Unit 13
Under the Investment Advisers Act of 1940, what is an IA that uses a website required to do? I. Maintain a copy of the screens used on its site in the firm's advertising file. II. Place copies of new screens into the firm's advertising file each time a change is made. III. File copies of the web design with the SEC. IV. Password protect the site to limit access to existing clients only. A) I and II B) II and IV C) III and IV D) I and III
A) I and II A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements. Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm's advertising file. Advertisements are never filed with the SEC.
An investment adviser representative's business card containing which of the following designations would be in violation of the NASAA policy on advertising? A) IAR B) CLU® C) MBA D) CFP®
A) IAR The term investment adviser representative may appear, but not the abbreviation IAR. As long as certain academic designations have been earned, such as MBA or JD, they may be used. Certain professional designations (if earned) may also be used. The LEM has a list of the most common ones.
One of your customers sends you an email with an attachment describing a "can't miss" investment opportunity. Which of the following would be a red flag you should share with the client? I. The security being offered is registered with the SEC and a number of states, including the state of residence of your client. II. The offer shows an anticipated return of 5% per month with little or no risk. III. Payment must be made by Western Union wire to an offshore account. IV. Payment may be made by a check payable to an escrow account at the largest bank in your state. A) II and III B) II and IV C) I and IV D) I and III
A) II and III A high return with little or no risk is one of the most obvious red flags; so is payment with a nontraditional and generally nontraceable method, especially offshore. Sure, registration with the SEC, the states, or both is no guarantee, but at least you have some expectation of disclosure being made.
Under the SEC's Marketing Rule for Investment Advisers, which of the following is true with regard to advertising? A) The advertisement may use testimonials from clients with proper disclosures. B) The advertisement may offer free services for a nominal charge. C) The advertisement may refer to any formula, charting device, or graphing method, provided a disclaimer is included stating there is no assurance that the same results will be obtained in the future. D) The advertisement may refer to specific past recommendations if they reflect the actual performance of a client's portfolio.
A) The advertisement may use testimonials from clients with proper disclosures. One of the key changes brought about by the Marketing Rule was the removal of prohibitions against testimonials. As long as it is from a client and discloses whether or not compensation was involved, the testimonial is generally permitted. Offers of free services are permitted but must be totally free with no strings attached. If past performance is included in the ad, it cannot cherry-pick and use only selected recommendations; everything must be shown. Charts, formulas, or other devices may be referred to in an ad, but the ad must disclose the difficulties or limitations in their use.
Each of the following would represent a potential conflict of interest except A) a broker-dealer writing a favorable research report about a company that was recently the subject of an IPO managed by another firm. B) a broker-dealer writing a favorable research report about a company that was recently the subject of an IPO managed by the firm. C) an agent limiting recommendations to mutual funds distributed by the agent's broker-dealer. D) an agent of a broker-dealer making a recommendation of a stock of a company in which the agent has a financial interest.
A) a broker-dealer writing a favorable research report about a company that was recently the subject of an IPO managed by another firm. Preparing a favorable research report about a company whose IPO was underwritten by another broker-dealer would not appear to be considered a conflict of interest.
In general, a broker-dealer will disclose its fee schedule A) at the time of the account opening. B) to its agents, who are then responsible for sharing it with the client. C) when requested by the client. D) within 30 days following any changes in fees or charges.
A) at the time of the account opening. Although there are no specific industry requirements, a broker-dealer's fee schedule typically is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made.
Social media can be static or interactive. Examples of static content typically available through social networking sites include all of the following except A) blogs. B) backgrounds. C) wall information. D) profiles.
A) blogs. Blogs are interactive, while the others are static.
In general, the Administrator would require that a broker-dealer's social media policies be A) committed to writing and communicated firmwide. B) left up to the manager of each branch office. C) updated at least once every three years. D) limited to defining the responsibilities of supervisory personnel.
A) committed to writing and communicated firmwide. Although NASAA does not yet have a Model Rule dealing with social media, individual states have developed policies, and most of them mirror FINRA's, which requires that a firm's social media policies be in writing and made known to all in the company. It is not just supervisory personnel who must know the policy; any employee is subject to it. Updating every three years is not nearly frequent enough in this dynamically changing industry.
One way to make money is to buy low and sell high. If an investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms, any advertisement about the system must A) indicate that there are limitations and difficulties to using the system. B) show performance for at least the past 12 months, including both winners and losers. C) provide customer testimonials evidencing their satisfaction with the system. D) indicate the length of time the system has been in play.
A) indicate that there are limitations and difficulties to using the system. Anytime you see a question dealing with advertising a charting system (or investment formula, etc.), always look for limitations and difficulties in the answer.
Content published on social media that allows for others to comment on, reuse, or "like" it is considered to be A) interactive content. B) advertising. C) unethical content. D) static content.
A) interactive content. Interactive means that others can react to the postings—things are constantly changing. Static content is basically fixed until the author makes a change.
Under the Uniform Securities Act, all of the following must be disclosed in an investment advisory contract except A) other states in which the adviser is registered. B) a provision prohibiting the adviser from assigning the contract without client consent. C) the manner in which the advisory fee will be computed. D) a provision prohibiting the adviser from being compensated based on a share of capital gains.
A) other states in which the adviser is registered.
A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true except A) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment. B) the adviser must state that the client may be subject to certain limitations because of this arrangement. C) the adviser may collect fees for investment advice and commissions for executing trades. D) this practice is ethical if full disclosure is made to all clients.
A) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment. In order for the investment adviser (IA) to sell securities products through any broker-dealer, affiliated or not, registration as an agent is required. Whenever an IA acts in an agency capacity with an advisory client, disclosure of the capacity and consent of the client must be received not later than completion of the trade. Please note that the consent does not have to be in writing. There are cases, such as agency cross transactions, where prior written consent of the client is needed. One of the limitations that must be disclosed is that dealing solely with proprietary products limits the universe of available recommendations.
Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients A) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented. B) that the adviser has never been subject to disciplinary action or censure by the SEC. C) that any transactions made on the adviser's own account are consistent with the advice given to clients. D) the number of clients with whom the adviser does business.
A) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented. Advisers must disclose to clients any outside interests or potential conflicts of interest involved in their recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent. If an advisory firm is also a broker-dealer and will enjoy transaction-related compensation if the advisory client acts on the adviser's recommendation, this must be disclosed in writing and the client must consent. There is no requirement that an adviser disclose to its clients the number of its other clients. The adviser is required to disclose disciplinary actions taken by regulatory authorities but not the absence of such actions. The adviser is not required to disclose its consistent transactions but must make disclosure if its transactions are not consistent with the advice given.
Under the USA, all of the following statements are true regarding investment advisory contracts except A) they cannot allow for prepaid advisory fees. B) they can allow fees to be performance related only under certain limited circumstances. C) they cannot be assigned without customer approval. D) they must be in writing.
A) they cannot allow for prepaid advisory fees. Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and to state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2.2 million, where performance-based fees are permitted.
Which of the following would be considered a prohibited practice if performed by an investment adviser representative without appropriate disclosure? A) Inheriting 200 shares of a New York Stock Exchange-listed company he recommends B) Acting as an agent of the brokerage firm that executes the trades he recommends and receiving commissions on them as a result C) Offering his client tickets to a game of a professional football team in which his son is the star quarterback and a principal stockholder D) Owning shares of a mutual fund that is not on his firm's recommended list
B) Acting as an agent of the brokerage firm that executes the trades he recommends and receiving commissions on them as a result An investment adviser representative (IAR) must disclose to the client the capacity in which he is acting so the client can make an informed decision as to the objectivity of the advice and whether to sustain the relationship. The fact that an IAR inherited a small amount of stock in a publicly traded company does not, of itself, present a conflict of interest that must be disclosed. No conflict of interest exists unless the IAR recommended companies in which he also has a significant beneficial ownership. It would not be required to disclose personal ownership of a mutual fund not on the firm's recommended list. Unless there is some kind of conflict of interest, an IAR's personal holdings do not have to be disclosed to clients.
Under the Uniform Securities Act, what is true regarding prepaid advisory fees? I. They must be detailed in the advisory contract. II. They may not exceed 2% of the customer's deposited assets. III. Fees in excess of $500 for six months or more of service require the adviser's balance sheet to be included in the brochure. IV. They may never be accepted. A) I, II, III, and IV B) I and III C) I, II, and III D) II and IV
B) I and III Under the Uniform Securities Act, prepaid fees are permitted if they are detailed in the advisory contract and there is a refund of the fees if the contract is canceled prematurely. If an adviser accepts more than $500 in prepaid fees, six months or more in advance of services, a balance sheet must be included in the brochure (Part 2 of Form ADV) given to customers.
Which of the following activities are prohibited under the Uniform Securities Act? I. Engaging in a practice not expressly forbidden by the act but defined as unethical by the Administrator in a rule II. Deliberately omitting a material fact when soliciting a client III. Selling recommended securities to a client from the investment adviser's own account without disclosing this and receiving consent of the client prior to completion of the transaction A) II and III B) I, II, and III C) I and III D) I and II
B) I, II, and III The USA gives the Administrator, and self-regulatory organizations, the power to define certain practices as unethical with the same force as those spelled out in the act. Omitting a material fact is specifically prohibited under the act. When an investment adviser sells securities from its own account, disclosure must be made and client consent obtained prior to completion of the transaction.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements about material conflicts of interest is true? I. Any conflicts of interest must be disclosed either orally or in writing before rendering advice. II. Material conflicts of interest must be disclosed in writing before rendering advice. III. Material conflicts relating to the adviser, adviser representative, or adviser employees must be disclosed. A) I only B) II and III C) II only D) I and III
B) II and III Advisers must disclose any material conflicts of interest in writing before rendering advice. Material conflicts of interest include any compensation to be received regarding recommendations to the client from other sources in addition to the advisory fee charged and affiliations between the adviser and suppliers of related services or other investment products.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? I. They must be renewed on an annual basis. II. They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. III. They must prohibit assignment of the contract without the client's consent. A) I and III B) II and III C) I, II, and III D) I and II
B) II and III There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent.
When opening an account at a broker-dealer, if the most recent copy of the firm's fee schedule is not available, NASAA recommends that the client A) select another broker-dealer and open the account there. B) not place any assets in the account until it is provided. C) go ahead with the account opening but refrain from trading until its receipt. D) promptly notify the Administrator of the firm's failure to comply.
B) not place any assets in the account until it is provided. It is proper for fees to be disclosed at the time a customer account is opened. If not presented, clients should ask for the fee schedule and make sure it's up to date. If it is not readily available, clients should not place any assets into the account until it is provided. NASAA believes that clients have the right to know the fees in advance.
Your high-net-worth advisory client has a large cash position in his money market account and is considering using the cash to purchase an investment property. You believe that the real estate investment will not provide the same returns that can be realized by investing in bonds, so you prepare a proposal that estimates the income stream and potential capital growth of a portfolio of convertible bonds currently in the firm's inventory. The recommendation is quite suitable for the client based on his current objectives. If the transaction is completed and you fail to both disclose that the bonds were sold in a proprietary transaction and receive client consent, you would have A) not breached your fiduciary duty. B) committed a prohibited practice. C) misrepresented a material fact. D) to disclose the amount of commission on the trade confirmation.
B) committed a prohibited practice Under both federal and state law, it is required to disclose to the client that the bonds will be sold from the firm's inventory, from one of the firm's accounts, often called a proprietary account. However, when selling from inventory, there would never be a commission. The charge, if any, would be a markup.
In reviewing prospectuses and registration statements, the SEC A) guarantees the adequacy of the disclosures made in a prospectus. B) does not approve or disapprove of the issue. C) passes on the merits of a particular security covered by a registration statement. D) certifies the accuracy of the disclosures made in a prospectus.
B) does not approve or disapprove of the issue. The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.
As a fiduciary, the investment adviser representative (IAR) owes his clients an affirmative duty of utmost good faith, as well as full and fair disclosure of all material facts. This affirmative duty of disclosure is required by the IAR in all of the following situations except A) he receives compensation from his employing broker for transactions that are executed through the brokerage house. B) he has donated funds to a nonprofit medical research institute that owns securities that he has recommended. C) the advice he is providing is outside the scope of his brokerage employment and is not under the control or supervision of his employer. D) his family has a beneficial interest in a private medical equipment firm that he recommends to the client.
B) he has donated funds to a nonprofit medical research institute that owns securities that he has recommended. The investment adviser representative (IAR) need not disclose that he donated funds to a nonprofit research institute. No conflict of interest is present that requires an affirmative duty to disclose. The fact that the institute owns securities consistent with the IAR's recommendations is not relevant to the IAR's relationship with the client. The IAR has an affirmative duty to disclose all material facts in all the other choices.
In addition to transaction costs (e.g., commissions or markups), most broker-dealers have a schedule of miscellaneous fees. The purpose of these fees is to A) build in a hidden markup. B) help reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client. C) increase the broker-dealer's net income. D) keep commissions low while making up the difference with fees.
B) help reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client. Executing a transaction for clients frequently incurs expenses that commissions don't cover, such as clearing fees and execution facility fees. There are services performed for clients, such as postage and handling, for which expenses are incurred. Although charging these fees does have a positive effect on the firm's bottom line, they are designed for reimbursement purposes, not as an additional source of income.
A federal covered investment adviser (IA) has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be disclosed A) promptly to the Administrator of the state where the IA maintains its principal office. B) promptly only to those customers who will be affected by the change through an amended brochure. C) promptly to all customers by amending the brochure. D) in the summary of material changes in the annual updating amendment to the SEC.
B) promptly only to those customers who will be affected by the change through an amended brochure. Because this will only affect new clients, the brochure (or Part 2A of Form ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.
Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade is being executed by an officer or partner of the firm. B) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation. C) directing securities transactions to an affiliated broker-dealer. D) engaging in an agency cross transaction.
B) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation. There are two principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.
Which of the following activities of an investment advisory firm would not require notification and consent of the clients of the advisory firm? A) The retirement of a sole proprietor investment adviser who wishes to sell the practice to another investment adviser B) An investment adviser wishing to merge with a larger national advisory firm C) A minority partner resigning from the firm to start his own advisory firm D) The chief operating officer of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm
C) A minority partner resigning from the firm to start his own advisory firm Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification and consent of the clients of the investment adviser. The change in a minority interest is not considered an assignment, so only notification, but not consent, is required.
There are a number of requirements placed upon investment advisers found in both the Uniform Securities Act and NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Which of the following is not included in those requirements? A) Investment advisory contracts must be in writing. B) The adviser may only accept an order from a third party if the proper trading authorization is in hand. C) Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. D) The adviser may not provide a report or a recommendation to any advisory client prepared by someone other than the adviser without making a disclosure of that fact.
C) Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. Under both state and federal law, new clients must receive the adviser's brochure no later than the time of entering into the advisory contract, not in advance. The 48-hour rule (state only) refers to the provision that if the brochure is not delivered at least 48 hours in advance, the client has the right to a penalty-free withdrawal from the agreement. The USA requires all initial and renewal investment advisory contracts to be in writing. If a specific securities report or recommendation has been prepared by someone other than the adviser, disclosure must be made to clients. In order to accept instructions from a third party (someone other than the client), the proper written authorization must be present.
With regard to a broker-dealer's use of social media, static content would be considered which of these? I. A planned communication to a target audience that is generally not altered II. Communication that does not provide for interaction with the author once published III. Content used to engage in real-time interactive communications with a target audience IV. A blog that gives readers the opportunity to post comments A) III and IV B) II and III C) I and II D) I and IV
C) I and II A key to recognizing static social media content is that it is usually not changed once published and does not provide a method for interaction (commenting) once published.
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it would be considered an unethical business practice for an investment adviser to charge an unreasonable advisory fee. In which of the following cases would it be likely that the Administrator would find the adviser's compensation to be unreasonable? I. An adviser's fee schedule is not competitive with other advisers in the same general area offering essentially the same services. II. In addition to charging a fee based on assets under management, the adviser also charges commissions on any securities transactions he effects. III. The adviser charges the same hourly fee, regardless of the amount of the specific client's assets under management. IV. The fee is projected to consistently be more than the expected return in the portfolio. A) III and IV B) II and III C) I and IV D) I and II
C) I and IV The Model Rule specifically refers to the authority of the Administrator to determine whether an adviser's fee schedule is competitive. Logic would dictate that fees that consistently exceed the return earned on the portfolio should not be acceptable. Investment advisers, upon making proper disclosure, are permitted to charge both fees and commissions, and there is no requirement to discount one's hourly fee, regardless of the size of the client's portfolio.
According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is not true? A) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. B) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received. C) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. D) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
C) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commissions received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the contract between an investment adviser and its clients shall include all of the following except A) the formula for computing the fee. B) whether the contract grants discretionary power to the adviser. C) a provision to reduce or waive fees in the case of underperformance. D) the services to be provided.
C) a provision to reduce or waive fees in the case of underperformance. There is never any case where waivers of this nature would be permitted.
A transaction in which an investment adviser acts on behalf of both the advisory client and another person on the other side of the transaction is known as A) an illegal and unethical activity. B) a discretionary trade. C) an agency cross transaction. D) an exempt transaction.
C) an agency cross transaction. If you are representing both sides of the trade, you are engaged in an agency cross transaction.
According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following except A) that assignment of the contract cannot occur without client consent. B) the amount of prepaid fees to be returned if the contract is terminated. C) any record of securities industry violations by the investment adviser. D) whether or not the contract grants discretionary authority.
C) any record of securities industry violations by the investment adviser. An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. The investment advisory contract must include the amount of prepaid fees to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority.
A client calls to discuss purchasing a specific security that he has been following. The agent handling the account recognizes that a potential conflict of interest exists. The best course of action would be to A) accept the client's order because it is clearly unsolicited. B) turn the client over to another agent who is not conflicted. C) disclose the conflict of interest and proceed if the client wishes. D) disclose the conflict of interest and end the discussion promptly.
C) disclose the conflict of interest and proceed if the client wishes. There is no problem with conflicts of interest as long as they are fully disclosed. If, after disclosure, the client wishes to proceed, that is fine. Unsolicited orders may make the security that is the subject of the discussion exempt from registration, but that has nothing to do with failure to disclose conflicts of interest.
In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940 this activity requires written: A) disclosure to the client. B) consent of and the disclosure to the client prior to execution of the transaction. C) disclosure to the client and consent prior to completion of the transaction. D) consent of the client.
C) disclosure to the client and consent prior to completion of the transaction. Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA-1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.
With regard to a state-registered investment adviser using Form ADV, Part 2 as its brochure, it would be correct to state that A) it must be delivered to all new clients. B) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client. C) it is filed through the IARD system. D) if requested by a client, it must be sent within 5 days of the request.
C) it is filed through the IARD system. The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV, Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a five-day penalty-free withdrawal right. Annually, Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempt. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered.
MaryBeth is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of A) qualification. B) authorization. C) registration. D) material information.
C) registration. Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. As an intrastate offering, the registration format would be qualification, but that is not the misrepresentation here.
Wealth Funders and Associates (WFA) is a state-registered investment adviser organized as a partnership. The firm has had five equal partners since its inception. However, with the retirement of one of the partners and the need for additional capital, WFA has added three new partners. As a result of this activity, WFA A) will now be required to register with the SEC. B) shall renew its registration promptly. C) shall notify clients of the change to the partnership within a reasonable time. D) is considered to have assigned client contracts and must obtain their consent.
C) shall notify clients of the change to the partnership within a reasonable time. It is unlawful for an investment adviser to enter into, extend, or renew any investment advisory contract unless it provides that the investment adviser, if a partnership, shall notify its clients of any change in the membership of the partnership within a reasonable time after the change. If the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the members of the investment adviser who have only a minority interest in the business of the investment adviser, or from the admission to the investment adviser of one or more members who, after admission, will be only a minority of the members and will have only a minority interest in the business. In this example, the new members will represent 3/7 of the partnership—a minority interest.
Under the Investment Advisers Act of 1940, a registered investment adviser may A) imply SEC approval or sponsorship because of registration. B) use the initials RIA after its name on a business card. C) use the statement "registered with the SEC" in advertisements. D) imply SEC approval or sponsorship because of passing an exam.
C) use the statement "registered with the SEC" in advertisements. Although an investment adviser registered with the SEC may state that fact, a registered investment adviser may not use the title in any way to suggest or imply that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. Because RIA is not an academic designation, it may not be used as such.
A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is not true? A) Material changes to wrap fee programs must be filed promptly with the Administrator. B) Information in Appendix 1 of Form ADV, Part 2A must also be contained in client disclosure documents. C) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year-end. D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.
D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. Explanation As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV, Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even nonmaterial information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes.
According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is not true? A) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction. B) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. C) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received. D) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent.
D) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. Explanation An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commissions received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
Which of the following would be a violation of the NASAA Contents of Investment Advisory Contract Model Rule? A) It is indicated that a performance-based contract has a fee arrangement that may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. B) An investment adviser organized as a partnership has the practice of notifying clients of any change in the membership of the partnership within a reasonable time after the change. C) An investment adviser permits clients to renew their investment advisory contracts by email. D) Without the consent of advisory contract holders, the owner of a majority of the stock of the advisory firm pledges that stock to a bank as collateral for a loan enabling the firm to acquire better cybersecurity technology.
D) Without the consent of advisory contract holders, the owner of a majority of the stock of the advisory firm pledges that stock to a bank as collateral for a loan enabling the firm to acquire better cybersecurity technology. Explanation The NASAA Contents of Investment Advisory Contract Model Rule states that no direct or indirect assignment or transfer of the contract may be made by the investment adviser without the consent of the client or other party to the contract. Pledging a majority interest in the company as collateral for a loan to the business is considered an indirect assignment; the reason for the loan is of no significance. All contract renewals for state-registered advisers must be in writing—email is considered written communication. Notification of changes to members of the partnership and warning of the incentive in a performance-based contract are requirements of the Model Rule.
SEC Release IA-1092 requires an investment adviser to make each of the following disclosures except A) that the investment adviser may structure his personal securities transactions to trade on the market impact caused by his recommendations to clients. B) if his personal securities transactions are inconsistent with the advice given to clients. C) any compensation received from an issuer of a security being recommended to clients. D) annual compensation for the past five years or initial registration if that is shorter.
D) annual compensation for the past five years or initial registration if that is shorter. Explanation An investment adviser (IA) must disclose his methods of compensation and must disclose compensation received from the issuer of any recommended security. However, IAs are under no obligation to disclose their annual income. An IA who structures his personal securities transactions to trade on the market impact caused by his recommendations to clients must disclose this practice to clients. An IA generally also must disclose if his personal securities transactions are inconsistent with the advice given to clients.
ABC Securities, a registered broker-dealer, has a wholly owned subsidiary, ABC Real Estate Ventures. ABC Real Estate Ventures is in the business of structuring limited partnership offerings designed to afford qualified investors an opportunity to earn income from commercial property. If an agent representing ABC Securities were to recommend one of these programs to a qualified client, A) it would be necessary to obtain consent of the agent's supervisor. B) the agent would be engaging in an unethical business practice. C) a sale could not take place without a review by the firm's compliance officer. D) disclosure of the potential conflict of interest must be made.
D) disclosure of the potential conflict of interest must be made. Explanation One of the more common cases of a conflict of interest is when a broker-dealer (or one of its agents) recommends a security issued by an entity affiliated with the firm. As long as disclosure of the relationship is made, there are no problems. Compliance officers do not review every transaction—they look for the red flags.
A client purchased a security per an agent's recommendation, and soon after, it declined by more than 50%. To compensate for the loss, the agent promised the client 1,000 shares in an oversubscribed IPO. In this situation, the agent has A) acted properly, provided the client pays for the IPO in full prior to resale for a profit. B) engaged in a fraudulent activity. C) acted properly because he did not guarantee the profit on the IPO. D) engaged in an unethical business practice as outlined in NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.
D) engaged in an unethical business practice as outlined in NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. Explanation There are two problems here. First of all, NASAA's Statement of Policy prohibits the compensation of clients for losses on accounts. Provided the agent made the recommendation on good investment grounds per the provisions of the Uniform Securities Act, the agent has no liability toward the client. The nature of stocks is to fluctuate in value. Secondly, that same Statement of Policy requires that oversubscribed IPOs be fairly allocated among clients. The actions of this agent would not pass the fairness test.
An agent is using social media to try to build her business. If her Facebook page allows for followers to "like" her, that would be considered A) misleading content. B) illegal content. C) static content. D) interactive content.
D) interactive content. Explanation One of the things that differentiates interactive content from static content is the ability for persons other than the originator of the content to have access. Posting a like to a Facebook page is an example of this.
Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan; after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A) Susan would have to obtain Mary's permission first. B) only Mary would have to make disclosure to Amanda. C) both Susan and Mary would have to disclose the cash payment to Amanda. D) it would be permitted if Susan made the proper disclosures.
D) it would be permitted if Susan made the proper disclosures. Explanation Referrals from unaffiliated third parties are considered endorsements under the SEC's investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect.
Matt, a registered investment adviser, operates an office down the hall from Jane, a CPA. Because Jane has no interest in portfolio management, she frequently refers her clients to Matt for investment advice. When one of Jane's clients signs a letter of engagement with Matt, Matt sends Jane a $200 referral fee. This occurred five times in the previous year. This situation is A) permitted because there were fewer than six occurrences involving referral fees. B) permitted without restriction. C) prohibited. D) permitted if the referral fee is disclosed to the appropriate clients.
D) permitted if the referral fee is disclosed to the appropriate clients. The marketing rule for investment advisers permits investment advisers to pay third parties for their endorsements as long as the required disclosures are made. A written agreement between the parties is required when the compensation, cash or non-cash, exceeds the de minimis amounts (more than $1,000 during the preceding 12 months). If this had occurred a sixth time, then the total would have been $1,200 and would have required a written agreement between Matt and Jane. It isn't the number of endorsements but rather the dollar amount that triggers the need for the written agreement.
Social networking sites typically contain both static and interactive content. The difference between these two is that static content A) is only visible to a limited number of website visitors, while all can access interactive content. B) is always provided by the broker-dealer, while interactive content is the domain of the firm's agents. C) need not be approved before use, while interactive content needs the approval of a designated supervisor. D) remains posted until it is changed by the poster, while interactive content contains real-time communication.
D) remains posted until it is changed by the poster, while interactive content contains real-time communication. Explanation Static is defined as something that doesn't change, so those communications will only change when the person who posted it removes it or makes a change. Interactive is live and constantly changing. Under FINRA rules, static must have approval prior to use, while interactive does not.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may guarantee investment results A) if the adviser uses a system based on objective evaluation of data, can document consistent gains using the system, and discloses all the limitations and difficulties of using the system to the client. B) if the guarantees are reasonable in view of the results other clients have obtained following the adviser's recommendations. C) as long as the basis for making guarantees is fully and accurately described in the application for registration filed with the Administrator. D) under no circumstances.
D) under no circumstances. Explanation Under no circumstances may an adviser guarantee that a client will achieve any investment result—either that a gain will be achieved or that no loss will occur.
Under the Investment Advisers Act of 1940, a registered investment adviser may A) imply SEC approval or sponsorship because of passing an exam. B) use the initials RIA after its name on a business card. C) imply SEC approval or sponsorship because of registration. D) use the statement "registered with the SEC" in advertisements.
D) use the statement "registered with the SEC" in advertisements. Explanation Although an investment adviser registered with the SEC may state that fact, a registered investment adviser may not use the title in any way to suggest or imply that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. Because RIA is not an academic designation, it may not be used as such.
Under the NASAA brochure rule requirements for investment advisers, an investment adviser (unless qualifying for an exemption) must deliver, A) a free, updated brochure and related brochure supplements every year, even when there are no material changes. B) within 90 days of the end of its fiscal year, a free, updated brochure and related brochure supplements that include or are accompanied by a summary of material changes. C) at least 48 hours in advance of entering into the advisory contract, a copy of the adviser's brochure. D) within 120 days of the end of its fiscal year, a free, updated brochure and related brochure supplements that include or are accompanied by a summary of material changes.
D) within 120 days of the end of its fiscal year, a free, updated brochure and related brochure supplements that include or are accompanied by a summary of material changes. Explanation The rule calls for delivery within 120 days of the end of the fiscal year. The 48-hour rule is not mandatory; if the adviser waits until the signing of the advisory contract, there is a five-day penalty-free withdrawal privilege granted to the customer. If there are no material changes, delivery of an annual brochure is not required.
