Series 65 Unit 1
Each of the following statements about postregistration provisions is true EXCEPT A) the securities Administrator does not have the authority to conduct an onsite examination of an investment adviser registered in his state if the adviser does not have an office in that state B) investment advisers must comply with recordkeeping rules C) a registered investment adviser may be required to file advertisements D) a correcting amendment to the Form ADV must be filed with the Administrator if any information filed becomes inaccurate or incomplete
A. Administrators have the authority to conduct an onsite examination of a registered investment adviser, even if there is no place of business maintained in the Administrator's state. Under the Act, Administrators may require the filing of advertising used by broker-dealers and investment advisers, who must also comply with certain recordkeeping requirements and file correcting amendments.
Under the Uniform Securities Act, persons providing investment advice do not have to register as investment advisers if they have no place of business in the state and they limit their clientele to individuals who meet the accredited investor standards deal only with institutional investors have 5 or fewer noninstitutional clients in the state during any 12-month period deal only with other registered investment advisers A) II, III, and IV B) II only C) III and IV only D) I, II, III, and IV
A. If a person offering advice on securities has no place of business in a state and deals only with institutional investors or other investment advisers, registration is not required. Also, if a person has no place of business in a state and has 5 or fewer noninstitutional clients in the state during any rolling 12-month period, they are not deemed to be investment advisers in that state under the USA. Please note that choice I specifies individuals who are accredited investors. Although institutional accredited investors would qualify the adviser for the exemption, individuals do not.
A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) for 3 years after the end of the fiscal year in which the most recent entry was made. B) for 3 years after the termination of the enterprise. C) easily accessible for 2 years in the firm's principal office. D) for 5 years after the end of the fiscal year in which the most recent entry was made.
B. NASAA's Model Rule on record keeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, to be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.
State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act? A) Bank subsidiary offering investment advice B) Broker-dealers receiving special compensation C) Investment adviser representatives D) Economists whose advice is strictly incidental to their professional activity
C. The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.
Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT A) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states B) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM C) Grand Visions Advisers, a sole proprietorship with $104 million in AUM D) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board
D. Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for: pension consultants once their AUM reach $200 million; small and mid-size advisers who would be required to register in 15 or more states; and those advisers with at least $100 million in AUM, but not $110 million in AUM. Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.
The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of A) the chief compliance officer. B) the managing principal. C) the Administrator. D) each investment adviser representative's immediate supervisor.
A. It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the "first-line" responsibility, but the "buck stops" with the CCO.
Under the USA, the definition of person includes which of the following? An unincorporated investment club An individual who buys and sells securities only for his own account Associations and partnerships whether or not they issue certificates The U.S. government A) III and IV B) I, II, III, and IV C) I and II D) II and III
B. An unincorporated investment club, an individual who buys and sells securities for his own account, associations, and partnerships (whether or not they issue certificates), and the U.S. government are specifically listed as persons in the act. On the exam, minor children, deceased individuals, and mentally incompetent individuals are the only choices that are not persons under the act.
The document that gives the Administrator the right to process complaints against a registrant is known as A) a writ of habeas corpus B) a consent to service of process C) a durable power of attorney D) an injunction
B. The consent to service of process gives the Administrator the right to process legal complaints against the applicant.
If a federal covered adviser's fiscal year ends on November 30, 2017, it must file its annual updating amendment to its Form ADV no later than A) March 30, 2018 B) December 31, 2017 C) February 28, 2018 D) January 18, 2018
C. The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.
The SEC requires investment advisers registered under the Investment Advisers Act of 1940 to maintain certain books and records for a minimum of A) 6 years B) 1 year C) 3 years D) 5 years
D. Investment advisers must keep most records for 5 years from the end of the fiscal year in which the record was created. The first 2 years, the records must be kept easily accessible in the principal office of the IA. Broker-dealers have a requirement of 3 years rather than 5 years.
The responsibility for administering the Investment Advisers Act of 1940 lies with A) the Administrator. B) the Investment Advisers Association (IAA). C) FINRA. D) the SEC.
D. The Investment Advisers Act of 1940 is federal law and that comes under the jurisdiction of the SEC.
Under the Investment Advisers Act of 1940, which of the following are excluded from the definition of an investment adviser? A) Attorneys who advise on securities (only) for a fee B) Insurance companies C) Accountants who advise on securities (only) for a fee D) Banks and trust companies
D. The act excludes the following from the definition: banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines); persons advising about certain securities (U.S. government or agency issues); broker-dealers not receiving special compensation for giving advice; and persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers
The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT A) emails B) bank records C) a list of discretionary accounts D) a record by security showing each client's interest and location thereof
D. The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets.
One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they have no more than 100 investors B) they are not registered as investment companies C) they have assets of less than $150 million D) their advisers are exempt from filing reports on Form ADV
B. Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.
An investment adviser who has custody of customer funds and securities discovers that her net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must notify the Administrator by close of business after the day of discovery file a report of its financial condition no later than close of business the day after notification include in the report of financial condition a statement as to the number of client accounts cease doing business A) I, II, III, and IV B) I only C) I, II, and III D) I and IV
C. As a condition of the right to continue business, the adviser must notify the Administrator by close of business after the day of discovery. No later than close of business the day after notification, the adviser must file a report of its financial condition, which must include statements regarding the number of client accounts.
Which of the following persons must register as an investment adviser under the Uniform Securities Act? A) An investment adviser representative with no place of business in the state who has dealt with 7 retail clients during the most recent 12 month period B) An investment adviser whose advice is limited to securities issued or guaranteed by the U.S. government and who has 3 places of business in the state C) An accountant who makes no pretense of providing investment advisory services but gives incidental advice to clients as a small part of accounting services provided D) An investment adviser who only serves institutional clients and whose only office is in this state
D. The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA.
In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the Release, which of the following would be included in the definition? Commercial banks offering comprehensive financial planning for their high-net-worth clients Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate Persons who receive a nominal fee for assisting employee benefit plan administrators select investment managers for the plan's assets Lawyers who prepare trust agreements for clients with large securities holding with a goal of minimizing estate taxes A) II and III B) I and IV C) I and II D) II and IV
A. Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent now comes under the IA-1092 definition of investment adviser. Similarly, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant and is required to register under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.
Which of the following situations would require registration as an investment adviser? A broker-dealer provided investment research services to a customer and charged a fee for the service. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A) I only B) I and III C) I, II, III, and IV D) I, III, and IV
B. Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.
A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would A) send a detailed financial report to the Administrator by the close of business Friday B) do nothing, as their net worth is far in excess of the minimum requirement of $10,000 C) send a detailed financial report to the Administrator by the close of business Monday D) need to increase the amount of their surety bond
C. A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a bond of the same amount (not both). If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator. The firm would need to increase their net worth, not the bond.
Under the National Securities Markets Improvement Act of 1996 (NSMIA), states are prevented from registering securities establishing capital and custody requirements that exceed those provided for in the Securities Exchange Act of 1934 establishing recordkeeping requirements for broker-dealers or investment advisers that exceed those required under federal securities law registering investment advisers A) I and IV B) I and III C) II and III D) III and IV
C. The NSMIA streamlined much of federal and state securities law and specifically prevented dual regulation. As a result, states may not impose capital, custody, and recordkeeping requirements that exceed requirements under federal securities law. States can register securities and investment advisers that are not covered by the registration requirements of federal legislation.
Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is CORRECT? A) SSI may remain SEC registered as long as AUM is at $90 million or more. B) SSI must become registered with SEC within 90 days of exceeding $110 million. C) SSI remains state-registered because its AUM is less than $100 million. D) SSI has the choice of remaining state-registered or registering with the SEC.
C. The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM (technically known as the RAUM - Regulatory AUM) shown on the annual updating amendment to the Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The mid-year increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.
A broker-dealer with an office in this state would be defined as an investment adviser if it charges: commissions for selling securities commissions for selling securities while offering investment advice incidental to the sale of the securities a fee for selling investment research and additional fees in the form of commissions for the sale of securities fees for investment research sold exclusively to institutions located in this state A) I and IV B) I and II C) II and III D) III and IV
D. A broker-dealer would be considered an investment adviser if it has a place of business in this state and if it charges a fee for selling investment research or any other form of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm meets the definition of an investment adviser. If a broker-dealer charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the broker-dealer is not an investment adviser because it is not compensated for the research.
A person who renders investment advice solely with respect to securities issued by the U.S. government A) need not be federal registered under the Investment Advisers Act of 1940 but must register in any state in which it has an office B) must be registered both with the SEC and the state C) is exempt from state registration under the Uniform Securities Act but must be federal registered under the Investment Advisers Act of 1940 D) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements
D. A person who renders advice solely with respect to securities issued or guaranteed by the U.S. government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996.
