Ch. 4: State Regulations Governing Investment Advisers and IARs
If information contained in any document filed with the Administrator is, or becomes inaccurate in any material respect, the registrant must file: a. A correcting amendment, promptly b. Schedule I, within 90 days of the end of the registrant's fiscal year c. Form ADV-W, within 60 days d. An updating amendment, within 30 days
a. A correcting amendment, promptly Explanation: The Uniform Securities Act, Sec. 203(d), requires the registrant to file a correcting amendment promptly with the Administrator. An updating amendment is filed within 30 days of any material changes in the ADV. Schedule I is no longer in use. Form ADV-W is used by advisers to withdraw registration from the SEC.
Under the Uniform Securities Act, an investment adviser who has no place of business in a state is exempt from registration if: a. All of the adviser's clients are institutional investors b. The adviser has no more than 10 clients who are residents of the state c. All of the adviser's clients were obtained on an unsolicited basis d. The adviser has no more than 15 clients who are residents of the state
a. All of the adviser's clients are institutional investors Explanation: Under the Uniform Securities Act, an adviser does not need to register in a state if it has no place of business in the state and only advises institutional investors (e.g., banks, insurance companies, and mutual funds) or limits the number of retail clients to less than six.
Under the Uniform Securities Act, an investment adviser must meet all of the following conditions in order to maintain custody of client assets, EXCEPT: a. Also obtaining written discretionary authority from each client for whom it is holding funds and/or securities b. Making sure all client cash and securities are segregated from the adviser's cash and securities c. Sending each client an itemized statement of his or her account at least quarterly d. Verifying client funds and securities at least once every calendar year in an unannounced audit by an independent accountant
a. Also obtaining written discretionary authority from each client for whom it is holding funds and/or securities Explanation: Client accounts for which the adviser maintains custody may be either discretionary or nondiscretionary. Obtaining discretionary authority does not automatically mean the adviser has custody unless the discretionary author is specified as full discretion. IAs with full discretion will need to follow the rules established for custody based on the adviser's ability to withdraw cash and securities.
Which of the following would NOT be considered an investment adviser representative under the Uniform Securities Act? a. An individual who works for an investment adviser as a clerk or receptionist b. An individual who works for an investment adviser and provides advice c. An individual who works for an investment adviser and manages assets d. An individual who works for an investment adviser and is compensated for transactional business
a. An individual who works for an investment adviser as a clerk or receptionist Explanation: The Uniform Securities Act specifically exempts clerical employees of an investment adviser from the definition of an investment adviser. Advisory fees may consist of both commissions and management fees. When clients begin the advisory relationship, they must receive written disclosure of any fees or commissions.
Under the Uniform Securities Act, what information is NOT disclosed in an investment advisory contract? a. Any other states in which the investment adviser is registered b. The manner in which the advisory fee will be computed c. A provision disallowing the investment adviser to assign the contract to another party without client consent d. A provision prohibiting the investment adviser from being compensated based on a share of capital gains
a. Any other states in which the investment adviser is registered Explanation: The investment advisory contract must disclose the manner in which the adviser will be compensated. The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and may not be compensated based on a share of capital gains.
A new investment advisory firm registers with the Administrator on June 1. Just before its one- year anniversary on June 1 of the following year, the firm renews its registration and the registrations of each of its investment adviser representatives. Which of the following statements is TRUE? a. Both the firm's and its IARs' registrations lapsed on December 31 of the prior year b. The representatives are properly registered, but the firm's registration has lapsed c. The firm effectively renewed prior to the deadline, but the representatives did not d. The firm has complied with the Uniform Securities Act since registrations are valid for one year from the initial registration (June 1)
a. Both the firm's and its IARs' registrations lapsed on December 31 of the prior year Explanation: Under the Uniform Securities Act, all registrations expire on December 31 and then must be renewed. In this situation, both the firm and the investment adviser representatives have allowed their registrations to lapse.
Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all electronic communications and their amendments must be maintained by the adviser for how long if distributed directly or indirectly and to how many persons? a. Five years if sent to two or more persons b. The life of the firm if sent to thirty-five or more persons c. Three years if sent to ten or more persons d. Three years if sent to two or more persons
a. Five years if sent to two or more persons Explanation:According to NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all investment adviser records must be maintained for not less than five years, the first two years in the principal office of the adviser, including those made by electronic media (Web sites, e-mail, etc.) if directly or indirectly sent to two or more persons.
An advisory firm has 30 individuals who are registered as IARs. What record is the investment adviser required to keep in regard to its IARs? a. Form U4 for each IAR b. A copy of each IAR's fingerprints that have been obtained from law enforcement c. The securities screening and background check for each IAR d. A copy of the driver's license or passport for each IAR
a. Form U4 for each IAR Explanation: Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, an IA is required to maintain all documents which are filed with the state and/or federal regulators that relate to the firm and its IARs (e.g., Form U4, amendments, and renewal filings). IARs are not required to obtain fingerprints from law enforcement.
All of the following choices are maintained for five years by an IA, EXCEPT: I. Partnership agreements II. Articles of incorporation III. A copy of audited financial statements IV. Written complaints V. A copy of a solicitor's written disclosure documents a. I and II only b. III and IV only c. II, III, and IV only d. I and V only
a. I and II only Explanation: Partnership agreements, articles of incorporation, minute books from board meetings, and stock certificate books are preserved for the life of the firm and for at least three years after termination of the firm. All other records are retained for five years.
An investment adviser has no place of business in State A. According to the Uniform Securities Act, in which TWO of the following situations is the firm required to register as an investment adviser in State A? I. The firm only provides advice to accredited investors in State A. II. The only client the firm has in State A is a pension fund. III. Over the last 12 months, the firm has provided advice to 10 retail customers who are residents of State A. IV. The firm is registered under the Investment Company Act of 1940. a. I and III b. III and IV c. II and III d. I and II
a. I and III Explanation: Under the USA, there are two situations in which a person that meets the definition of an investment adviser is considered exempt from registration. The first exemption is when the adviser has no place of business in the state and the adviser's only clients are institutional investors. The second exemption is when the adviser has no place of business in the state and the adviser does not direct communications to more than five non-institutional clients in the state within 12 consecutive months. In this question, although the firm has no place of business in State A, choice (I) indicates that the adviser's clients are accredited investors (as defined under Regulation D). To be exempt, the firm's clients must be institutional investors; however, the reference to accredited investors does not specifically mean that all of the investors are institutional (individual investors who meet a financial test are included as accredited). Choice (III) indicates that the adviser has 10 retail (non-institutional) clients, but to be exempt, it may have no more than five retail (non-institutional) clients.
Which of the following brochure delivery periods applies to investment advisers under the Uniform Securities Act? a. If an ADV or brochure is not provided at least 48 hours prior to signing the contract, clients must be given five days to rescind without penalty b. Clients must receive the adviser's brochure or ADV Part 2 at least 48 hours prior to signing a contract in order to rescind c. If an ADV or brochure is not provided, clients must be given 10 days to rescind the contract d. Clients must receive the adviser's brochure or ADV Part 2 five business days prior to signing a contract or the client has 48 hours to cancel without penalty
a. If an ADV or brochure is not provided at least 48 hours prior to signing the contract, clients must be given five days to rescind without penalty Explanation: Under the Uniform Securities Act, all clients must receive the adviser's brochure or ADV Part 2 no later than the time they enter into an agreement with the adviser. If the client is not given anADV Part 2 or brochure at least 48 hours before signing the contract, then the contract must specify that the client has five days to rescind the contract.
According to the NASAA Custody Requirements for Investment Advisers Model Rule, an investment adviser who wants to send account statements directly to clients: a. Is permitted to do so, if audited by an independent CPA b. Will be committing a violation c. Is permitted to do so, if statements are sent on a monthly basis d. Is permitted to do so, if approved by the Administrator
a. Is permitted to do so, if audited by an independent CPA Explanation: According to the NASAA Custody Requirements for Investment Advisers Model Rule, an investment adviser who wants to send account statements directly to clients is permitted to do so if audited by an independent public accountant. The custodian maintaining the client's funds and securities may also send account statements to the adviser's clients.
Which of the following statements is TRUE of an investment adviser that maintains custody of client funds and/or securities? a. It must initiate Form ADV-E. b. It must complete Form ADV-W. c. It must arrange for an independent public account to audit these assets on a regular basis at least every three years. d. It must complete Form ADV-NR.
a. It must initiate Form ADV-E. Explanation: All registered investment advisers that have custody of client funds and/or securities must have an independent public accountant to conduct surprise audits of these assets at least once every calendar year. The adviser also must initiate Form ADV-E and provide it to the accountant, who then submits it to the regulators with a copy of the audit report attached. Form ADV-W must be filed by advisers that want to withdraw their registration or register with a different regulator. Form ADV-NR must be filed by advisers that have managing agents who are non-residents of the United States.
An investment adviser is registered and located State A. One of the IAR's has three non-institutional clients and one institutional client in State B. A different IAR has four non-institutional clients in State B. If the investment adviser does NOT have an office in State B, who must register in that state? a. Only the investment adviser b. Neither the IARs nor the investment adviser c. The IARs and the investment adviser d. Only the IARs
a. Only the investment adviser Explanation: An advisory firm that has more than five non-institutional clients residing in a state is required to register in that state. Since one IAR has three clients and the other has four clients, the investment adviser has seven clients total and must register. However, since neither IAR has more than five non-institutional clients, neither one needs to register in State B. Notice that all persons (the IA and IARs) need to be registered in State A.
A state Administrator is permitted to apply all of the following administrative actions, EXCEPT: a. Require a higher minimum financial requirement than the state in which a broker-dealer maintains its principal office. b. Suspend a broker-dealer's registration in the state. c. Order a broker-dealer to cease conducting business in the state. d. Bar an agent from association with any other broker-dealer registered in the state.
a. Require a higher minimum financial requirement than the state in which a broker-dealer maintains its principal office. Explanation: No other state Administrator may impose financial requirements on a broker-dealer that are more restrictive than those that are established by the state in which the broker-dealer maintains its principal (main) office.
All of the following would be reasons for a state Administrator to revoke an IA's registration, EXCEPT: a. The adviser filed for personal bankruptcy four years ago b. The adviser was subject to a misdemeanor conviction of securities fraud c. Discovery that the adviser had violated the Investment Company Act of 1940 d. Discovery that the IA violated CFTC rules or regulations established by the Commodities Exchange Act
a. The adviser filed for personal bankruptcy four years ago Explanation: Personal bankruptcy is not an event that leads to the revocation of a registration. However, any violation of securities laws or industry regulations, or conviction within the last 10 years for any felony or securities-related misdemeanor, is grounds for revocation of a registration. Although the Commodities Exchange Act and the CFTC govern futures trading, a commodities violation would be grounds for the loss of a securities registration.
Under the Uniform Securities Act, an investment adviser is required to provide a balance sheet when it files Form ADV Part 2 in all of the following situations, EXCEPT when: a. The investment adviser inadvertently received client securities, but returned them after two business days. b. The investment adviser requires prepayment of advisory fees of $800, seven months in advance. c. The investment adviser has custody over clients' funds and securities. d. The investment adviser has the authority to execute transactions in an account in which a client has beneficial interest.
a. The investment adviser inadvertently received client securities, but returned them after two business days. Explanation: The investment adviser has three business days to return the securities before custody is established. Since the adviser returned the securities in two business days, custody was not established and no balance sheet was required. Under the USA, investment advisers that require the prepayment of fees of more than $500, six months or more in advance, are required to include a balance sheet when they file Form ADV Part 2. When an investment adviser has custody, the USA requires the inclusion of a balance sheet when the IA files Form ADV Part 2. If an investment adviser has authority to execute transactions in an account that belongs to a client, the adviser has discretion over the account and is required to provide a balance sheet when it files Form ADV Part 2.
According to NASAA's model rules, which of the following is NOT required to be disclosed to a client when an investment adviser renews or extends its contract? a. The investment adviser's level of experience b. The formula used to calculate its investment advisory fee c. The length of the contract d. Any prepaid fees or penalties assessed to clients who elect to cancel the contract
a. The investment adviser's level of experience Explanation: When renewing an advisory contract, a firm is required to disclose the formula used to calculate its advisory fee, the amount of the fees, and the length of the contract. The adviser's experience level is not required to be disclosed. Advisers are not disciplined or subject to additional disclosures simply because they are new to the industry.
According to the recordkeeping requirements for IAs, if a client trade is executed, which of the following items is NOT required to be included on the order memorandum? a. The time that the order was executed b. The person who recommended the transaction c. The date on which the order was entered d. The person who placed the order
a. The time that the order was executed Explanation: According to the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, the order memoranda (order ticket) should show the terms and conditions of the order, instructions, modification, or cancellation, the person connected with the IA who recommended the transaction, and the person who placed the order.
The Uniform Securities Act considers which of the following to be an investment adviser representative (IAR)? a. A CPA who gives occasional advice in connection with his tax service, but charges no additional fees b. A CPA with an office in a state who charges a fee for advice that is more than just incidental to his profession c. A clerical employee of an advisory firm that has a place of business in the state d. An officer or director of a federal covered adviser who has clients in a state, but has no office in that state
b. A CPA with an office in a state who charges a fee for advice that is more than just incidental to his profession Explanation: According to the Uniform Securities Act, an individual who solicits, sells, or negotiates investment advisory services is defined as an investment adviser representative (IAR). The rule excludes any person serving in a clerical or administrative position or any employee of a federal covered adviser who does not have an office in the state. Professionals (lawyers, accountants, teachers, and engineers) qualify for the exemption if their advice is incidental to their profession and no additional fee or charge is assessed for the advice.
Under the Investment Advisers Act, which of the following forms must be filed if an investment adviser has custody of customer funds and securities? a. ADV-H b. ADV-E c. ADV-NR d. ADV-W
b. ADV-E Explanation: Submission of Form ADV-E with the SEC is required if the adviser has custody of client funds and securities. The form is filed by an independent public accountant hired by the adviser who has audited the adviser's records. Form ADV-H is filed by an adviser seeking an exemption for a temporary or continuing hardship. Form ADV-NR is filed by a nonresident general partner or nonresident managing agent of a U.S. registered investment adviser. Form ADV-W is filed by an adviser that is either seeking a partial or full withdrawal from registration.
According to the Uniform Securities Act, which of the following investment advisers would be exempt from registration? a. An adviser with one office in the state and only institutional clients b. An adviser with only five retail clients c. An adviser with only clients who have a net worth of at least $1 million d. An adviser with 20 clients, all of whom are accredited investors
b. An adviser with only five retail clients Explanation: There is no investment adviser exemption based on net worth in the Uniform Securities Act. (In federal securities law, there is a securities registration exemption for private placements to accredited investors.) If an adviser does not have a place of business in a particular state and limits clientele to institutional investors or no more than five retail investors, the adviser is exempt from registration in the state.
For disclosure purposes on Form ADV, a felony (as compared to a misdemeanor) is defined by all of the following choices, EXCEPT: a. An offense that's punishable by a prison sentence of at least one year b. An offense that's punishable by a fine of at least $500 c. A general court martial d. An offense that's punishable by a fine of at least $1,000
b. An offense that's punishable by a fine of at least $500 Explanation: All the choices are considered felonies, except an offense that's punishable by a fine of at least $500. A felony is an offense that's punishable by a prison sentence of at least one year and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial or an offense that's punishable by a prison sentence of less than one year and/or a fine of less than $1,000.
Under the Uniform Securities Act, an investment adviser must deliver a disclosure document (brochure) to a client: a. Within three business days of an existing client's request b. At least 48 hours prior to signing the contract or, if given at the time that the contract is signed, the client must be given five days to rescind the contract c. With each statement, but at least on a quarterly basis d. Five business days prior to signing the contract, as long as the client has two business days to rescind the contract without penalty
b. At least 48 hours prior to signing the contract or, if given at the time that the contract is signed, the client must be given five days to rescind the contract Explanation: A disclosure document (ADV Part 2 or a document containing the same information) must be provided to new clients at least 48 hours prior to the signing of the contract, or at the time of the contract signing with the customer. If provided at the time of the signing of the contract, the client must be given five days to rescind the contract. The disclosure document must be sent to existing clients at least annually. If an existing client requests a current copy of the disclosure document, it must be sent to the client within seven days of the request.
All of the following records must be retained by an investment adviser and broker-dealers, EXCEPT: a. Ledgers used by the firm to record assets and liabilities b. Clients' tax returns used to obtain their annual income c. E-mail between clients and the firms covering investment recommendations d. Trade tickets detailing the type and amount of securities purchased by a client
b. Clients' tax returns used to obtain their annual income Explanation: Any investment adviser subject to the registration provisions of the Advisers Act is required to keep certain records. Ledgers are used by the firm for accounting purposes. E-mail is used as a means of communication between the firm and clients. Trade tickets are used to record all orders for the purchase and sale of securities. There is no requirement that an investment adviser or broker-dealer retain a copy of a client's tax return.
According to the Uniform Securities Act, the Administrator may require federal covered advisers to: a. Register in every state in which they have a branch office b. Give notice or notice file in any state where they transact business with six or more individual retail clients c. Register with the Administrator in any state where they transact business with six or more individual retail clients d. Do nothing because the Administrator has no jurisdiction
b. Give notice or notice file in any state where they transact business with six or more individual retail clients Explanation: The Administrator may require federal covered investment advisers to notice file if they transact business with more than five noninstitutional clients over a 12-month period. Notice filing is not a form of registration. Instead, it is the process of a federal covered adviser sharing information with the Administrator that it has filed with the SEC.
According to the Uniform Securities Act, if an investment adviser is registered in, and has an office in, a particular state, it must: I. File any required financial statements with the Administrator II. Maintain books and records as required by the Administrator III. File an updated Form ADV with the Administrator for any material changes to its business IV. Schedule annual inspections with the Administrator a. II and III only b. I, II, and III only c. I, II, III, and IV d. I and II only
b. I, II, and III only Explanation: Investment advisers initially register with the Administrator by filing Form ADV. If the adviser experiences any material changes to its business, an updated Form ADV must be filed. The Administrator also requires advisers to file financial statements and to maintain certain books and records. While the Administrator may subpoena books and records at any time, it does not inspect advisers on a specific schedule.
Under the Uniform Securities Act, which of the following statements is TRUE regarding the registration of investment advisers (IAs) and investment adviser representatives (IARs)? a. IARs are not required to be registered in a state as long as the IA is registered there. b. IARs are required to be registered in a state even if the IA is registered there. c. IARs are required to register in a state even if the IA is provided an exemption from registration there. d. IARs that are giving advice about exempt securities don't need to be registered even if the IA is required to be registered.
b. IARs are required to be registered in a state even if the IA is registered there. Explanation: Under the USA, it's unlawful for any registered investment adviser to employ an investment advisor representative unless the IAR is also registered.
You are the chief financial officer of Colfax Advisers, a registered investment adviser located in Dallas, Texas. Your firm manages portfolios and has safekeeping services for its clients. The state of Texas requires that all registered advisers who have custody of client assets maintain a minimum net worth of $35,000. In reviewing the month-end financials for the firm, you calculate the current net worth at $32,875. What would your best course of action be considering these circumstances? a. Increase net worth to $35,000 and notify the Administrator of the increase b. Notify the Administrator within one business day and file a statement of financial condition by the next business day c. Notify the Administrator and post a $35,000 bond d. Cease operations in the state and file a notice of withdrawal
b. Notify the Administrator within one business day and file a statement of financial condition by the next business day Explanation: If an investment adviser's net worth drops below the required minimum (as set by the Administrator), the adviser must file a deficiency notice with the Administrator within one business day and also file a report on its financial condition by the next business day.
In the public's best interest, an Administrator may use all of the following actions as grounds for denial of an agent's application for registration, EXCEPT: a. She violated federal commodities laws within the past 10 years b. She withdrew from registration as an agent in another state c. She sold unregistered, non-exempt securities in another state without acknowledgement from investors d. She failed to disclose a six-month gap of employment on her Form U4
b. She withdrew from registration as an agent in another state Explanation: If registered persons (e.g., broker-dealers or agents) withdraw their registrations, it is a voluntary procedure and does not imply wrongdoing by the registrant. All of the other choices are justifiable reasons for the Administrator to deny an application for registration.
An investment adviser has begun to experience difficulties in collecting fees from the accounts of clients that do not elect to have the fees deducted directly from their accounts. To compensate for this, the firm decides to raise its fees and require a larger up-front deposit from all new accounts for the upcoming year. To reward its current clients, the adviser waives the fee increase and does not change the terms of their contracts. What must the adviser do in this situation? a. The IA must notify all current clients of the new fees and update its Form ADV Part 2 within 60 days b. The IA must make all necessary changes and promptly file amendments to its Form ADV c. The IA must update its Form ADV Part 2 and any customer disclosure documents within 90 days of its year-end d. The IA must make necessary changes to all of its disclosure documents and receive written consent from all of its current clients within 30 days
b. The IA must make all necessary changes and promptly file amendments to its Form ADV Explanation: In this question, since the contracts of the current clients are not being changed, they are not required to be given written notification and the firm is not required to obtain their consent. However, since this is a material change to the business, the adviser's Form ADV must be updated and filed promptly. If a change is deemed to be routine, it may be filed within 90 days of the year-end.
According to NASAA Model Rule 411(c), an investment adviser is required to keep a record of all the following documentation, EXCEPT: a. Written supervisory procedures b. The IARs personal e-mails c. Statements of unpaid bills d. A ledger reflecting the return of third-party checks within three business days
b. The IARs personal e-mails Explanation: All of the documentation listed is required to be maintained by investment advisers with the exception of the personal e-mails of their representatives.
A sole proprietor who was registered as a broker-dealer is now charging a separate fee for securities advice. According to the Uniform Securities Act, the sole proprietor: a. Must change from sole proprietor to another business structure in order to become an investment adviser b. Would need to register as an investment adviser c. Has an exemption from registration as an investment adviser d. Must register only if the activities are called financial planning
b. Would need to register as an investment adviser Explanation: Any business entity not specifically exempted from registration that charges a separate fee for administering advice is subject to registration as an investment adviser. Broker-dealers are excluded from the definition of investment adviser if they provide only incidental advice with no separate, identifiable charge.
Which of the following is NOT defined as an IAR? a. A person who manages IARs at an investment advisory firm b. A person who solicits new business for an investment adviser c. A person that manages portfolios and assets for its clients d. A person who gives advice and is employed by an investment adviser
c. A person that manages portfolios and assets for its clients Explanation: This is a challenging question, but three of the choices listed are clearly considered investment adviser representatives (IARs). A person who provides advice as an employee of an investment adviser, a person who solicits business for an investment adviser, and a person who manages other IARs for an investment adviser each meet the definition of an investment adviser representative. On the other hand, a person managing portfolios could be either an individual or a business. Keep in mind, if the person is a business (firm), it's considered an investment adviser (IA) and not an investment adviser representative (IAR).
A semi-retired IAR works for an investment adviser that is located in State A, but she intends to spend the winter months in her second home in State B. The IAR put the addresses of both her office in State A and her home address in State B on her business cards since she intends to continue servicing her clients that reside in State A over the winter months. If the investment adviser does not have an office in State B, which of the following statements is TRUE? a. The IAR needs to register in State B, but the investment adviser does not. b. The investment adviser needs to register in State B, but the IAR does not since neither she nor her clients are residents of the state. c. Both the IAR and the investment adviser need to be registered in State B since the IAR's residence in State B is considered an office and it is listed on her business card. d. Neither the IAR nor the investment adviser need to be registered in State B since they are only doing business with clients whose residence is in State A.
c. Both the IAR and the investment adviser need to be registered in State B since the IAR's residence in State B is considered an office and it is listed on her business card. Explanation: Because the IAR has put both her home address in State B and phone number on her business cards, her residence qualifies as an office in State B. Both the investment adviser and the IAR are required to register in State B, despite the fact that they are only doing business with clients who are not residents of State B.
Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE? a. Client notification must be made immediately regarding the location where the firm will hold the funds b. Client funds may be held by a qualified custodian that has met certain standards c. Clients must receive a statement at least annually that discloses certain details of the funds held by the firm d. Client funds may only be held in an account that is established for that specific purpose
c. Clients must receive a statement at least annually that discloses certain details of the funds held by the firm Explanation: Client account statements are sent on a quarterly basis and must include the amount of funds in the firm's possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided.
According to the Uniform Securities Act, the application process for an investment adviser includes: a. Filing all client contracts with the Administrator for approval b. Determining the value of each account on a daily basis c. Filing a completed Form ADV and a Form U4 for each IAR who will be providing advisory services d. Having net capital that is at least 2% of the assets managed
c. Filing a completed Form ADV and a Form U4 for each IAR who will be providing advisory services Explanation: For an investment adviser, the application process includes the filing of a completed Form ADV and a Form U4 for each investment adviser representative who will be providing advisory services on behalf of the firm.
Under the Uniform Securities Act, amendments to an investment adviser's Form ADV must be filed promptly. On August 31, an investment adviser closes one of its branch offices and must therefore file an amendment. What constitutes a prompt filing with the IARD? a. Filing the notice by October 31 of the current year b. Filing the notice by the end of the adviser's fiscal year. c. Filing the notice by September 30 of the current year d. Filing the notice by December 31 of the current year
c. Filing the notice by September 30 of the current year Explanation: Amendments to Form ADV are required to be filed promptly with the Investment Adviser Registration Depository. Under the Uniform Securities Act, a filing is done promptly if it is done within 30 days of the event that caused the filing requirement, which in this question is September 30.
According to NASAA Model Rule 502(c), regarding contents of investment advisory contracts, an advisory contract would include which of the following choices? I. The term of the contract II. An exculpatory clause waving compliance with the Investment Advisers Act of 1940 III. A nonassignment clause IV. A clause requiring the adviser to notify clients of any change in membership if the firm is a partnership a. I, II, and III only b. I only c. I, III, and IV only d. I and III only
c. I, III, and IV only Explanation: It is unlawful for an investment adviser, investment adviser representative, or federal covered investment adviser to enter into, extend, or renew any investment advisory contract unless it provides, in writing, the term of the contract, how the fees will be calculated, the fact that the adviser may not be compensated on gains only, and a nonassignment clause. It is unlawful to include any condition, stipulation, or provision binding any person to waive compliance with any provision of this Rule or of the Investment Advisers Act of 1940. This prohibited practice is known as an exculpatory clause.
An IAR of a state-registered adviser is registered in State X, but gives seminars to potential clients in State C. The IAR is: a. Exempt from registration in State C since he has no place of business there b. Required to register in State X only c. Required to register in State C if he directs solicitations to more than five noninstitutional clients d. Exempt from registration in State C
c. Required to register in State C if he directs solicitations to more than five noninstitutional clients Explanation: An IAR of a state-registered adviser is subject to registration in any state where he has a place of business and or directs communication to more than five noninstitutional clients.
According to NASAA provisions, an investment adviser that maintains custody of a client's funds must: a. Provide prior verbal notification to the Administrator of its intention to take custody of the client's funds b. Notify the client of the location of the funds within 90 days of taking custody c. Schedule an independent annual audit d. Maintain a separate bank account in the adviser's name as agent/trustee for the client's benefit
c. Schedule an independent annual audit Explanation: If an investment adviser maintains custody of its clients' funds, it must provide prompt written notification as to the location of where the funds are being held as well as prompt written notification if that location is changed. An adviser is required to promptly notify the Administrator in writing when it takes custody. An annual audit of the records must be performed by an independent accountant, not by the Administrator.
An investment adviser with no place of business within a state will not be required to register with the Administrator under which of the following conditions? a. The adviser will provide advice only to accredited investors. b. The adviser has been in business for 10 years. c. The adviser will provide advice to four individual clients. d. The adviser will provide advice only to 401(k) plans with assets of at least $500,000.
c. The adviser will provide advice to four individual clients. Explanation: An adviser with no place of business in a state, who only provides advice to mutual funds (a type of investment company), other investment advisers, broker-dealers, banks, trust companies, insurance companies, savings and loan associations, employee benefit plans such as a 401(k), where the minimum amount of the assets is $1,000,000, is exempt from registration. An adviser with no place of business who only advises four individual clients would meet the de minimis exemption.
Which of the following statements is FALSE regarding an investment adviser's contract? a. If the investment adviser is a partnership, advisory clients must be notified of any change in partners b. Contracts may not be assigned without customer consent c. The contract may stipulate that the adviser will receive a share of the gains and appreciation that are generated in the account as long as the time period is disclosed to the customer d. Contracts may allow for an adviser to be compensated based on the value of the assets under management between designated dates
c. The contract may stipulate that the adviser will receive a share of the gains and appreciation that are generated in the account as long as the time period is disclosed to the customer Explanation: The regulators consider sharing in the gains of a customer's account to be a form of performance-based fee. These fees are generally prohibited in advisory contracts unless the customer qualifies for a waiver or exemption based its status (e.g., institutional investors or officers/directors of the firm), net worth, or assets under management. Asset-based fees are not considered performance-based fees if they are calculated based on the value or average value of the assets and not the appreciation.
An investment adviser is registered in 10 states. The firm wants to transact business with three clients in a state in which it is not registered. According to the Uniform Securities Act, which of the following statements is TRUE? a. The firm would be required to register as an investment adviser with the SEC since it is now doing business in more than 10 states and is defined as a federal covered adviser b. The firm would be required to register in the new state if the clients were employee benefit plans with assets greater than $1,000,000 c. The firm would not be required to register as an investment adviser if it did not lease an office in the state in which it is not registered d. The firm would be required to register in the new state if the clients were not accredited investors
c. The firm would not be required to register as an investment adviser if it did not lease an office in the state in which it is not registered Explanation: According to the Uniform Securities Act, if a firm has five or fewer clients in a state (during a 12-month period) in which it has no office, it is exempt from registration in that state. Also, if all the clients, regardless of their number, are banks, trust companies, insurance companies, or employee benefit plans, the firm is exempt from state registration.
According to the Uniform Securities Act, which of the following statements is NOT correct regarding an Administrator's authority over the books and records of an IA? a. The state securities Administrator may indicate the time periods for the preservation of books and records of investment advisers that have their principal place of business in the state. b. The state securities Administrator is allowed to inspect the books and records of any investment adviser both inside and outside its state. c. The state securities Administrator may indicate the types of books and records that are required to be kept by an investment adviser that's registered with the SEC. d. The state securities Administrator may indicate the types of books and records that are required to be kept by an investment adviser in its principal place of business.
c. The state securities Administrator may indicate the types of books and records that are required to be kept by an investment adviser that's registered with the SEC. Explanation: Investment advisers that are registered with the SEC are referred to as federal covered advisers (FCAs). FCAs are required to follow federal (SEC) rules regarding books and records; therefore, state Administrators don't determine the requirements.
If information in an adviser's brochure becomes materially inaccurate, the adviser must file a(n): a. Updating amendment within 120 days b. Annual amendment of Part 2 c. Updating amendment promptly d. Updating amendment within 90 days
c. Updating amendment promptly Explanation: Any materially inaccurate information in the brochure must be corrected by filing an updating amendment promptly by substituting pages in ADV Part 2 or affixing a sticker. Part 2 is filed by a state-registered adviser with the Administrator. For a federal covered adviser, Part 2 is not filed with the SEC, but retained on file.
According to the Uniform Securities Act, the term investment adviser includes all of the following types, EXCEPT: a. A broker-dealer who charges for investment advice b. A person who sells security analyses c. A financial planner who sells written financial plans covering insurance and securities purchases d. An accountant who advises his clients on how to minimize the tax consequences of the securities in their portfolio
d. An accountant who advises his clients on how to minimize the tax consequences of the securities in their portfolio Explanation: Professionals who give investment advice that is incidental to their normal course of business (such as accountants), would not be considered investment advisers. The other individuals listed would be considered investment advisers.
Under the Uniform Securities Act, which of the following advisers meets the definition of a federal covered adviser? a. An adviser who has a place of business in only two states b. An adviser whose recommendations are solely based on exchange-traded securities c. An adviser whose recommendations are solely based on U.S. government securities d. An adviser who is registered with the SEC under the Investment Advisers Act of 1940
d. An adviser who is registered with the SEC under the Investment Advisers Act of 1940 Explanation: If an investment adviser registers with the SEC, it is considered federal covered under the Uniform Securities Act. Based on the information provided, the other advisers would not necessarily be federal covered investment advisers. The Investment Advisers Act of 1940 specifically excludes U.S. government securities advisers from the definition of an investment adviser. Therefore, these advisers are required to register at the state level.
Which of the following could be considered an investment adviser representative under the Uniform Securities Act? a. Chelsea Asset Management, a portfolio management firm b. A clerical employee of Chelsea Asset Management c. Smart Choice, a discount broker-dealer d. An individual employed by Chelsea Asset Management who solicits clients for the firm
d. An individual employed by Chelsea Asset Management who solicits clients for the firm Explanation: Firms such as Smart Choice or Chelsea Asset Management are classified as either broker-dealers or investment advisers. IA representatives are individual (natural) persons who are associated with an IA and make recommendations, manage accounts, give advice, solicit business, or negotiate the sale of IA services. Additionally, anyone who supervises persons engaged in these activities is also considered an IA representative. Persons whose job functions are considered strictly clerical are not considered IA representatives.
According to NASAA provisions, an investment adviser that maintains custody of a client's funds must: a. Provide prior verbal notification to the Administrator of its intention to take custody of the client's funds b. Notify the client of the location of the funds within 30 days of taking custody c. Notify the client of the location of the funds within 90 days of taking custody d. Be subject to a surprise audit by an independent accountant
d. Be subject to a surprise audit by an independent accountant Explanation: If an investment adviser maintains custody of its clients' funds, it must provide prompt written notification as to the location of where the funds are being held as well as whether the location is changed. The notification of taking custody of client funds must be provided in written form, not verbal. Any audit of the records must be performed by an independent accountant, not by the Administrator.
Which of the following terms is not pertinent when determining whether a firm meets the investment adviser definition? a. Compensation b. Business c. Advice d. Commission
d. Commission Explanation: To meet the definition of an investment adviser, a firm must be providing advice, as a regular part of its business, and receive specific compensation. Commission is a normal charge for a broker in transactions, not for an investment adviser.
Under the Uniform Securities Act, an individual applying for an investment adviser representative registration may be required by the Administrator to: I. Pass an examination II. Pay a filing fee III. Maintain a minimum net capital a. I and III only b. I, II, and III c. II and III only d. I and II only
d. I and II only Explanation: When an individual applies for an investment adviser representative registration, the Administrator may require the individual to pass an examination (which may be oral, written, or both) and pay a filing fee. Investment advisers and broker-dealers may be required to maintain a minimum net capital in addition to meeting the two previously mentioned requirements.
Which of the following statements is/are TRUE of an investment adviser who takes custody of cash and securities belonging to its customers? I. The funds must be deposited into one or more separate accounts that only contain customer funds. II. The adviser may combine customer cash with its own if proper disclosure is made. III. The adviser must also be registered as a broker-dealer with the Administrator. IV. The adviser must disclose to its clients both the location and manner in which the securities are held. a. I and III only b. II only c. II, III, and IV only d. I and IV only
d. I and IV only Explanation: Firms that maintain custody of customer assets must satisfy these guidelines: (1) Customer funds must be segregated, (2) The location of assets must be disclosed in writing and, (3) The records must be audited annually. When a firm has custody of customer cash and securities, it is required to be a qualified custodian. Broker-dealers, banks, and trust companies may be recognized as qualified custodians and may, therefore, hold cash and securities belonging to customers. Since these different entities may serve as qualified custodians, it is incorrect to state, as in choice (III) that the adviser may only maintain custody if it is also registered as a broker-dealer.
Under the Investment Advisers Act, records that MUST be maintained by an investment adviser include:. I. All checkbooks, bank statements, and cancelled checks II. A record of the personal securities transactions of the adviser and its employees III. Copies of all circulars, advertisements, and newspaper articles sent to ten or more persons a. I and III only b. II and III only c. I and II only d. I, II, and III
d. I, II, and III Explanation: The Investment Advisers Act specifies which records an adviser must keep and maintain. All of the choices listed are required.
A firm is located in State Y and has been hired by a pension plan to evaluate its investment manager. The investment manager's office is in State Z. The firm will be advising the pension plan whether it should retain the investment manager or hire a new one. Under the Uniform Securities Act, is the firm required to register as an investment adviser in State Z? a. Yes, because the firm is advising the pension plan owner and not the participants. b. Yes, because a fee is being charged for the firm's services as a consultant. c. No, because the firm is not making investment recommendations regarding the plan's portfolio. d. No, because the firm has no place of business in State Z and is servicing an institutional investor.
d. No, because the firm has no place of business in State Z and is servicing an institutional investor. Explanation: Under the Uniform Securities Act, an adviser that has no place of business in a state and whose clients are only institutional investors (e.g., pension plans) is exempt from the registration requirements.
Under the USA, which of the following persons is considered an investment adviser? a. An engineer b. A lawyer c. An accountant d. None of the above
d. None of the above Explanation: Under the Uniform Securities Act, lawyers, accountants, teachers, and engineers are specifically excluded from the definition of an investment adviser.
If a federal covered adviser makes a material change to its Form ADV, it must notify the SEC: a. Within 48 hours b. Within 10 business days c. Within 90 days of its fiscal year-end d. Promptly, (generally within 30 days)
d. Promptly, (generally within 30 days) Explanation: If an investment adviser makes a material change to its Form ADV, it is required to file an amendment with the SEC promptly (generally within 30 days). For non-material changes that are made to the information found in Form ADV, an adviser must file an amended within 90 days of the end of the IA's fiscal year.
An investment adviser is registered in many states, including the state in which its principal place of business is located. Which of the following statements is TRUE concerning the IA's obligation to maintain a minimum financial requirement? a. The IA must satisfy the requirements of the state. b. The IA must satisfy the requirements of the SECA. c. The IA must satisfy the requirements of the state in which it has the largest number of clients. d. The IA must satisfy the requirements of only the state in which its principal place of business is located.
d. The IA must satisfy the requirements of only the state in which its principal place of business is located. Explanation: An investment adviser is only required to maintain the minimum financial requirement that established by the state in which it maintains its principal place of business.
An IAR has been discussing the advantages of purchasing a financial plan with a potential client. During a party that they are both attending, the client mentions that she has looked over the contract and is ready to move forward with the financial plan. The client hands her signed contract and a check to the IAR. Although the IAR has not provided the client with his firm's brochure, the client states that she has reviewed it online. Regarding the disclosure document, which of the following statements is TRUE? a. The IAR may obtain the client's signature on the contract as long as he delivers a brochure to her within five business days. b. The IAR must ensure that the client receives the brochure within 48 hours. c. The IAR is not required to provide the client with the brochure, since she has reviewed it online. d. The IAR may not accept the contract until he has provided the client with a copy of his firm's brochure.
d. The IAR may not accept the contract until he has provided the client with a copy of his firm's brochure. Explanation: In this question, since the IAR did not give the client his firm's brochure earlier, he must provide it at the time of entering into the contract. When clients are given the brochure at the time of signing a contract, they must be provided with five business days to cancel the contract without a penalty. However, if a client is given a brochure 48 hours in advance of signing a contract, she cannot cancel the contract without a penalty.
Under the Uniform Securities Act, an investment adviser who has no place of business in a state is exempt from registration if: a. All of the adviser's clients were obtained on an unsolicited basis b. All of the adviser's clients are accredited investors c. The adviser has no more than fifteen clients who are residents of the state d. The adviser has no more than five clients who are residents of the state
d. The adviser has no more than five clients who are residents of the state Explanation: Under the Uniform Securities Act, an adviser does not need to register in a state if it has no place of business in the state and does not have more than five clients who are residents of that state. This is referred to as the de minimis exemption.
The Administrator may require an investment adviser to file which of the following documents along with its initial ADV application? a. A list of all of its recommendations for the past five years b. A list of all customers and their addresses c. A list of all customer securities and the location where they are held d. The firm's current financial condition
d. The firm's current financial condition Explanation: Of the items listed, a new adviser would only be required to file a statement regarding its financial condition.
Which of the following persons would be required to register as an investment adviser under the Uniform Securities Act? a. A federal covered adviser b. A bank's trust department that provides fee-based investment advice c. An accountant who provides investment advice that is incidental to her tax practice d. The publisher of a financial periodical that responds to each subscriber with personalized investment advice
d. The publisher of a financial periodical that responds to each subscriber with personalized investment advice Explanation: Federal covered advisers and trust companies are not subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. If a publisher has tailored its investment advice it would be subject to registration.
Under the Uniform Securities Act, which of the following persons is required to register as an investment adviser? a. A federal covered adviser b. An accountant who provides investment advice that is incidental to her tax practice c. A bank's trust department that provides fee-based investment advice d. The publisher of a financial periodical that responds to each subscriber with personalized investment advice
d. The publisher of a financial periodical that responds to each subscriber with personalized investment advice Explanation: Federal covered advisers and trust companies are not subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. Of the choices given, the publisher is providing tailored investment advice and is therefore subject to registration.
If an adviser inadvertently receives client funds and/or securities, it can avoid the implication that it is maintaining custody of the assets by returning them to the sender within: a. Seven business days of receiving them b. Three calendar days of receiving them c. Seven calendar days of receiving them d. Three business days of receiving them
d. Three business days of receiving them Explanation: An investment adviser that holds clients' cash and/or securities, even temporarily, puts those assets at risk of misuse or loss. For an investment adviser to avoid the implication of having custody after inadvertently receiving client funds or securities, it must return them to the sender within three business days of receiving them.
For how long must broker-dealers and investment advisers maintain their books and records according to the Uniform Securities Act? a. Two years for each b. Two years for broker-dealers and five for investment advisers c. Five years for broker-dealers and three for investment advisers d. Three years for broker-dealers and five for investment advisers
d. Three years for broker-dealers and five for investment advisers Explanation: Investment advisory firms are required to keep books and records for a minimum of five years and broker-dealers for three years, according to the Uniform Securities Act.
As of the close of business on Monday, a state-regulated IA has fallen below its minimum financial requirement. When must the deficiency be reported to the state Administrator? a. Wednesday b. Monday c. Thursday d. Tuesday
d. Tuesday Explanation: If an IA falls below the minimum financial requirement, it must notify the state Administrator by the next business day.
According to the Investment Advisers Act of 1940, when is an investment adviser required to provide an audited balance sheet to its clients? a. When the adviser has limited discretion over the account b. When the adviser requires the prepayment of a $500 initial advisory fee c. When the adviser requires the prepayment of a fee that is greater than $500, six months or more in advance of providing service d. When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service
d. When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service Explanation: Since state and federal laws overlap regarding the concept of providing an audited balance sheet, it is important to identify which regulator is asking the question. According to the Investment Advisers Act of 1940 (federal law) an adviser is required to provide clients with an audited balance sheet if it collects prepaid fees of more than $1,200, six months or more in advance of providing advisory services. However, according to the Uniform Securities Act (state law), an adviser is required to provide clients with an audited balance sheet if 1) the firm collects/solicits prepaid fees of more than $500, six months or more in advance of the service, or 2) the firm maintains custody or discretionary control of clients' assets.
Under the USA, financial planners: a. May only use the designation financial planner on business cards if it is followed by RIA b. Would include persons who recommend investment strategies using life insurance only c. Would be considered de facto investment advisers regardless of their stated or actual activities d. Would not include persons who provide advice on fixed annuities only
d. Would not include persons who provide advice on fixed annuities only Explanation: An investment adviser is defined as any person who, for compensation, as a regular part of a business engages in advising others, as to investing in, the value of, purchasing and/or selling securities. The designation of financial planner does not automatically define the person as an investment adviser if the person does not engage in the activities previously described. The abbreviation RIA is not allowed on business cards. Since life insurance and fixed annuities are not securities, a person giving advice on those insurance products would not be considered a financial planner under the USA.
