STC Series 66 Chapter 4 Test

According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is:

10 or fewer An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising.

Under the Uniform Securities Act, even if an investment adviser representative has no place of business in a state, he must register there if all of his clients are:

Accredited investors An investment adviser representative is required to register in any state in which he has an office or has six or more noninstitutional customers. The language of the Uniform Securities Act does not define an accredited investor as a type of institutional investor. Investment advisers, employee benefit plans, and mutual funds are examples of institutional investors.

Klearkettle Associates is a registered investment adviser in Delaware. Due to the retirement of the firm's senior partner and namesake, Horace Klearkettle, the firm decides to close it doors permanently, effective Thanksgiving weekend. What is the status of the registrations of Klearkettle's IA representatives upon the firm's closing?

All registrations will be ineffective upon the closing of the firm Investment adviser representative registrations only remain in force as long as the IA representative is affiliated with a firm that has a current registration. An agent is not permitted to act independently if her firm goes out of business.

If an IA has recently changed the number of partners, but not control of the firm, the IA registration must be amended within 30 days. Since there is no change in control or ownership of the firm, a Form ADV-W is not filed. This type of change, however, is known as succession by:

Amendment This is an example of succession by amendment, as the ADV is simply amended to reflect the new control structure. If the advisory firm were sold, then a change in ownership occurs and the new firm must submit a new application or ADV. Once effective, a Form ADV-W is filed to withdraw the registration of the acquired adviser.

All of the following accounts would be considered institutional, EXCEPT:

An account with a total value in excess of $1 million Under the USA, there is no minimum size that defines an institutional account. The simple fact that an account value in excess of $1 million does not make it an institutional account

If an adviser has custody of customer funds and securities, the submission of Form ADV-E must be performed by

An independent accountant within 120 days after the completion of an audit Submission of Form ADV-E with the SEC is required if the adviser has custody of client funds and securities. The form must be filed by an independent accountant, not the adviser, within 120 days after the completion of the audit.

Which of the following investment advisers is subject to registration with the SEC?

An internet investment adviser If an investment adviser provides advice to clients exclusively through an interactive website based on information that has been submitted by its clients, the adviser is considered an Internet investment adviser and is subject to SEC registration. Additionally, the IA must maintain a record which demonstrates that the advice was exclusively provided through the interactive website. Advisers that are required to register in fewer than 15 states and hedge fund advisers that manage less than $150 million in assets are required to register with the Administrator, not the SEC. A newly formed investment adviser is permitted to register with the SEC as long as it meets the eligibility requirements within 120 days of its formation, not within 120 days of its second anniversary.

For disclosure purposes on Form ADV, a felony (as compared to a misdemeanor) is defined by all of the following choices, EXCEPT:

An offense that's punishable by a fine of at least $500 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. (32474)

The Administrator may require the filing of advertisements related to which of the following securities?

An oil lease certificate of interest A certificate of interest is a security regulated by the Administrator along with its advertising. Advertisements sent to existing stockholders, as well as those related to investments issued by an insurance company, are exempt from filing. Also, mutual fund advertising is regulated by FINRA, not by a state Administrator.

Under the Investment Advisers Act, the form that is filed annually with the SEC and determines an adviser's continued eligibility for federal registration is called:

Annual Updating Amendment The Annual Updating Amendment is submitted to confirm that an SEC registered investment adviser is still eligible for federal registration. The form must be filed within 90 days after the end of the adviser's fiscal year.

Under the Uniform Securities Act, what information is NOT disclosed in an investment advisory contract?

Any other states in which the investment adviser is registered 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.

Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE?

Clients must receive a statement at least annually that discloses certain details of the funds held by the firm 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.

All of the following records must be retained by an investment adviser and broker-dealers, EXCEPT:

Clients' tax returns used to obtain their annual income 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.

Advisory affiliates include all of the following, EXCEPT:

Customers of the advisor All are considered affiliates of the adviser, with the exception of the adviser's customers.

If an IA or any advisory affiliate pleads nolo contendere to a felony that was committed in a foreign jurisdiction, this action is:

Disclosed to clients on Form ADV Part 2 An investment adviser is required to provide clients with disclosure of certain disciplinary events on Form ADV Part 2 and then must complete a Disclosure Reporting Page (DRP) to provide details regarding the event. DRPs provide information to the public and/or to regulators about specific criminal, regulatory, and civil actions. Any felony or misdemeanor charges or convictions against an IA must be reported on a Criminal Action DRP. For any actions that are taken by the SEC, state, or a foreign financial regulatory authority, reporting is done on a Regulatory Action DRP. For proceedings in a civil court, reporting is done on a Civil Judicial DRP. Although advisers must also include DRPs in Form ADV Part 1, that disclosure is for the applicable regulator (i.e., the SEC or state Administrator), but not for individual clients.

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?

Form U4 for each IAR 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.

Under the Uniform Securities Act, an individual applying for an investment adviser representative registration may be required by the Administrator to: Pass an examination Pay a filing fee Maintain a minimum net capital

I and II 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

All of the following choices are maintained for five years by an IA, EXCEPT: Partnership agreements Articles of incorporation A copy of audited financial statements Written complaints A copy of a solicitor's written disclosure documents

I and II only 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.

The Administrator of the state of Wisconsin has designated the Investment Adviser Registration Depository (IARD) as the approved method for filing registration applications in that state. All filings must be done electronically through the IARD. Under which TWO conditions would an investment adviser requesting an application in Wisconsin NOT need to file electronically with the IARD?

I and III In states where the Administrator has designated the IARD as the method for filing registration applications electronically, two exemptions are available. The exemptions are given in cases where the form that is filed cannot be accepted by the IARD and for hardships incurred through unexpected technical difficulties in filing. In such cases the investment adviser may file a manual application.

If an investment advisory firm decides to increase its fees for all new business, which of the following steps must it take to properly disclose its new fees? Change its brochure to reflect the new fee schedule Deliver a copy of its brochure with the new fee schedule to all current clients Deliver a copy of its brochure with the new fee schedule to all new clients Continue to use the current brochure while it awaits the Administrator's approval

I and III only If an investment adviser changes its fee schedule, it is considered a material change and it must update its Form ADV Part 2 to reflect the new fees. Many IAs use Form ADV Part 2 as the disclosure document that they provide to their clients. After the update is made, the revised brochure must be provided to all new clients; however, the firm is not required to deliver the brochure to current clients. (Note: investment advisers must offer to deliver their disclosure brochures to all of their clients annually.) If an IA changes its fee schedule, it is considered a material change and the firm must amend its Form ADV Part 2.

According to the NASAA Recordkeeping Rule, which of the following documents must be retained in a file by an investment adviser? Correspondence Photos of all employees The registration applications of its IARs Employment applications

I and III only NASAA's Recordkeeping Requirements for investment advisers include the retention of all documents that are filed with either the state or federal regulators regarding the adviser and its representatives. Some of the required documents are registration applications, amendments, renewal filings, and correspondence. However, there is no retention requirement for employee photos and employment applications.

According to the Uniform Securities Act, if an investment adviser is registered in, and has an office in, a particular state, it must: File any required financial statements with the Administrator Maintain books and records as required by the Administrator File an updated Form ADV with the Administrator for any material changes to its business Schedule annual inspections with the Administrator

I, II, III only 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.

When an investment adviser files Form ADV with the SEC, it will include: The past 10 years of business history and current affiliations of control persons An audited balance sheet The scope of authority over client funds The compensation to be received

I, II, III, and IV An investment adviser must disclose on Form ADV the past 10 years of business history. An audited balance sheet is also required. In addition, the adviser must disclose the scope of authority over client funds: e.g., discretion, custody, substantial prepayment of fees. The manner in which the adviser will be compensated must also be disclosed.

An investment adviser wants to enter into an advisory relationship with a client in a state without being registered there. Legally, the relationship may be established if the advisory firm has no place of business in the state and all of its clients are: Insurance companies Banks and/or trust companies Investment advisers Broker-dealers

I, II, III, and IV The Uniform Securities Act does not require the registration of an IA if it has no place of business in the state and all of its clients are institutional investors. For purposes of this rule, broker-dealers, trusts, insurance companies, banks, and other investment advisers are all considered institutional investors. (32403)

Under the Investment Advisers Act, records that MUST be maintained by an investment adviser include: All checkbooks, bank statements, and cancelled checks A record of the personal securities transactions of the adviser and its employees Copies of all circulars, advertisements, and newspaper articles sent to ten or more persons

I, II, and III The Investment Advisers Act specifies which records an adviser must keep and maintain. All of the choices listed are required.

Triangle Advisers is a very small investment adviser that is planning to register in three states. Which parts of Form ADV must Triangle file? Part 1A Part 1B Part 2

I, II, and III A firm must file Form ADV to register as an investment adviser. Generally, this is done electronically through the Investment Adviser Registration Depository (IARD), which forwards the forms to the appropriate regulator(s). The first section of the form consists of Parts 1A and 1B. Part 1A is completed by all firms regardless of their status as a state or federal adviser. Part 1B is completed only by firms that are registering at the state level. Form ADV also contains a separate section (Part 2), which is filed by both federal and state advisers. Part 2 contains the information about the investment adviser's business. Information contained in this section may be copied directly to, or used as, the basis for investor disclosure information found in the investment adviser's investor brochure. (62630)

ABC Investment Adviser is a federal covered adviser and requires its IARs to have an MBA degree before they are able to provide advice to its clients. For any of the firm's IARs who provides advice, in what document(s) must their education be disclosed? ADV Part 1 ADV Part 2 Schedule E The adviser's brochure

II and IV only If an investment adviser requires a specific level of education or business experience for its IARs to be able to provide advice, it must be disclosed in its ADV Part 2, which may also be used as the adviser's brochure.

According to the USA, if an investment adviser wants to charge a fee based on the average value of a client's portfolio, the fee:

Is permitted unless prohibited by the Administrator Asset-based fees are one of the most common methods that investment advisers use to charge their clients. Under the Uniform Securities Act, these types of fees are allowed provided they have stated time periods. Since Administrators may create rules prohibiting any type of fee, it would be incorrect to state that they are always permitted.

Megamerger is a federal registered investment adviser with offices in all fifty states. John is an investment adviser representative with Megamerger. He is registered in New York where his primary office is located but often travels to New Jersey and uses one of Megamerger's offices there to conduct business. John:

Must register as an IAR in New Jersey Investment adviser representatives who work for federal covered investment advisers must register in every state in which they maintain a place of business

As of the close of business on Monday, a state-regulated IA has fallen below its minimum financial requirement. When must the IA file a statement of financial condition?

On the business day following the date that it reported the issue to the state Administrator. If an IA falls below the minimum financial requirement, it must provide notice to the state Administrator by the next business day. The IA must then file a statement of its financial condition by the next business day after providing notice. The statement of financial condition includes: A trial balance A statement which indicates all client funds or securities which are not segregated A computation of the aggregate amount of client ledger debit balances A statement as to the number of accounts

An IA may charge a client an investment advisory fee for rendering investment advice while receiving compensation for effecting securities transactions related to such advice:

Only if disclosed to the client Under NASAA's Model Rule on Prohibited Conduct of IAs, IARs, and federal covered advisers, this practice is acceptable if it is disclosed to the client before effecting transactions pursuant to the advice.

If TopJob Advisers has limited discretionary authority over client funds, it is required to:

Prepare a balance sheet and file it with the Administrator If a registered investment adviser has discretionary authority over client funds or securities, it is required to file a balance sheet; however, the balance sheet is not required to be audited. An audited balance sheet is required to be created and filed if an adviser has custody or full discretion.

Bob Bender is an investment adviser representative for Bender Investments, a firm founded by his great grandfather several decades ago. Over the years, he has held several positions with the firm. In which of the following job capacities would Bob NOT have been required to register as an IAR?

Preparing tax documentation for some of Bender's customers Investment adviser representatives (IARs) are defined as employees of investment advisers (IAs) who negotiate the sales of advisory services, manage client portfolios, make recommendations regarding securities, or manage other employees involved in any of these functions. Bob would have been exempt from registration in his tax preparation role, since this would have been considered a clerical function.

Under the USA, if information in a document that has been filed by an IA with the Administrator becomes inaccurate or incomplete, a correcting amendment must be filed:

Promptly A prompt filing, typically within 30 days, is required by an IA if material changes are made to any document that has been filed with the Administrator (e.g., a change of address, a change in management, etc.).

If a federal covered adviser makes a material change to its Form ADV, it must notify the SEC:

Promptly, (generally within 30 days) 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

According to the Investment Advisers Act of 1940, which of the following statements is NOT TRUE regarding the storage of records?

Records must be destroyed after five years All choices are true, except the statement that records must be destroyed after five years. In fact, some records must be maintained for up to three years after termination of the firm (e.g., partnership agreements, articles of incorporation, minutes from board meetings, etc.)

An IAR of a state-registered adviser is registered in State X, but gives seminars to potential clients in State C. The IAR is:

Required to register in State C if he directs solicitations to more than five noninstitutional clients 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.

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:

She withdrew from registration as an agent in another state 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.

Who must an adviser notify if they have custody of client assets?

State Administrator According to NASAA's Custody of Client Funds or Securities by Investment Advisers Model Rule, any investment advisers that maintain custody of client funds and/or securities must notify the state Administrator using Form ADV.

Under the Uniform Securities Act, all of the following statements are TRUE regarding the requirements for investment advisers that have a place of business in a state, EXCEPT:

The Administrator will inspect their books and records annually An Administrator will not inspect the books and records of an investment adviser on an annual basis. However, if an IA has custody of customer funds, an independent public accountant must perform an annual audit. All of the other choices are true.

According to NASAA Model Rule 411(c), an investment adviser is required to keep a record of all the following documentation, EXCEPT:

The IARs personal e-mails All of the documentation listed is required to be maintained by investment advisers with the exception of the personal e-mails of their representatives.

All of the following would be reasons for a state Administrator to revoke an IA's registration, EXCEPT:

The adviser filed for personal bankruptcy four years ago 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. (67663)

An investment adviser contracts with a person who is not affiliated with the firm. In fact, the contractor is not registered with any state Administrator or with the SEC. Under the Investment Advisers Act of 1940, if the IA intends to give the contractor a finder's fee for any investment advisory client that's secured through her service, which of the following statements is TRUE?

The contractor doesn't need to register with the SEC as a solicitor. In this question, the contractor is acting as a solicitor for the investment adviser. Registered investment advisers are permitted to pay solicitors as long as they have a written contract. If the solicitor is only referring clients and not providing advice directly, the solicitor doesn't need to register with the SEC. However, most states do require solicitors to register as investment advisers or investment adviser representatives. In comparison, broker-dealers are prohibited from paying any fees or commissions to non-registered persons.

The Administrator may require an investment adviser to file which of the following documents along with its initial ADV application?

The firm's current financial condition Of the items listed, a new adviser would only be required to file a statement regarding its financial condition.

ABC Inc., a financial services company, is registered as both a broker-dealer and an investment adviser. On a regular basis, ABC is required to provide its clients with disclosures and obtain written agreements from them regarding acting in both a broker-dealer and investment adviser capacity. In which of the following situations is ABC not required to obtain a written agreement from the client prior to effecting the transaction?

The investment adviser side of ABC makes no recommendation to the client, but the client decides to effect a securities transaction through the broker-dealer

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?

The investment adviser's level of experience 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.

Under the Uniform Securities Act, which of the following persons is required to register as an investment adviser?

The publisher of a financial periodical that responds to each subscriber with personalized investment advice 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.

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?

Tuesday If an IA falls below the minimum financial requirement, it must notify the state Administrator by the next business day.

If information in an adviser's brochure becomes materially inaccurate, the adviser must file a(n):

Updating amendment promptly 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.

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:

Would need to register as an investment adviser 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