdings of registered security owners.

An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included? I. A sofa in the reception area II. The value of the copyright on an investment manual authored by the investment adviser III. The reputation of the investment adviser IV. Patents held by the investment adviser on a stock tracking software program A) II, III, and IV B) I only C) I, II, and III D) IV only

Answer is B. For purposes of this Rule, the term "net worth" means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets.

Under the Uniform Securities Act, the recordkeeping requirements established by the Administrator for out-of-state investment advisers wishing to register in his state are subject to the limitations of A) the Securities and Exchange Act of 1934 B) the requirements set by the Administrator of the adviser's home state C) the requirements set by each individual state D) the Investment Advisers Act of 1940

Answer is B. For state-registered investment advisers, requirements set by the Administrator are subject to the limitations of the requirements set by the Administrator of the adviser's home state. Covered advisers don't register in any state, only with the SEC (and come under the SEC's requirements set forth in the Investment Advisers Act of 1940).

Form PF must be filed by A) state-registered private fund managers, regardless of the amount of assets under management B) SEC-registered advisers with at least $150 million in private fund assets under management C) SEC-exempt reporting advisers D) SEC-registered advisers with no more than $150 million in private fund assets under management

Answer is B. Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.

On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions are required for Alpha? A) Withdraw from SEC registration immediately B) Withdraw from SEC registration within 180 days of the adviser's fiscal year-end C) Withdraw from SEC registration within 90 days of the adviser's fiscal year-end D) Do nothing and continue as a federal covered adviser

Answer is B. If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements.

ABC Advisers changes its name to XYZ Advisers and also changes its location. Under the Investment Advisers Act of 1940, it must A) notify the Administrator B) amend Form ADV promptly C) notify FINRA within seven days D) amend Form ADV in advance

Answer is B. If information on certain parts of Form ADV becomes out of date, a federal covered adviser must file a prompt amendment with the SEC (a state-registered adviser would have to do the same with the Administrator under the USA). Information requiring immediate amendment includes name, address, telephone number, organization type changes (corporation, sole proprietorship, and partnership), degree of control over clients' funds, sources of funding, management organization, or any information relating to disclosure to clients. If any other information on the form changes (nonmaterial information), the SEC requires the form to be amended within 90 days of the end of the adviser's fiscal year.

Under the Uniform Securities Act, investment advisers are exempt from registration in a state where they have no office if they direct business communications with no more than 5 retail clients within A) 30 days B) 12 months C) 2 years D) 6 months

Answer is B. If investment advisers have no office in a state, they are not defined as investment advisers and are exempt from registration if either of the following conditions applies: their only clients within the state are other investment advisers or broker-dealers, financial institutions (banks, savings and loans, trusts), institutional investors (certain pension funds, insurance companies, investment companies), or government agencies or other political entities; and they have no more than 5 clients within the state in a 12-month period (de minimis exemption).

Which of the following would NOT be considered to be in the business of an investment adviser? A) A person who provides investment advice but is compensated only through commissions on the sale of stock B) An accountant who provides occasional investment advice but receives no separate fee for the service C) A person compensated for investment advice, although this service is not a primary part of the business D) A person compensated for investment advice, but who provides the advice only to institutions

Answer is B. In applying the business standard, the following criteria are used: (1) Does the person hold himself out as an investment adviser, or does he provide investment advice on a frequent or regular basis? (2) Does the person receive any compensation, regardless of whether it is paid separately or included in any other compensation? (3) If the person engages in other financial service activities in connection with the advice, it cannot be used to avoid the business standard. In looking at these criteria, it would appear that all choices listed are considered investment advisers. However, under exclusions from the definition, accountants who give advice solely incidental to the conduct of their profession and who receive no special compensation for this advice are excluded from the definition along with lawyers, engineers, teachers, and broker-dealers.

Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed? A) 20 B) 30 C) 45 D) 10

Answer is C. In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date.

In which of the following cases could revocation of the registration of an IAR lead to disciplinary action against the investment adviser employing that individual? A) The IAR failed to make full disclosure of a previous felony conviction on the Form U4. B) The firm was found guilty of failure to supervise. C) The firm supplied the IAR with a copy of its Code of Ethics and administered regular training on its contents. D) The IAR was found guilty of first degree murder.

Answer is B. In most cases, disciplinary action against an investment adviser representative (unless the individual is filling an executive position) will not have a direct impact on the investment advisory firm. The major exception is when the IAR's actions leading to the revocation can be shown to have be aided by the firm's failure to supervise.

Investment advisers who manage investment portfolios that total less than $100 million must register with A) both a state and the SEC B) a state only C) the SEC only D) neither the SEC nor a state

Answer is B. Investment advisers who manage less than $100 million of investment assets are prohibited from registering with the SEC and are required to register with a state Administrator unless exempt under the laws of that state. Please do not confuse this with an SEC-registered IA whose AUM may drop to as low as $90 million with continued SEC registration allowed. Any question about that rule will state that AUM has "dropped."

All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 EXCEPT A) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million B) investment advisers with $110 million or more in assets under management C) investment advisers whose only clients are insurance companies D) an adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities

Answer is B. Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act. Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the U.S. reaches $150 million.

A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) for 5 years after the end of the fiscal year in which the most recent entry was made. B) for 3 years after the termination of the enterprise. C) for 3 years after the end of the fiscal year in which the most recent entry was made. D) easily accessible for 2 years in the firm's principal office.

Answer is B. NASAA's Model Rule on record keeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, to be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act? A) A civil damages attorney who advertises that he is available to assist clients in suggesting appropriate investments for their successful claims B) The publisher of a weekly newsmagazine, sold on newsstands, that contains at least 5 stock recommendations per issue C) A broker-dealer charging a separate fee for investment advice D) A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price

Answer is B. Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds himself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice, as would appear to be the case here. On this examination, the term "comprehensive financial planning" always includes securities advice.

The powers of the Administrator include the ability to determine

Answer is B. The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

The responsibility for administering the Investment Advisers Act of 1940 lies with A) FINRA. B) the SEC. C) the Administrator. D) the Investment Advisers Association (IAA).

Answer is B. The Investment Advisers Act of 1940 is federal law and that comes under the jurisdiction of the SEC.

The responsibility for administering the Investment Advisers Act of 1940 lies with A) FINRA B) the SEC C) the Administrator D) the Investment Advisers Association (IAA)

Answer is B. The Investment Advisers Act of 1940 is federal law, and that comes under the jurisdiction of the SEC.

Under the Investment Advisers Act of 1940, for how many years must an investment adviser maintain the records required by regulation? A) No requirement B) 5 years C) 3 years D) 1 year

Answer is B. The Investment Advisers Act requires records to be kept readily accessible for a period of 5 years from the end of the fiscal year in which the record was made. The records must be kept in the principal office of the firm for the first 2 years and are subject to SEC examination at any time.

There are a number of exclusions from the definition of investment adviser. Which of the following would NOT qualify for an exclusion under the Uniform Securities Act? A) An accountant who conducts seminars on the tax benefits of contributing to IRAs, both traditional and Roth B) A teacher at the local high school who receives nominal compensation for giving investment advice to engineers C) A lawyer who charges an hourly fee for preparing trust documents for individuals referred to her by an investment adviser D) A financial planner who conducts seminars for the local PTA, where he presents the benefits of term life insurance

Answer is B. The LATE exclusion applies when advice is given by one of the listed professionals on an incidental basis. When a teacher (or any of the others) is compensated specifically for giving advice, regardless of the amount, the exclusion is lost. To be defined as an investment adviser, one must give advice on securities; term life insurance is not a security. Similarly, preparing trust documents is not securities advice, even if the clients are referred by an investment adviser. Finally, one of the roles of an accountant is giving tax advice, and IRAs are not securities.

Under the Uniform Securities Act, all of the following persons with no place of business in the state are exempt from registration as an investment advisers EXCEPT A) advisers who deal exclusively with savings banks located in the state B) advisers who have conducted business with no more than 6 individual clients in the state within the last 12 months C) advisers who deal exclusively with federal covered investment advisers located in the state D) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940

Answer is B. The de minimis rule for a registered investment adviser who has no place of business in the state is fewer than 6 clients. Doing business with 6 clients within the last 12 months exceeds this de minimis amount, and therefore, the exemption from registration does not exist. All others listed as possible answers are institutional or professional types of investment client. If a registered investment adviser works only with this type of client, an exemption from registration in that state exists as long as the registered investment adviser has no place of business in that state.

Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is CORRECT? A) SSI has the choice of remaining state-registered or registering with the SEC. B) SSI remains state-registered because its AUM is less than $100 million. C) SSI may remain SEC registered as long as AUM is at $90 million or more. D) SSI must become registered with SEC within 90 days of exceeding $110 million.

Answer is B. The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM (technically known as the RAUM - Regulatory AUM) shown on the annual updating amendment to the Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The mid-year increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.

Under SEC Release 1A-1092, which 3 standards are used to define an investment adviser? I. Provides advice, reports, or analyses concerning securities II. Is in the business of providing securities-related advice or analysis III. Receives compensation IV. Is the principal business activity A) II, III, and IV B) I, II, and III C) I, III, and IV D) I, II, and IV

Answer is B. The release establishes 3 criteria in defining an investment adviser. First, the person must provide advice, reports, or analyses concerning securities. Second, the person must be in the business of providing securities-related advice or analyses. Third, the person must receive compensation. Investment advising does not have to be the person's principal business. They need only hold themselves out as advisers and provide investment advice on a frequent or regular basis.

An investment adviser who has no office in a state is exempt from registration in a state if, during any 12-month period, he has no more than how many retail clients in the state? A) 20 B) 5 C) 10 D) 35

Answer is B. There are provisions for exclusions from the definition of investment adviser in the Uniform Securities Act. Out-of-state advisers who have no place of business in the state are not defined as investment advisers if they have no more than 5 noninstitutional clients in this state in a 12-month period. This is known as the de minimis exemption.

An investment adviser registered with the SEC could use the term investment counsel if I. its principal business consists of rendering investment advice II. a substantial portion of its business involves investment supervisory services III. it maintains full investment discretion A) I, II and III B) I and II C) I and III D) II and III

Answer is B. These are the 2 requirements for use of the term investment counsel. Although it can be a factor, exercising discretion is not a requirement of the definition. Many investment advisers exercise discretionary power over client accounts, but do not meet the two principal requirements for use of the term, investment counsel.

To be defined as an investment adviser under the Uniform Securities Act, which of the following must apply? I. Compensation must be received. II. Advice is provided regarding securities. III. Advice must be provided through direct written communication. A) II and III B) I and II C) I, II, and III D) I and III

Answer is B. This question contains 2 of the 3 key "prongs" of the definition of investment adviser. Those are that the person provides advice on securities and that the person receives compensation for rendering that advice. The advice may be provided orally or in writing. The third prong, not included here, is that the person must be "in the business" of providing investment advice.

According to the Investment Advisers Act of 1940, for how many years must books and records be maintained for an account after the end of the year in which the last transaction occurred? A) 1 year B) 5 years C) 2 years D) 10 years

Answer is B. Those investment advisers registered with and regulated by the Securities and Exchange Commission (SEC) must adhere to SEC Rule 204-2 regarding the maintenance of records. The rule states the required records must be kept for 5 full years from the end of the fiscal year during which the last entry was made on the record. The first 2 years, records must be kept in the principal office of the adviser and the balance of the time, easily accessible. They are subject to SEC examination at any time.

In defining an investment adviser under SEC Release 1A-1092, which of the following would meet the business standard? I. A person who advertises himself as an investment adviser II. A person who provides securities-related advice on a frequent or regular basis III. A person who receives separate or additional compensation for securities-related advice A) II and III B) I, II, and III C) I and II D) III only

Answer is B. To meet the business standard, persons must meet 3 criteria. First, they must hold themselves out (advertise) as persons who provide investment advice. Second, they must provide such advice on a frequent or regular basis, but it need not be their principal business activity. Third, they must receive separate or additional compensation for doing so.

Which of the following would meet the USA's definition of "person"? I. An individual II. An unincorporated association III. A political subdivision

Answer is C. The USA's definition of person is extremely broad. Just remember the three nonpersons: minors, those who are deceased, and those declared mentally incompetent.

USAAdvisers is registered in 10 Midwest states. Regarding financial requirements, USAAdvisers must meet those of A) the state with the most stringent financial requirements B) the state in which its principal office is located C) each state in which it has a place of business D) the SEC

Answer is B. Unlike broker-dealers, investment advisers register with either the SEC or the state(s), but never both. Therefore, we know this must be a state-registered adviser not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located, the other states have no further claim.

Under the Uniform Securities Act, which of the following statements is TRUE regarding registration of an investment adviser if the application has not been amended? A) Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed. B) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. C) Unless specified earlier, registration becomes effective no later than 90 days after the application is filed. D) Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application.

Answer is B. While the Administrator may specify an earlier date, absent any denial orders or pending proceedings, registrations become effective at noon on the 30th calendar day after the date of filing. The application is considered to be filed on the date received in the offices of the Administrator, not the date of mailing by the applicant.

Under the Uniform Securities Act, which of the following is included in the definition of an investment adviser? A) Bank that offers investment counseling to its high-net-worth customers B) Antiques dealer who receives a fee for advising customers as to the value of antiques and rare coins C) A broker-dealer who receives a flat fee for analyzing a customer's investment objectives and recommending a portfolio of securities D) Publisher that receives a yearly subscription fee for a newsletter that provides nonspecific investment advice

Answer is C. A broker-dealer who receives fees for investment recommendations is an investment adviser because that fee is considered special compensation relating to securities advice. The antiques dealer provides non-securities-related advice. Publishers may provide generic investment advice without registering as investment advisers. Commercial bankers are excluded from the definition of an investment adviser.

Which of the following statements is (are) TRUE? I. A person with a place of business in the state who transacts business exclusively with banks and savings institutions is not a broker-dealer under the Uniform Securities Act. II. A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator. III. A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator. IV. Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration. A) II and III B) I and II C) III and IV D) I and IV

Answer is C. A person who conducts business exclusively with banks and savings institutions is a broker-dealer under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers.

As defined in the Uniform Securities Act, the term person would include I a limited partnership II. a political subdivision III. an unincorporated association IV. the executor of an estate for a deceased individual A) I and IV B) II and III C) I, II, III, and IV D) I, II, and III

Answer is C. All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged mentally incompetent.

Under the Uniform Securities Act, which of the following is an investment adviser? A) Jane advises customers regarding the value of gold and silver coins. B) The Trust Department of ABC Bank provides investment advice to its clients. C) Jill is an attorney specializing in estate planning who, as a side job, structures portfolios for the beneficiaries of her deceased clients at a reduced fee. D) Tom writes a newspaper column that analyzes and recommends securities.

Answer is C. Although an attorney is generally excluded, Jill is giving investment advice for a fee in a manner that is not incidental to her legal practice. Jane's advice does not concern securities; banks are excluded from the definition; Tom's advice is not specific on the basis of the situation of each client (impersonal advice).

The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice I. relates solely to municipal issues II. relates solely to issues issued by or guaranteed by the U.S. Treasury III. is solely incidental to their professional practice as an aeronautical engineer IV. is limited to fewer than 15 clients in any 12-month period, none of whom is a registered investment company A) I, II, and IV B) I, II, III, and IV C) II and III D) III and IV

Answer is C. Among the exclusions from the definition of "investment adviser" under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions. Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government-issued or guaranteed issues. Advice to fewer than 15 clients qualifies one for an exemption (not an exclusion from the definition) from registration, but only in the case of a foreign adviser with less than $25 million in AUM in the United States.

Under the Uniform Securities Act, which of the following are NOT considered investment advisers or investment adviser representatives in this state? I. An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. II. United Trust Company of America III. An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management IV. An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state A) IV only B) I, II, III, and IV C) II and IV D) I and II

Answer is C. An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an investment adviser representative. An individual who sells advisory services for AAA Advisers, Inc., is an investment adviser representative. A trust company is not an investment adviser under the USA. An investment adviser with no office in the state and does business exclusively with other investment advisers located in that state is also excluded as an investment adviser under the USA.

Under the Uniform Securities Act, which of the following are elements in the definition of an investment adviser? I. Advice as to investments must be in writing, not given orally. II. Advice must relate to the value of securities or recommendations to purchase or sell securities. III. There must be compensation for services rendered. A) I and III B) I and II C) II and III D) I, II, and III

Answer is C. An investment adviser provides advice related to securities for compensation. The advice may be given orally or in writing.

An investment adviser with no place of business in the state is exempt from registration with the state when making recommendations to all of the following EXCEPT A) Amalgamated Bank B) AAA Manufacturing Co., with respect to the quality of investment bankers available for an underwriting of AAA securities C) when the recommendations are made exclusively to individual residents of the state who are accredited investors regarding new issues of exempt securities not registered in that state D) St. Amelia's college endowment fund

Answer is C. An investment adviser with no place of business in the state is not exempt from registration with the state when making recommendations to individual accredited investors who are residents of that state, even when the securities being recommended are exempt from registration. The Uniform Securities Act exempts investment advisers with no place of business in the state who deal with certain institutional customers such as banks, insurance companies, investment management companies, and employee benefit plans with assets in excess of $1 million. College endowments and other nonprofit organizations also carry exempt status, but not wealthy individuals. An adviser advising an issuer on the quality of potential underwriters does not fall within the definition of investment adviser under the Uniform Securities Act and is therefore exempt from registration.

Which of the following is required to register in a state under the Uniform Securities Act? A) A broker-dealer who has no place of business in the state and whose only clients in the state are limited to insurance companies, banks, and broker-dealers B) An investment adviser who has no place of business in the state and communicates with only 5 advisory clients in the state for the year C) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers D) ABC State Bank, which provides investment advice in its branches throughout the state

Answer is C. Because the investment adviser has a place of business within the state and is acting as investment adviser in the state, it must register, regardless of the fact that the only clients are financial institutions. Notice that the state registration rules are different for broker-dealers and investment advisers. Banks are exempt from registration as broker-dealers or as investment advisers, as are investment advisers with no place of business in the state and fewer than 6 clients in the state in a 12-month period (de minimis standard).

Certain documents belonging to a federal covered investment adviser must be kept for a period of time after the enterprise closes. Those documents are A) sent to the Administrator for safekeeping B) sent to the SEC for safekeeping C) the responsibility of the investment adviser D) required to be shredded

Answer is C. Broker-dealers and investment advisers must keep certain records for a period of 3 years after the termination of the business. How and where those records are maintained is the responsibility of the firm, not the regulators. This is a separate requirement from the one that has active broker-dealers keeping records for 3 years and investment advisers for 5.

With regard to the keeping of records, the Uniform Securities Act states that investment advisers must keep records for A) 5 years B) 3 years C) 5 years, the first 2 in the principal office of the adviser D) 3 years, the first 2 in the principal office of the adviser

Answer is C. For state-registered investment advisers, records must be kept for a total of 5 years. For the first 2 of those years, they must be located in the principal office of the adviser.

Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092? A) The secretary of the U.S. Treasury, as part of his official duties, comments on conditions in the financial markets and their future investment implications. B) A retired chief investment officer of a well-known investment management company, without compensation, writes a column in a general circulation newspaper commenting on the value of investing in equity securities; many readers find his advice useful and become clients of his former investment management company. C) A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space. D) A wealthy college professor gives free lectures on sound investment practices and makes specific securities recommendations based on a quantitative model he has developed.

Answer is C. If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all 3 elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice.

Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator? A) It need not be filed, unless requested by the Administrator B) With the original application and renewal C) With the original application only D) When a case is pending

Answer is C. Initial applications for registration must be accompanied by a consent to service of process. This document becomes a permanent part of the application and appoints the Administrator to accept subpoenas on behalf of the applicant.

The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of A) each investment adviser representative's immediate supervisor. B) the managing principal. C) the chief compliance officer. D) the Administrator.

Answer is C. It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the "first-line" responsibility, but the "buck stops" with the CCO.

Which of the following is specifically excluded from the definition of investment adviser under the Investment Advisers Act of 1940, when that person's investment advice is solely incidental to the practice of their profession? A) Financial planner B) Athlete's financial manager C) Aeronautical engineer D) Pension consultant

Answer is C. Lawyers, accountants, engineers, teachers, and broker-dealers who do not charge a separate fee for investment-related advice, when such advice is solely incidental to the practice of their profession, are excluded from the definition.

Which of the following is specifically excluded from the definition of an investment adviser providing the investment advice is solely incidental to the business in which the person is engaged? A) Movie star's business manager who handles the star's investment portfolio B) Sports representative who advises on securities for a fee C) Industrial engineer D) Pension manager

Answer is C. Lawyers, accountants, engineers, teachers, and broker-dealers whose advice is incidental to their profession and who do not charge a separate fee for investment-related advice are excluded from the definition under the Investment Advisers Act of 1940.

Create A Large Legacy (CALL), Inc., is a state-registered investment adviser with offices in States X, Y, and Z. CALL currently does not have a place of business in State W, but does have 5 retail clients who are residents there. Opening an account for which of the following prospective clients domiciled in State W would now require CALL to register in State W? A) A small community bank depositing $500,000 B) An insurance company account with an opening balance of $750,000 C) A trust having 4 minor children as beneficiaries with total trust assets of $5 million D) A county in State W desiring advice on investment over $250,000 of surplus funds

Answer is C. Regardless of the assets involved, a trust account, unless one for an employee benefit plan with at least $1 million in assets, is considered a retail rather than institutional client. Once the investment adviser goes over the de minimis limit of 5, registration with the state is required. Regardless of the assets involved, institutional clients, such as insurance companies, banks and government instrumentalities, do not count toward the de minimis limit.

An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify, A) neither the private fund adviser nor any of its advisory affiliates have been convicted of a felony within the past 12 years B) the private fund adviser must have less than $110 million in private fund assets under management C) every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million D) the fund's outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are individuals with at least $5 million in investments

Answer is C. The 100 or less investors is technically known as advising a 3(c)(1) issuer. In that case, all the investors must be qualified buy meeting the net worth or assets managed by the adviser as stated. The $5 million is the requirement under federal law for an adviser seeking the federal exemption for a 3(c)(7) fund, which is not limited to 100 investors. Conviction of a felony within the past 10 years, not 12, will generally make one a "bad actor" and cause the exemption to be forfeited. Private fund advisers must keep the AUM under $150 million, not $110 million.

Under the NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of A) $35,000.00 B) $5,000.00 C) $10,000.00 D) $50,000.00

Answer is C. The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000.

Under the NSMIA, the term "federal covered adviser" includes a person I. registered with the SEC under the Investment Advisers Act of 1940 II. registered as an investment adviser in two or more states III. excluded from the definition of investment adviser under the Investment Advisers Act of 1940 IV. required to register with the state Administrator A) I and IV B) II and IV C) I and III D) II and III

Answer is C. The NSMIA defines "federal covered adviser" as a person who is either required to register with the SEC under the Investment Advisers Act of 1940 or who is specifically excluded from the definition of "investment adviser" under that act. Registration with the state Administrator is not required of a federal covered adviser. If an investment adviser who otherwise would not qualify for SEC registration would be required to register in 15 or more states, the Dodd-Frank Act makes that adviser eligible for federal registration.

Which of the following statements regarding registration of investment advisers is (are) TRUE under the Investment Advisers Act of 1940? I. If any material information filed in the registration becomes inaccurate, an amendment must be filed promptly. II. If any nonmaterial information filed on Form ADV changes, an amendment must be filed within 90 days of the end of the fiscal year. III. Material information requires a prompt amendment, but nonmaterial changes do not require amendment. A) I only B) III only C) I and II D) II only

Answer is C. The SEC requires prompt amendment of any material information changes on Form ADV (e.g., names, location, control, custody, organization) and also requires nonmaterial amendments within 90 days of the end of the adviser's fiscal year.

Which of the following investment advisers, with no place of business in the state, does not qualify for the de minimis exemption? A) An investment adviser who, during the preceding twelve-month period, has had no more than 5 retail clients. B) An investment adviser who, during the preceding twelve-month period, has had fewer than 6 retail clients. C) An investment adviser who, during the preceding twelve-month period, has had no more than 6 retail clients. D) An investment adviser who, during the preceding twelve-month period, has had 5 or fewer retail clients.

Answer is C. The de minimis exemption limits the number of retail clients to a maximum of 5 during the preceding 12 months. There are 3 ways to say that: Fewer than 6. Five or fewer. No more than 5.

As defined in the Investment Advisers Act of 1940, all of the following would be considered investment advisers EXCEPT A) a portfolio manager who limits advice to municipal securities exclusively B) a civil engineer making investment decisions for $5 million held in escrow while a bridge for which she is the project manager is being constructed C) a professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors D) a tax attorney who manages investment portfolios for 50 clients

Answer is C. The plumber would not be considered an investment adviser because two of the three "prongs" are missing—advice is not being given as part of a regular business and there is no compensation. While an exclusion from the definition applies to advisers limiting advice to U.S. government securities, no such exclusion operates for advisers limiting advice to municipal securities. Similarly, there is an exclusion for attorneys providing investment advice on an incidental basis, but 50 clients is not incidental. Engineers are excluded from the definition, provided their advice is incidental to their profession, but making investment decisions on the money in escrow is clearly not incidental.​

Which of the following firms would be a federal covered adviser? A) GHI Consultants, a sole proprietorship managing $15 million belonging to high-net-worth individuals B) XYZ Broker-Dealer with custody over $50 million of clients' invested assets C) ABC Money Managers, a partnership with $112 million under management D) DEF Fund Managers, a corporation managing an unregistered hedge fund with $20 million in assets

Answer is C. The structure of the adviser is irrelevant; if assets under management equal $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply. A broker-dealer is excluded from the definition of investment adviser if investment advice is incidental to its business. Custody has nothing to do with giving advice.

There are waivers from the Series 65 exam requirement for certain professional designations. Among those qualifying for the waiver are individuals who have which of the following designations? A) Ph.D. in economics B) MBA in finance C) ChFC® D) CIMA

Answer is C. There are waivers from the Series 65 exam requirement for certain professional designations. In general, the following designations allow for a waiver of the exam requirement: CFP®—CERTIFIED FINANCIAL PLANNER™ (granted by the CFP Board of Standards); CIC—Chartered Investment Counselor (granted by the Investment Adviser Association); ChFC®—Chartered Financial Consultant® (granted by the American College of Financial Services); PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants); and CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Institute).

The USA provides either an exclusion from the definition or an exemption from registration as an investment adviser for certain persons. Which of the following would be required to register? A) A teacher who teaches a course in the local high school on consumer economics B) A bank trust officer with less than $250 million in assets under management C) A CFP® who provides a full range of financial planning to clients on a fee-only basis D) An engineer employed by an oil company selling limited partnership interests to public investors who provides estimates of recoverable reserves

Answer is C. Unless excluded or exempted, anyone charging a fee for investment advice must register. Banks and their employees are excluded. Engineers and teachers fall under the late exclusion as long as the advice is incidental to their profession and no special compensation is received.

Long-Term Financial Solutions, Inc. (LTFSI), an investment adviser registered in five states, files a Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct? A) As the successor firm, Gold and Sylver Advisers must keep copies of the LTFSI corporate charter for at least three years after LTFSI's acquisition. B) Gold and Sylver must notify all clients of LTFSI that their advisory contracts have been assigned. C) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition. D) Gold and Sylver will not have to amend their Form ADV Part 1 until the filing of their annual updating amendment.

Answer is C. When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to the Form ADV Part 1.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following is (are) required to register as investment adviser in a particular state? I. An adviser who manages client accounts in excess of $100 million in value II. An adviser who manages client accounts with less than $100 million in value III. An adviser to investment companies registered under the Investment Company Act of 1940 IV. An adviser who acts as pension consultant to employee benefit plans with assets of $200 million or more A) I, II, III, and IV B) I only C) II and IV D) II only

Answer is D Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, only advisers who manage client assets that total less than $100 million are required to register with the state Administrators. Those who manage client assets of at least $110 million or advise registered investment companies are required to register with the SEC and are exempted from state registration. The pension consultant in this question would not be required to register with the state because those who act as pension consultants and have at least $200 million in assets under management have the option to register with the SEC. There is a corridor between $100 and $110 million in which the adviser also has a choice of state or federal registration.

A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would A) send a detailed financial report to the Administrator by the close of business Friday B) do nothing, as their net worth is far in excess of the minimum requirement of $10,000 C) need to increase the amount of their surety bond D) send a detailed financial report to the Administrator by the close of business Monday

Answer is D. A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a bond of the same amount (not both). If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator. The firm would need to increase their net worth, not the bond.

Advisers that manage $110 million or more in customer assets are required to do which of the following? I. Register with the Securities Exchange Commission II. File notice with FINRA III. Post a bond in an amount specified by the appropriate regulatory body IV. File notice with the state in which their principal office is located if notice filing is required by the Administrator A) II and III B) I and III C) II and IV D) I and IV

Answer is D. Advisers that manage $110 million or more in customer assets are federal covered advisers and are required to register with the SEC under the Investment Advisers Act of 1940. In addition, they are normally required to file notice in each state where they conduct business. There are no bonding requirements for federal covered advisers.

The Investment Advisers Act of 1940 would consider each of the following investment advisers to be exempt from registration EXCEPT A) an adviser whose only clients are venture capital funds B) an adviser whose only clients are insurance companies C) an adviser who maintains an office in only one state, advises only residents of that state (none of whom is a private fund), and gives advice relating solely to securities not traded on any national exchange D) an adviser whose only clients are banks

Answer is D. Advising banks only does not qualify one for the exemption. Advisers who only service insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities.

A federal covered investment adviser registered with the SEC that has offices in 5 states must do which of the following? I. Pay state filing fees if required by the Administrator II. Notify the Administrator within 1 business day if net worth falls below the required minimum III. Notice file in any of those states where required by the Administrator IV. Become licensed as a broker-dealer A) II and IV B) I and II C) II and III D) I and III

Answer is D. Although exempt from state registration, federal registered investment advisers must notice file and pay state filing fees (if required by the Administrator) to practice within a given state. Federal covered advisers do not come under the financial or recordkeeping requirements of the state, only the SEC.

Under both state and federal law, there are a number of exclusions from the definition of investment adviser. Which of the following would not qualify for an exclusion? A) A personal injury attorney who recommends that clients consult with a CFP® for advice on how to deal with the large settlements they receive B) A CPA who gives high tax bracket clients a chart showing the tax-equivalent yield of municipal bonds C) An economist who teaches a course in fundamental analysis at a local community college D) A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities

Answer is D. Although there is an exclusion for publishers, it must be of general and regular circulation and not be the recipient of compensation from the issuers of any securities covered.

Under the provisions of the Uniform Securities Act, it is NOT necessary for an investment adviser to register when it A) has a place of business in the state but has conducted business with 3 individual investors during the preceding 12 consecutive months B) has a place of business in the state but deals exclusively with federal covered advisers C) is headquartered in a state where it conducts most of its business with broker-dealers only D) has no place of business in the state and deals with savings and loan associations only

Answer is D. An adviser who has no place of business in the state and deals only with savings and loan associations is not required to register with the state securities Administrator. An adviser with a place of business in the state must register with the Administrator whether clients are exclusively broker-dealers or federal covered advisers and regardless of the number of clients.

Under the Uniform Securities Act, which of the following investment advisers with no place of business in the state must register with the state as an investment adviser? A) An adviser rendering advice solely to broker-dealers B) An adviser managing more than $110 million in assets C) An adviser rendering advice to employee benefit plans with at least $1 million in assets D) An adviser rendering advice to no more than 10 individual clients within a 12-month period

Answer is D. An investment adviser with no office in the state would be exempt from registration in the state if the adviser renders advice to no more than 5 noninstitutional clients (not 10) in a 12-month period. If an investment adviser has no office in the state, and renders advice solely to broker-dealers, insurance companies, banks, investment companies, governmental agencies, or employee benefit plans with assets of $1 million or more, the adviser is exempt from registration with the state. If the adviser manages assets of $110 million or more, the adviser would be required to register with the SEC, not the state.

Transparent Investment Advisers (TIA) is registered in 3 states and has $55 million in assets under management. TIA maintains custody of customer securities. TIA's chief financial officer reports that the net worth of the firm has suddenly fallen to $28,000. This would require TIA to A) obtain a surety bond in the amount of $7,000. B) issue $7,000 of stock. C) borrow $7,000 from the owners. D) obtain a surety bond in the amount of $10,000.

Answer is D. State-registered investment advisers who maintain custody of customer funds or securities must have a minimum net worth of $35,000. If the net worth should fall below that amount, the firm must immediately obtain a surety bond rounded to the next $5,000 to meet that level. In this case, the firm's deficiency is $7,000, and the next $5,000 that will cover that is a bond for $10,000. Borrowing money does not increase net worth and, even if TIA is a corporation, it would probably take too long to issue additional stock.

Sam wants to start his own registered investment adviser firm, independent of the brokerage firm where he is registered as an agent. He plans to provide financial planning services, which will include investment advice as an integral part of his business. Sam must I. file with either the state securities Administrator or with the Securities Exchange Commission as a registered investment adviser by filing the appropriate Form ADV II. file Form ADV with his current brokerage firm III. notify his current brokerage firm and receive permission to operate independently from the firm as a registered investment adviser IV. do nothing and begin performing investment advisory services without regard to his current brokerage firm A) I and IV B) II and IV C) II and III D) I and III

Answer is D. Any registered person acting on behalf of a brokerage firm must receive that firm's permission to act as a registered investment adviser apart from the control of the brokerage firm. A brokerage firm may deny a registered person's ability to start his own advisory firm if the brokerage firm deems it to be a conflict of interest. An individual or a firm can start a registered investment adviser firm by filing an ADV form with the state or with the SEC. A person working for a registered investment adviser would have to pass either a Series 65 or Series 66 exam to become a registered investment adviser representative. It is important to recognize the difference between the firm (the registered investment adviser) and the person working for the firm in giving investment advice (the registered investment adviser representative).

Which of the following is an investment adviser? A) A bank that purchases securities on behalf of its custodial accounts B) A lawyer with sophisticated investment experience who gratuitously offers his clients advice on the value of securities C) A columnist for a major news magazine who writes on the business and economic functions of banking institutions D) A retired mechanical engineer who offers investment advice in his areas of expertise to a small number of clients for a fee

Answer is D. Even though an engineer is part of the acronym LATE, a retired or active mechanical engineer who offers investment advice to clients for a fee falls within the definition of investment adviser under the Uniform Securities Act. The LATE exclusion only applies to incidental advice given in the practice of a profession.

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE? A) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration. B) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. C) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. D) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration.

Answer is D. Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received.

Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT A) investment adviser representatives B) publishers of financial publications that are not addressed to clients' specific individual investment situations C) investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million D) financial planners who provide fee-based investment advisory services to clients

Answer is D. Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator, as long as their total assets under management are less than $100 million. Investment advisers with no office in the state, who only advise employee benefit plans with assets of more than $1 million, need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration.

Registration with the SEC as an investment adviser would be required for a person who A) limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE) B) limits the advice offered strictly to securities issued or guaranteed by the U.S. government C) acts as the investment adviser to an investment company registered under the Investment Advisers Act of 1940 D) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940

Answer is D. If a person acts under contract to an investment company registered under the Investment Company Act of 1940 (investment companies do not register under the Advisers Act; only advisers do) is required to register with the SEC. Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.

An investment adviser sends a notice offering a research report she has recently prepared to a group of 25 new members of the local Lions Club. Under the NASAA Model Rule on recordkeeping for investment advisers, the firm must keep a copy of the notice along with A) the date the Administrator approved the research report B) a copy of the full roster of the local chapter C) the names of those members to whom the report was sent D) a memorandum describing the list and its source

Answer is D. If an investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent, except if the notice, circular, or advertisement is distributed to persons named on any list, then the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.

Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of A) an officer of a trust company handling investments for trust accounts B) a tax attorney who, as an incidental part of his tax practice, recommends that his high-tax-bracket clients investigate the use of municipal bonds in their portfolios C) an agent of a broker-dealer who recommends model portfolios to clients in exchange for them executing their trades through him D) an economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee

Answer is D. If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of "investment adviser." A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice.

In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management? A) An investment adviser that acts as an adviser solely to 1 or more insurance companies B) An investment adviser that acts as an adviser solely to private funds and has assets under management in the United States of less than $150 million C) An investment adviser with assets under management of less than $25 million D) An investment adviser that acts as an adviser solely to 1 or more venture capital funds

Answer is D. It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM. Private fund advisers with AUM of $150 million or more must register, and "small" investment advisers, those with less than $25 million in AUM, are generally prohibited from SEC registration. If the investment adviser's only clients are insurance companies, the adviser is exempt from SEC registration even if the firm has billions in AUM.

Registration as an investment adviser is required for any firm in the business of giving advice on the purchase of A) rare convertible automobiles B) apartments undergoing a conversion to condominiums C) gold coins D) convertible bonds

Answer is D. Only those individuals in the business of giving advice on securities are required to register as investment advisers; only the convertible bonds are securities.

Which of the following is NOT considered to be in the business of investment advising? A) An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business B) A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance C) A person who prepares reports about securities in general D) Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only

Answer is D. Please note that this question is not asking "who is an investment adviser?" It is asking about one of the 3 prongs - being in the "business". The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.

Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser? A) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities B) The trust officer of a commercial bank who manages investment accounts for clients C) A syndicated columnist who gives weekly reports and recommendations on investments D) A lawyer who specializes in consulting on investing in securities

Answer is D. Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty.

Under the Investment Advisers Act of 1940, for how many years must records be kept after the end of the fiscal year in which an entry was made? A) 2 years B) 10 years C) 1 year D) 5 years

Answer is D. Records must be kept for a full 5 years — the first 2 years in a in the firm's principal office — and are subject to SEC examination at any time. The 5-year requirement governs records of business activities. Additional rules require the articles of incorporation or partnership documents of the advisory firm and other business organizational documents to be kept for 3 years after termination of the enterprise.

Under the Uniform Securities Act, if no denial or proceedings are pending, when does an investment adviser registration become effective? A) 60 days after application or an amendment is filed B) No sooner than 15 days C) When the Administrator so orders, but not to exceed 90 days D) When the Administrator so orders, but not to exceed 30 days

Answer is D. Registrations become effective at noon on the 30th calendar day after the date of filing if there are no denial orders or pending proceedings.

Which of the following statements are TRUE? I. The Uniform Securities Act is not the actual law of any state or territory of the United States. II. The National Securities Markets Improvement Act of 1996 requires states and the federal government to have identical registration requirements. III. The state securities Administrator has responsibility for the enforcement and administration of a state's securities law. A) I, II, and III B) II and III C) I and II D) I and III

Answer is D. The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The NSMIA's purpose is to eliminate dual registration, not to require identical laws.

Under the Investment Advisers Act of 1940, which of the following are excluded from the definition of an investment adviser? A) Insurance companies B) Accountants who advise on securities (only) for a fee C) Attorneys who advise on securities (only) for a fee D) Banks and trust companies

Answer is D. The act excludes the following from the definition: banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines); persons advising about certain securities (U.S. government or agency issues); broker-dealers not receiving special compensation for giving advice; and persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers

Under the Uniform Securities Act, which of the following are excluded from the definition of investment adviser, provided the advice is incidental to their profession? I. Bankers II. Lawyers III. Broker-dealers IV. Teachers A) I and III B) II and III C) I and IV D) II and IV

Answer is D. The key to this question is that it deals with professionals qualifying for an exclusion. Lawyers, accountants, engineers, and teachers are excluded from the definition when the advice provided is incidental to the practice of their profession. Financial institutions, such as banks, savings and loans, and trust companies, are excluded without any requirement that advice be rendered on an incidental basis. Broker-dealers are not included in the list of professionals qualifying for this exclusion; however, if they do not receive special compensation when advising their clients, they too are excluded.

Under the Securities Act of 1933, the term "person" would NOT refer to which of the following? A) An unincorporated amateur athletic club B) A nonprofit, charitable corporation C) A subdivision of a government D) A deceased individual

Answer is D. There are 3 specific "nonpersons" on this exam. They are 1) deceased individuals, 2) an individual declared mentally incompetent, and 3) a minor. A person can be almost any entity, including a corporation, partnership, unincorporated association, subdivision of a government, trust that issues shares of ownership (such as a unit investment trust), or a natural person (an individual).

Which of the following is (are) required to register with a state Administrator? I. An adviser who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publication of general and regular circulation II. Investment adviser representatives of federal registered advisers who have natural person clients and have a place of business in the state III. An investment adviser who has no place of business in the state and has 5 advisory clients in the state IV. A person who is an officer of a federal registered investment adviser who has no natural person clients A) I only B) II and III C) I, II, III, and IV D) II only

Answer is D. Under federal law, publishers of bona fide newspapers, magazines, and financial publications of general and regular circulation are excluded from the definition of an investment adviser. Under state law, the publication of investment advice that is not based on the specific investment situation of each client excludes the publisher from the definition of an investment adviser. Based on these definitions, the publisher of an investment advisory newsletter providing only impersonal investment advice available only on a subscription basis is not required to register under federal or state law. The investment adviser representatives of a federal registered adviser are required to register in each state in which they have a place of business. The Uniform Securities Act provides a de minimis standard exemption from state registration for advisers who have no place of business in a state and have fewer than six clients resident in the state. A person employed by and supervised by a federal registered investment adviser who is not an investment adviser representative with natural person clients (as defined by federal law) is not required to register with state Administrators.

Under which of the following circumstances may attorneys and accountants claim an exclusion from the definition of investment adviser under the Investment Advisers Act of 1940? A) The investment advisory activities have grown to represent 30% of their business. B) They charge a separate fee for the provision of investment advice from that received for their professional services. C) They advertise that they are available to provide investment advice. D) The advice is incidental to the practice of their profession.

Answer is D. Under the Investment Advisers Act of 1940, lawyers, accountants, teachers, and engineers (LATE) giving investment advice that is incidental to their professions are not considered investment advisers. If they receive a fee for the advice, hold themselves out to the public as doing so, or offer excessive advice that is no longer incidental to their practice (as 30% of the practice would indicate), they lose this exclusion and must register as investment advisers.

Under the Investment Advisers Act of 1940, which of the following is (are) excluded from the definition of investment adviser? I. The publisher of a financial newsletter on a paid subscription basis, which contains only general securities recommendations II. Persons whose investment advice relates solely to issues distributed or guaranteed by the U.S. government III. A lawyer who charges a separate fee for investment advice that is provided as a separate part of the business A) I, II, and III B) III only C) I only D) I and II

Answer is D. Under the Investment Advisers Act of 1940, publishers of bona fide publications, such as financial newsletters, on a paid subscription basis with regular circulation are excluded as long as the publication does not contain recommendations of specific securities. One thing to look for on the exam is if the publication is market-event driven. That is, publication is not regular and is based on current events affecting the securities markets. In that case, the exclusion does not apply. Another exclusion is for persons whose advice relates solely to issues distributed or guaranteed by the U.S. government. One of the most tested exclusions is L.A.T.E. where lawyers, accountants, teachers, and engineers are excluded, but that is only the case when the advice is given as a an incidental part of their professional practice. A lawyer charging a separate fee for advice cannot claim that it is incidental.

Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employees pension fund with assets of $4 billion. What are this firm's registration requirements? A) It does not have to register because its only client is the U.S. government. B) It can only register with the SEC because the District of Columbia is not a state. C) It must register with the SEC because the AUM is so high. D) It may choose to register with either the D.C. Administrator or the SEC.

Answer is D. Under the provisions of the Dodd-Frank Act of 2010, once a pension consultant's AUM reaches $200 million, it has the choice of state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client.