Quiz 3
Which of the following investment advisers would be permitted to use the term "investment counsel"? A)A professional providing a market timing service with an annual subscription fee of $995; this service attempts to maximize profits by suggesting entry and exit points for over 100 listed stocks. B)A financial planner offering a wide range of services to his clients, including tax planning, estate planning, insurance planning, and investment advice. C)An investment adviser who has been admitted to the bar in the state in which the firm's principal office is located. D)A firm whose exclusive business is placing clients' assets into model portfolios.
A firm whose exclusive business is placing clients' assets into model portfolios. To use the term "investment counsel", two criteria must be met. First, the principal business of the adviser must be the rendering of investment advice. Second, the nature of the advice must meet the definition of investment supervisory service. That means giving continuous investment advice to clients based on their individual needs. That is frequently accomplished by selecting model portfolios most appropriate to the client's needs. The financial planner clearly is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only a part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the publisher's principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored. Reference: 3.5.5 in the License Exam Manual
Individuals who supervise employees whose role is the giving of investment advice must be registered as A)principals B)compliance officers C)investment advisers D)investment adviser representatives
D)investment adviser representatives The definition of investment adviser representative includes individuals who supervise the activities of other IARs. Because IAR registration is done on a state rather than federal level, the term registered principal has no meaning—that is a FINRA term. Reference: 3.7 in the License Exam Manual
Under the Uniform Securities Act, which of the following are defined as sales? A gift of an assessable stock. A gift of a nonassessable stock. A security given as a bonus for purchasing a bond. An offer of securities. A)III and IV. B)II and IV. C)I and II. D)I and III.
I and III. A sale is a contract or transaction for value. Therefore, when a security is given as a bonus in connection with the sale of another security, it is also considered a sale. Because an assessable stock may require a payment made by the recipient, the gift is considered a sale. The gift of a non-assessable stock is not a sale as it is not a contract for value. An offering of securities is not a transaction or sale of securities until the offer is accepted. Reference: 2.12.1 in the License Exam Manual
Willful violations under the Investment Advisers Act of 1940 may result in which of the following punishment(s)? $10,000 fine. A prison term of up to 10 years. Being barred from association with any investment adviser. A)II and III. B)I, II and III. C)I and III. D)I only.
I and III. Violations of the Investment Advisers Act or SEC rules carry penalties of up to $10,000 in fines and prison terms of up to five years. The SEC also has the power to suspend the violator for up to 12 months or bar individuals from the industry. This is in addition to any disciplinary actions that may be imposed by SROs, state Administrators, or civil actions brought by clients or regulatory authorities. Reference: 3.22 in the License Exam Manual
Under the Uniform Securities Act, an Administrator who believes a violation has occurred or is about to occur may: issue a cease and desist order without a prior hearing. bring action to obtain an injunction and have a receiver appointed over the alleged violator's accounts. seek a court order requiring the alleged violator to make restitution to others. A)I and II. B)II and III. C)I, II and III. D)I and III.
I, II and III. Administrators have the power to issue cease and desist orders, apply to a court for a temporary or permanent injunction, or apply to a court for restitution to investors or to have the court appoint a receiver for a violator's assets. In issuing the cease and desist order, the Administrator may do so with prior notice and hearing or may issue the order summarily (without such notice and hearing). Reference: 2.14.3 in the License Exam Manual
The USA exempts investment advisers from state registration who: have no place of business in the state and limit clientele to other investment advisers. have no place of business in the state and limit clientele to banks and insurance companies. is an out-of-state investment adviser and directed business communications to fewer than 12 clients in the state in the past 12-month period. have no place of business in the state and limit clientele to broker-dealers. A)I only. B)III only. C)I, II and IV only. D)I and II only.
I, II and IV only. An adviser is exempt from state registration if it has no place of business in the state and limits clientele to other investment advisers, banks and insurance companies, or broker-dealers. There is a de minimis exemption, but it is for no more than five (not 12) clients during a 12-month period. Reference: 3.4 in the License Exam Manual
Under the Securities Exchange Act of 1934, which of the following is a government security? Bonds issued by the state of Indiana Securities which are issued or guaranteed by the Tennessee Valley Authority Treasury bills A)I and II B)II and III C)I, II and III D)III only
II and III The Securities Exchange Act of 1934 defines government securities as those issued or guaranteed by the U.S. government or one of its agencies. Securities issued or guaranteed by a state, county, city, etc., or any agency of a nonfederal governmental unit are municipal securities. Reference: 1.6.2.12 in the License Exam Manual
Which of the following is (are) NOT a prohibited practice? An IAR recommends high-grade, tax-exempt securities to a low-income client with long-term aggressive growth as his primary objective. A certified financial planner indicates to customers that he is certified by the Administrator to conduct quantitative securities analysis. An investment adviser representative identifies his clients to prospects, by name and account balances, giving examples that accurately support his sales and performance claims. After several weeks spent establishing a client's trust, an adviser representative then discloses to the client that he had been convicted of a nonsecurities-related misdemeanor in France. A)II and III. B)I and IV. C)IV only. D)I and II.
IV only. An agent or investment adviser representative need not disclose nonsecurities-related misdemeanors. The other activities are all prohibited. Recommending tax-exempt bonds to a low-income client is prohibited because it is most likely unsuitable. A certified financial planner cannot lawfully indicate that he is certified by the Administrator to conduct quantitative analysis. If registered in a state, the planner can only indicate that he is registered in the state. Investment advisers must keep their clients and their transactions confidential unless under a legal order to provide disclosure or prior permission has been obtained from the client. Reference: 3.17 in the License Exam Manual
The Administrator from State A feels that Mr. Smith, who is registered in State A, is mishandling client's accounts. Can the Administrator arrest Mr. Smith? A)Yes, but it must be in the public's best interest. B)Yes, but there must be solid proof of wrongdoing. C)Yes, as long as there is probable cause. D)No, Administrators are not allowed to make arrests.
No, Administrators are not allowed to make arrests. State Administrators do not make arrests, but they have the authority to report certain activities to the proper authorities who will make an arrest if necessary. Reference: 2.15.2 in the License Exam Manual
The Investment Company Act of 1940 does which of the following? A)Sets rules for the registration of investment advisers. B)Prescribes procedures for the establishment of investment companies. C)Governs the issuance of new issues. D)Regulates the secondary market.
Prescribes procedures for the establishment of investment companies. The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure investors are fully informed and fairly treated by the management of investment companies. Reference: 1.10. in the License Exam Manual
Jim Thomas contracts with XYZ Advisory Services for the design of a financial plan and investment advice. He pays an up-front fee when the contract is signed and receives XYZ's disclosure brochure at that time. After three days, Jim decides to cancel the investment advisory service with XYZ. According to the Uniform Securities Act, which of the following statements is TRUE? A)The contract is binding, and XYZ has no obligation to return any fees collected. B)The advisory firm must cancel the contract and return all fees collected. C)The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date. D)The advisory firm must cancel the contract but may keep all fees collected.
The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date. Because the brochure was delivered at the time of the signing of the contract, the client may cancel without penalty within five business days. The firm must return all of the up-front fees collected except for an amount that is proportionate to the time advisory services were rendered. This is commonly known as the 48-hour rule because any time the client does not receive the adviser's brochure at least 48 hours prior to entering into the contract, this refund right is in effect. Reference: 3.10.3.2 in the License Exam Manual
If a public customer plans to purchase stock in a company that has been listed on a stock exchange for the past year in a regular way secondary transaction, when must the customer receive the prospectus? A)There are no prospectus delivery requirements for this transaction. B)Before the order entry. C)No later than three days from the settlement date. D)Before the settlement date.
There are no prospectus delivery requirements for this transaction. Because this is a secondary market transaction in a listed stock, there is no requirement that a prospectus be delivered to the customer. Reference: 2.5.3.2 in the License Exam Manual
A federal covered investment adviser feels that some recent industry regulations will limit his ability to provide the returns to clients that both he and they desire. He communicates this to his clients and urges those who are willing, to sign an agreement waiving their rights to take any legal action in the event of loss due to his refusal to follow those rules. This means: A)clients would still be permitted to sue because there is no way that legal rights can be waived. B)that as long as this is part of the agreement with the IA, no legal action can be taken. C)clients would not be able to sue because they have executed a document waiving their rights. D)a suit would be possible, but only if agreed to by the IA.
clients would still be permitted to sue because there is no way that legal rights can be waived. There is no way, NEVER, NEVER, that a waiver of legal rights is ever enforceable. Reference: 3.12.2 in the License Exam Manual
In 1940, Congress passed the Investment Company Act. Among the provisions of this sweeping law was the listing of the classifications of investment companies. Included in that listing would be all of the following EXCEPT: A)holding companies. B)unit investment trusts. C)face amount certificate companies. D)management investment companies.
holding companies. Even though holding companies do many of the same things as investment companies (buy stock in other companies to try to make a profit), they are not included in the definition stated in the Investment Company Act of 1940 Reference: 1.10.1 in the License Exam Manual
Gibraltar Investment Advisers is organized as an investment advisory partnership. If Jack, a partner with a minority interest, retires, Gibraltar is required to: A)notify its clients within 30 days of Jack's retirement that he is no longer with the firm. B)do nothing; notification is not required. C)notify its clients immediately that Jack is no longer with the firm. D)notify its clients as soon as reasonably possible of Jack's retirement.
notify its clients as soon as reasonably possible of Jack's retirement. When a partner with a minority interest leaves an advisory firm for any reason, client notification must be made within a reasonable period. However, if Jack were a majority partner, the law would consider that the clients' accounts were assigned and client consent would then be required to maintain those contracts, as opposed to notification. Reference: 3.14 in the License Exam Manual
If general interest rates increase, the interest income of a bond unit investment trust will probably: A)remain the same. B)increase. C)change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace. D)decrease.
remain the same. Since the portfolio of a UIT is fixed, the income generated by that portfolio will not change. However, one would expect the value of the unit to decrease. Remember, a UIT does not have a portfolio manager. Reference: 1.10.1 in the License Exam Manual
Kapco Investment Advisers currently has $138 million in assets under management and has offices in Colorado and Utah. Kapco's only clients in Utah are 2 insurance companies domiciled in that state. Kapco has no office in New Mexico but does service the accounts of 3 middle-class individuals. Kapco recently has opened an advisory account for a pension plan for a corporation located in Montana. Under the Uniform Securities Act, Kapco would have to register with: A)the SEC. B)the Administrator in the states of Colorado and Utah. C)the Administrator in each state in which it does business. D)the Administrator in the states of Montana and New Mexico.
the SEC. With $138 million in assets under management, Kapco is a federal covered investment adviser and is only required to register with the SEC. Reference: 3.2.3 in the License Exam Manual
The revocation or suspension of a federal covered investment adviser's registration under the Investment Advisers Act of 1940 may be appealed: A)to the United States Supreme Court because the Investment Advisers Act of 1940 is federal legislation, unlike the Uniform Securities Act, which is a model for state securities legislation. B)through arbitration with the Financial Industry Regulatory Authority (FINRA). C)by petition to the appropriate state securities Administrator. D)to the U.S. Court of Appeals serving the district where the order was issued within 60 days of its issuance.
to the U.S. Court of Appeals serving the district where the order was issued within 60 days of its issuance. The revocation or suspension of an investment adviser's registration under the Investment Advisers Act of 1940 may be appealed to the Court of Appeals for the appropriate U.S. district within 60 days of the revocation or suspension order. Advisers covered under federal legislation do not make appeals to state securities Administrators. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminates dual regulation of investment advisers. FINRA does not have regulatory authority over the registration of federal covered investment advisers. Reference: 3.22 in the License Exam Manual
