Unit 1 - Regulation of Investment Advisers, Including State-Registered and Federal Covered Advisers

Under the terms of the Uniform Securities Act, which of the following is an investment adviser for purposes of state regulatory jurisdiction? A) An investment advisory subsidiary of a bank holding company located in the state that manages $20 million in assets B) A federal covered adviser with clients in the state C) A commercial bank with a place of business in the state that advises clients on banking matters D) An accountant located in the state who offers general securities advice as an incidental part of his business

A A bank holding company's investment advisory subsidiary that manages $20 million in assets is an investment adviser subject to the Uniform Securities Act (USA). Under the language of the USA, a commercial bank is excluded from the definition of investment adviser whereas a bank holding company subsidiary is not. While a federal covered adviser is an investment adviser in practice (that is, it performs the functions of an adviser), it is excluded from the definition of an investment adviser under the USA to avoid duplicate regulation. An accountant located in the state that offers general securities advice as an incidental part of his business is not an investment adviser. U1LO5

Under the Investment Advisers Act of 1940, which of the following is included in the definition of an investment adviser? A) A lawyer who advertises to the public that he offers comprehensive legal and investment advice to high-net-worth individuals B) A professional research analyst who holds himself out to the public as an expert in trading the Euro and other foreign currencies C) A research service that offers advice on the value of gold D) A bank that advertises to the public that it offers a complete line of trust services

A A lawyer who advertises to the public that he offers comprehensive legal and investment advice to high-net-worth individuals falls within the definition of an investment adviser because he offers investment services as an integral part of his practice. U1LO3

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) I and III B) I and II C) II and IV D) II and III

A 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 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) Accounts receivable B) Accounts payable C) Copyrights D) Advances or loans to partners in the case of an IA organized as a partnership

A 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. U1LO5

Credible Investment Specialists (CIS) is a state-registered investment adviser with its only offices in State A. In which state(s) would registration be required? I. State A where the only clients are large pension plans II. State B where the only clients are banks III. State C where the only clients are insurance companies IV. State D where there are 6 or fewer retail clients over any 12 month period A) I and IV B) II and III C) IV only D) I only

A For those investment advisers who are not federal covered, registration is always required in any state in which the firm maintains a place of business, regardless of the nature of its clientele. If there is not a place of business in the state, registration is not required when the clientele is limited to institutions, such as banks, insurance companies, and large employee benefit plans (at least $1 million in assets). Once the adviser has more than 5 retail clients in a state over a 12-month period, the de minimis exemption is lost and registration is required. U1LO3

Which of the following investment advisers would be required to register with the state? A) An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million B) An IA who expects to have $132 million in AUM within 120 days C) An IA whose annual updating amendment showed a drop in AUM from $141 million to $99 million D) An IA who is under contract to manage a registered investment company

A No IA can remain registered with the SEC with assets under management (AUM) of less than $90 million (except those who manage registered investment companies). It takes $100 million in AUM to be able to initially register with the SEC; thereafter, the IA must maintain at least $90 million to remain SEC-registered. U1LO5

Perpetual Prosperity Advisers (PPI), a state-registered investment adviser, files an application to withdraw its registration as a registered investment adviser. Records pertaining to client accounts must be A) retained for the time period specified in the NASAA Model Rule on record keeping. B) sent to the Administrator of the state in which PPI maintained its principal office. C) sent to the Administrator of the state in which the client was a resident. D) destroyed once the withdrawal has become effective.

A The NASAA Model Rule on record keeping requires that records relating to an investment adviser's clients be retained for a period of 5 years from the end of the fiscal year in which the record was made. Those records must be retained even though the firm is no longer in business. U1LO5

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) Registrations become effective in 30 days unless delayed by the SEC. C) Registrations expire on December 31 of each year. D) Withdrawal from registration is done on Form ADV-W and takes effect 45 days after filing.

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. U1LO5

If an investment adviser files an initial registration with a state on June 30, which of the following statements regarding the filing fee to be paid is TRUE? A) The full year's fee must be paid. B) The fee will be prorated from the effective date. C) The fee will be prorated from the filing date. D) No filing fee is required until December 31.

A While some states make exceptions for filings late in the year, under the USA there is no pro rating of filing fees. The full year's fee must be paid with the initial registration request. U1LO5

Blue-sky laws pertain to all of the following EXCEPT A) the registration of securities salespeople in a state B) the regulation of securities trading in other countries C) the regulation of securities transactions in a state D) the registration of securities within a state

B Blue-sky (Uniform Securities Act) laws refer to state securities regulation in the state. Blue-sky laws require new securities to be registered with the state and regulate trading of securities in a state. U1LO1

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

B 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. U1LO3

The Uniform Securities Act's definition of investment adviser would include A) An investment adviser representative of an advisory firm who makes securities recommendations on a regular basis for compensation B) A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities C) A temporary employee hired to assist in administrative responsibilities of an advisory firm D) Any person who is a federal covered investment adviser

B A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities meets the 3-prong test as an investment adviser. U1LO3

Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2015. A copy of this must be maintained until at least A) January 31, 2017 B) December 31, 2020 C) January 31, 2020 D) December 31, 2017

B Investment adviser records, including copies of advertisements, must be kept for at least 5 years from the end of the fiscal year in which the record originated—in this case, 5 years from the end of 2015. U1LO5

A state-registered investment adviser with discretionary authority over client accounts discovered on Monday, that the firm's net worth is below the required amount. He must notify the administrator and then file a report no later than the A) close of business Tuesday, close of business Friday B) close of business Tuesday, close of business Wednesday C) close of business Monday, close of business Wednesday D) close of business Monday, close of business Friday

B Unless otherwise exempted, every investment adviser registered or required to be registered under the Act shall by the close of business on the next business day notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition. U1LO5

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) A lawyer who specializes in consulting on investing in securities C) The trust officer of a commercial bank who manages investment accounts for clients D) A syndicated columnist who gives weekly reports and recommendations on investments

B 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. U1LO3

The document that gives the Administrator the right to process complaints against a registrant is known as A) an injunction B) a consent to service of process C) a writ of habeas corpus D) a durable power of attorney

B The consent to service of process gives the Administrator the right to process legal complaints against the applicant. U1LO5

A federal covered investment adviser has which of the following obligations regarding the state in which it maintains its principal place of business? I. It must notify the Administrator of its SEC registration. II. It must pay state-required filing fees. III. Its adviser representatives are exempt from state-required exams. IV. It must maintain net worth equal to the higher of federal requirements or those of the state. A) II only B) I only C) I and II D) I, II, III, and IV

C A federal covered investment adviser is required to notify the Administrator of its federal covered status and pay any state-required fees. The state may require examinations, such as the Series 65 or 66, but not a net worth in excess of that required under federal law. U1LO5

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 to employee benefit plans with at least $1 million in assets B) An adviser rendering advice solely to broker-dealers C) An adviser rendering advice to no more than 10 individual clients within a 12-month period D) An adviser managing more than $110 million in assets

C 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. U1LO5

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) II and III B) I and III C) II and IV D) I and IV

C 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. U1LO3

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) need to increase the amount of their surety bond C) do nothing, as their net worth is far in excess of the minimum requirement of $10,000 D) send a detailed financial report to the Administrator by the close of business Monday

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. U1LO5

Under the Uniform Securities Act, a state-registered investment adviser whose only office was in State N would NOT have to register in State O if its only clients were A) complex trusts B) individual accredited investors C) 6 or fewer retail clients D) trust companies

D A state-registered investor can make use of the de minimis exemption if it has no place of business in a state and its only clients are institutions, such as bank and trust companies, investment companies, and insurance companies. Don't confuse a trust with a trust company—trusts are not institutions unless it specifically states a pension or profit-sharing trust, and even then, it only qualifies if it has assets of not less than $1 million. No individual, regardless of wealth, is an institution and the de minimis limit is fewer than 6 (sometimes shown as 5 or fewer). U1LO3

Based on the Investment Advisers Act of 1940, which of the following would be excluded from the definition of investment adviser? I. A lawyer who advertises financial planning services II. Persons whose advice relates solely to government securities III. An accountant who receives separate fees for providing investment advice A) II and III B) I only C) I and III D) II only

D Lawyers and accountants may not claim the exclusion if they advertise their investment advisory or financial planning services, or if they charge a separate fee for such services. Broker-dealers may not claim the exception if they provide investment advice beyond the scope of the brokerage business or if they charge a separate fee for advice. U1LO3

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

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. U1LO1

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) A lawyer who charges an hourly fee for preparing trust documents for individuals referred to her by an investment adviser B) A financial planner who conducts seminars for the local PTA, where he presents the benefits of term life insurance C) An accountant who conducts seminars on the tax benefits of contributing to IRAs, both traditional and Roth D) A teacher at the local high school who receives nominal compensation for giving investment advice to engineers

D 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. U1LO3

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 must register with the SEC because the AUM is so high. B) It can only register with the SEC because the District of Columbia is not a state. C) It does not have to register because its only client is the U.S. government. D) It may choose to register with either the D.C. Administrator or the SEC.

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. U1LO5

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) An engineer employed by an oil company selling limited partnership interests to public investors who provides estimates of recoverable reserves C) A bank trust officer with less than $250 million in assets under management D) A CFP® who provides a full range of financial planning to clients on a fee-only basis

D 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. U1LO3

ABC Advisers, a federal covered investment adviser, is moving the firm's headquarters to a new office park in the suburbs. ABC is required to file this change with the SEC A) promptly B) within 90 days C) within 60 days D) within 30 days

A Any material change that affects an investment adviser's ADV must be filed promptly with the SEC (or Administrator if state-registered) and a change of address would certainly be material. U1LO5

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

A 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. U1LO5

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 Investment Advisers Act of 1940 D) the requirements set by each individual state

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). U1LO5

When filing the consent to service of process, which of the following is TRUE? A) It must be filed annually on the dates specified by the Administrator. B) It is supplied with the initial registration and remains on file permanently. C) It is not required of investment adviser representatives, only investment advisers. D) It expires simultaneously with the registration on December 31.

B The consent to service of process is supplied with the initial registration and remains on file permanently. U1LO5

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) required to be shredded B) sent to the SEC for safekeeping C) sent to the Administrator for safekeeping D) the responsibility of the investment adviser

D 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. U1LO5

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) $10,000.00 C) $5,000.00 D) $50,000.00

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. U1LO5

Under SEC Release 1A-1092, which of the following has (have) met the test of providing advice or analysis concerning securities? I. A stockbroker calls a client and recommends the purchase of a certain stock. II. A lawyer recommends against purchasing shares of a mutual fund in favor of another investment. III. A publisher of an investment newsletter provides general information and recommendations concerning specific securities. A) I, II, and III B) I only C) I and II D) I and III

A Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning specific securities meets the criterion of providing advice. This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but may still meet the first criterion. Likewise, if the stockbroker's only compensation is commissions from securities transactions, the exclusion is in effect. U1LO2

Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which he has no place of business if he A) had no more than 10 clients in that state within the past 12 months B) had no more than 5 clients in that state within the past 12 months C) is registered as a broker-dealer D) had no more than 15 clients in that state within the past 12 months

B An adviser who had no more than 5 clients in a state within the prior 12-month period or deals exclusively with institutions is not required to register in a state in which he has no place of business. U1LO3

Which of the following is required to register as an investment adviser with the state securities Administrator? A) A person with no office in the state whose only advisory clients are investment companies and banks in the state B) An investment advisory firm that opens an office in the state with less than $100 million in assets under management C) A newly formed investment advisory firm with $145 million in assets under management D) The author of a book on money and banking that was sold to residents of the state in which it is published

B An investment adviser must register in a state if it manages less than $100 million in assets. Publishers of general circulation books are exempt from state registration, as are advisers with no offices in the state whose only customers are institutions, such as banks and investment companies, in the state. Investment advisers with $110 million or more in assets under management must register with the SEC, not the state Administrator. U1LO5

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.

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. U1LO3

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

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. U1LO5

Under the Uniform Securities Act, if not denied, an application for registration as investment adviser will generally become effective how soon after filing? A) Immediately B) 30 days C) 15 days D) 10 days

B If not denied and no disciplinary proceedings are instituted, an application for registration becomes effective at noon on the 30th day after being filed. U1LO5

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 finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price D) A broker-dealer charging a separate fee for investment advice

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. U1LO2

Both the Investment Advisers Act of 1940 and SEC Release IA-1092 specifically exclude from the definition of "investment adviser" certain persons who provide investment advice solely incidental to the practice of their profession. Which of the following would NOT by definition qualify for this exclusion? I. An accountant who provides high-tax-bracket clients with a useful chart showing them how to compute the tax-equivalent yield for municipal bonds II. A divorce attorney who, after obtaining settlements for clients, provides them with a list of suggested investment alternatives encouraging them to be prudent with their newfound wealth III. A university professor who provides investment advice for a substantial fee to fewer than 15 clients during any consecutive 12-month period, none of whom is an investment company IV. An economist who consults with very large corporate employee benefit plans on how to best invest their funds A) I and II B) III and IV C) I and IV D) II and III

B The university professor loses the exclusion as soon as the advice is no longer incidental to the practice of the profession (which it clearly is here, regardless of the number of clients). The list of professions qualifying for the exclusion does not include an economist, who in this case would be included in the definition as a pension consultant. The key to remember is the acronym "LATE"—lawyer, accountant, teacher, and engineer. U1LO3

Under both state and federal law, the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser is properly referred to as A) the registered office B) the principal office and place of business C) the office of supervisory jurisdiction (OSJ) D) the home office

B This is the way it is defined in the act. It is generally the home office, but you must chose the answer that best meets the terminology referred to in the question. Office of supervisory jurisdiction (OSJ) is a FINRA term and is not applicable on this exam. U1LO5

A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to A) securities listed on a national stock exchange B) bank and insurance company securities C) U.S. government securities D) foreign securities

C Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government. U1LO3

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) $1,200 for the next 6 months of advisory service. B) $1,500 for the next 3 months of advisory service. C) $1,500 for the next year's advisory service. D) $600 for the next 6 months of advisory service.

C 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.

On April 15, ABC Advisers, Inc., made application for registration as an investment adviser with State X. Absent a denial or stop order, registration will become effective A) April 30 B) April 15 C) May 15 D) May 1

C If no denials or stop orders are in effect and no proceedings are pending to do so, registration automatically takes effect at noon on the 30th day after the application was filed. U1LO5

According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing? A) 30 B) 60 C) 45 D) 90

C The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application. U1LO5

Which of the following persons must register as an investment adviser under the Uniform Securities Act? A) An accountant who makes no pretense of providing investment advisory services but gives incidental advice to clients as a small part of accounting services provided B) An investment adviser representative with no place of business in the state who has dealt with 7 retail clients during the most recent 12 month period C) An investment adviser who only serves institutional clients and whose only office is in this state D) An investment adviser whose advice is limited to securities issued or guaranteed by the U.S. government and who has 3 places of business in the state

C The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA. U1LO3

All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT A) the adviser's registration expires on December 31 each year B) the initial application must include a consent to service of process along with Form ADV and the appropriate fees C) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process D) if the investment adviser is not an individual, any officer or partner active in the advisory business is automatically registered as an investment adviser representative

C The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with Form ADV and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice are automatically registered as IARs. U1LO5

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 must become registered with SEC within 90 days of exceeding $110 million. B) SSI may remain SEC registered as long as AUM is at $90 million or more. C) SSI remains state-registered because its AUM is less than $100 million. D) SSI has the choice of remaining state-registered or registering with the SEC.

C 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.

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

C 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. U1LO5

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) I, III, and IV B) II, III, and IV C) I, II, and III D) I, II, and IV

C 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. U1LO2

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) investment advisers whose only clients are insurance companies B) an adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities C) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million D) investment advisers with $110 million or more in assets under management

D 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. U1LO5

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

D 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. U1LO5

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) II and III B) II and IV C) I and II D) I and III

D 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". (https://www.sec.gov/divisions/investment/iaregulation/memoia.htm). U1LO3