Investment Advisers Act of 1940

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An investment adviser can call itself an "investment counsel" if the: Correct A. adviser's principal business is rendering investment supervisory services StatusB B. adviser is a broker-dealer registered in the state StatusC C. adviser's principal business is the custody of customer's monies only StatusD D. adviser's principal business is the custody of customer's monies and securities A

***Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm. Having custody of the customer's monies or securities does not mean the firm is also advising about securities.

An exempt reporting adviser: Incorrect Answer A. must file Form PF with the SEC Correct Answer B. must file Form ADV with the SEC StatusC C. must file both Form PF and Form ADV with the SEC StatusD D. is neither required to file Form PF nor Form ADV with the SEC B

*An "exempt reporting adviser" is a private fund adviser (such as a hedge fund adviser) with less than $150 million of AUM (assets under management). Exempt reporting advisers are not required to register with the SEC (which is accomplished with Form PF - as in Private Fund adviser). ***However, they must still report to the SEC on Form ADV Parts 1 and 2 annually - and this information is made public.

advisory contract rules - m/b in writing:

- canNOT provide for compensation to IA based upon capital gains in acct, w/ exception for wealthy clients - canNOT provide for "reduction" in fee if acct does NOT reach specified performance level - canNOT allow for assignment of contract to ano IA unless cust consents - canNOT contain "hedge clauses" that seek to elim adviser's liability for negative invest results - m/ provide for notification to custs of changes in composition of partnership o performance fees: sllowed for "substantial" clients - that is, clients w/ NW of at least $2,000,000 or who have at least $1,000,000 under mgmt - m/ use formula: 1/ fulcrum fee (basic fee t/b charged by IA) AND 2/ performance fee (addtl fee based upon comparative performance to specified index :. "hedge fund" rule: permits hedge funds that are only open to wealthy investors to charge performance fees; "2 and 20" the IA gets 2% of AUM plus 20% of cap gains as fee o req'd performance fee disclosures: incl that fee arrangement m/cause IA to enter into more speculative invest >>> custody rules - seg cust funds and sec fr those of IA, or omnibus acct at b/d - maintain any acct hold cust funds or sec w/ qualified custodian in name of IA as trustee for cust - notify cust n writing of qualified custodian's name, addr and manner in which funds and sec w/b maintained - send to ea cust at least qtrly itemized acct stmt o independent auditor files Form ADV-E w/ SEC w/in 120 days of completing annual surprise audit o omnibus acct

advertising rules: advertisement defined as: o any notice, circular, ltr or oth written commun addressed to more than 1 person, or any notice in any publication radio or TV o material that offers any analysis, rpt or publication concern sec which is intended t/b used in determining which sec to buy or sell, and when to buy or sell a sec o graphs, charts, formulas or sim devices used to determine which sec to buy or sell, or when to buy or sell a sec o any oth invest advisory serv w/ regard to sec

- m/b trutful and caNOT be false or misleading - m/ show past performance - canNOT be deliberate selection of which clients to use as basis for showing past performance - the entire "universe" of clients m/b shown and there m/b accompanying stmt of genl mkt conditions during period shown - canNOT show prior recomm -but advertisement c/offer to provide list of prior recomm upon request as long as list shows all recomm made over last 12 mos, date of recomm, price at that time, curr mkt price, accompanied by stmt to effect that "performance of prior recomm is NOT predictor of future performance" - canNOT use testimonials - that purport that graphs, formulas, computer programs etc by themselves c/determine which sec to buy or sell, or when to buy or sell sec are PROHIBITED unless limitations of such devices are prominently disclosed - m/ NOT state that rpt, analysis or oth serv is "free" to cust unless this is actually the case - m/ NOT state that IA IS "FEE ONLY" if adviser gets compensation fr sale of sec products to cust such as commissions or 12b-1 fees :. NASAA - advertisements that d/NOT comply w/ SEC requirements are "unethical", also state that using cust list for advertising purposes is unethical unless ea cust gives authorization for use of their name, *** while SEC rules do NOT address this o registration does NOT imply SEC approval o use of term "investment counsel" unless adviser's principal bus is rendering invest supervisory services

unit investment trust: type of investment co organized under "trust indenture", issue "shares of beneficial interest" representing undivided interest in "unit" of specified securities

1/ fixed UIT: selects port of bonds, no buying or selling takes place; as int pymts are made on bonds, they are passed to unit hldrs, as bonds mature, principal is repaid and when all bonds have matured, trust self-liquidates 2/ participating UIT: trust invests in shares of mgmt co, mutual fund shs - used when investors buy mutual fund "contractual purchase plans" o variable annuity

Under the Investment Advisers Act of 1940, which of the following are defined as "investment advisers"? I A firm that prepares research reports about the NYSE market II A firm that solely prepares research reports about the municipal securities market III A firm that prepares asset allocation reports covering securities, real estate, commodity and insurance investments IV A firm that prepares reports on the outlook for the U.S. economy StatusA A. I and IV only StatusB B. II and III only Correct C. I, II, III StatusD D. I, II, III, IV C

A firm that prepares research reports about the NYSE market or municipal securities is included within the definition of an investment adviser; as is a firm that prepares asset allocation models for investors. A firm that prepares reports about the outlook for the U.S. economy is not giving advice about securities, and thus is not an investment adviser.

All of the following statements are true EXCEPT: StatusA A. Investment advisers can be required to be registered in each State StatusB B. Investment advisers can be required to be registered with the SEC StatusC C. Investment adviser representatives can be required to be registered in each State Correct D. Investment adviser representatives can be required to be registered with the SEC D

Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. ***Note that the SEC registers the investment adviser only - it does not register investment adviser representatives. The smaller advisers are only required to be registered at the State level. However, the State can require registration of investment adviser representatives for any investment adviser firm.

All of the following are "federal covered" advisers EXCEPT an adviser: StatusA A. with $400,000,000 of assets under management Correct B. with $40,000,000 of assets under management StatusC C. to an investment company with $400,000,000 of assets StatusD D. to an investment company with $40,000,000 of assets B

Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. The smaller advisers are only required to be registered at the State level. Thus, the adviser with $400,000,000 of assets under management need only register with the SEC; and is exempt from registration in the State (Choice A). The adviser to an investment company (Choices C and D) need only register with the SEC and is exempt from registration in the State. In contrast, the adviser with $40,000,000 of assets under management need only register with the State; and is not required to be SEC registered.

Investment advisers that manage under $100,000,000 of assets are subject to: StatusA A. Federal registration only Correct B. State registration only StatusC C. Both Federal and State registration StatusD D. Neither Federal nor State registration B

Which of the following statements are TRUE regarding an investment adviser rendering advice solely to an investment company? The investment adviser: I must register with the State II is exempt from registering with the State III must register with the SEC IV is exempt from registering with the SEC StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV C

Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These advisers are known as "federal covered" advisers. An investment adviser to an investment company (regardless of the dollar amount) need only register with the SEC; and is exempt from registration in the State. One of main intents of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation.

Which of the following statements is TRUE regarding an investment adviser who renders advice solely to investment companies? The investment adviser: Correct Answer A. must register with the SEC only StatusB B. must register with the State only StatusC C. must register with the SEC and State Incorrect Answer D. is exempt from registering as it renders advice to "professional investors" A

Advisers that: o manage $100,000,000 or more of assets; or o render advice to investment companies; are not regulated at the State level and must register with the SEC only. One of main intents of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation.

When is an Investment Adviser obligated to deliver an updated Brochure to an existing client? StatusA A. Annually, within 120 days of fiscal year end Correct B. Annually, within 120 days of fiscal year end, if there are material changes StatusC C. Semi-annually, within 65 days of the fiscal mid-year date and 120 days of fiscal year end StatusD D. Semi-annually, within 65 days of the fiscal mid-year date and 120 days of fiscal year end, if there are material changes B

An IA is only required to provide an updated Brochure to a client annually, within 120 days of fiscal year end, if there are any material changes from the last Brochure delivered. The exception here is if the IA has been subject to a disciplinary action, in which case an amended Brochure must be delivered to clients promptly, describing the material facts of the disciplinary action.

An updating amendment to Form ADV must be filed by an investment adviser with the SEC: Correct A. within 90 days of the firm's fiscal year end StatusB B. within 90 days the calendar year end StatusC C. upon withdrawing from an existing registration StatusD D. upon applying for an initial registration A

An annual amendment of Form ADV must be filed electronically with the SEC no later than 90 days after the firm's fiscal year end. Note that the updating ADV amendment must be filed with NASAA under the same time frame for State-registered advisers. Do not confuse this with the NASAA requirement that all registrations expire December 31st of each year, unless renewed (and that all important annual renewal fee is paid!).

If an investment adviser wishes to hire an individual to solicit business for the advisory firm: I the solicitor must be registered as an agent of that investment adviser in the State II the adviser must be registered with either the SEC or the State as appropriate III there must be a written agreement between the adviser and the solicitor IV there must be a written agreement between the adviser and the SEC or the State Administrator, as appropriate StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV C

An investment adviser solicitor must be registered in the State; however, the solicitor can be an independent third party that is not a representative of that investment adviser, making Choice I incorrect. The investment adviser (the firm) must be registered with the SEC if it has $100,000,000 or more of assets under management (a federal covered adviser). If the firm has less than $100,000,000 of assets under management, then it only is required to register with the State. To use a solicitor, there must be a written agreement between the adviser and the solicitor that spells out the work to be performed and the compensation to be paid.

Under the Investment Advisers Act of 1940, which of the following statements are TRUE regarding advisory contracts? I Advisory fees cannot be based upon capital gains in the account II Advisory fees for clients with at least $1,000,000 of assets under management; or $2,000,000 net worth; can have a fee that is partly based upon capital gains III Advisory contracts must be filed with the SEC if they allow for $1,200 or more of prepaid advisory fees, 6 or more months in advance of services rendered IV Advisory contracts cannot contain provisions that violate Federal law StatusA A. I and II only Incorrect Answer B. III and IV only Correct Answer C. I, II and IV StatusD D. I, II, III, IV C

Any contract cannot contain provisions that violate the law. Advisory contracts must be in writing under the Investment Advisers Act of 1940; and cannot provide for an advisory fee based on capital gains. ***However, for wealthy customers, a "performance" fee is permitted if the customer has at least $1,000,000 invested with the adviser; or the customer has a net worth of at least $2,000,000. Regarding Choice III, if an adviser accepts $1,200 or more of prepaid fees, 6 months or more in advance of services rendered, it must include a balance sheet in the "brochure" provided to customers.

Delivery of the brochure under the "Brochure Rule" is NOT required for: I impersonal advisory services requiring payment of less than $500 annually II prepaid advisory fees requiring payment in advance of $1,000 or more III advisory contracts with investment companies IV advisory contracts with pension plans Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

Delivery of the brochure under the "Brochure Rule" is required for which of the following? I Impersonal advisory services requiring payment of less than $500 annually II Prepaid advisory fees requiring payment in advance of $1,000 or more III Advisory contracts with investment companies IV Advisory contracts with pension plans StatusA A. I and III StatusB B. I and IV Incorrect Answer C. II and III Correct Answer D. II and IV D

Delivery of the "Brochure" to customers is not required for the sale of impersonal advisory services calling for no more than a $500 annual fee; or for the sale of advisory services to investment companies. ***Prepaid advisory fees requiring payment in excess of $500; or advisory contracts with anyone other than investment companies, requires the delivery of a brochure.

Under the Investment Advisers Act of 1940, if an investment adviser has an impaired financial condition, this must be disclosed to customers: StatusA A. by all investment advisers Correct B. only by investment advisers that take custody of customer funds; or those that accept prepaid advisory fees of $1,200 or more StatusC C. only if the investment adviser files for bankruptcy StatusD D. only if the investment adviser is also a broker-dealer B

Disclosure of an impaired financial condition to customers by an investment adviser is only required where the investment adviser already has his "hands in the customer's pocket," and thus, could use the customer's monies to help the firm through its financial difficulties! ***Thus, this disclosure is required only if the adviser takes custody of client funds or securities; or if the adviser accepts prepaid advisory fees of $1,200 or more, 6 or more months in advance of rendering services.

IA def: "a person who rec's compensation for advising others about securities or about the advisability of investing in securities"; if a person gives advice about securities, but does NOT charge a fee, then this person is not an IA!

EXCLUDED - not req'd to register w/ SEC: - banks or bank hold cos - lawyers, accountants, engineers or teachers whose performance of such serv is solely incidental to practice of their profession - b/ds and their RRs whose advisory serv are solely incidental to sec bus and who rec no special comp for making recomm - publishers of bona fide newspapers, mags or fin publications of genl and reg circulation - any person who advises solely about US govt guaranteed obligations - family offices ^^ :. any of these excluded persons falls under def of a "federal covered adviser" under State law and is NOT req'd to register in State as well as NOT being req'd to register w/ SEC ^^ family office exclusion: SEC Rule 202(a)(11)(G)-1 (the "Family Office Rule") 3 requirements: 1- m/ only provide investment advice to clients who are part of that family oo all family descendants upto 10 generations removed fr common ancestor and also incl adopted and foster children, spouses and "spousal equivalents" and former family mbrs, ie, divorce. Incl key employees of family office, estates and trust est'd for family mbrs and not-for-profit or charitable inst funded by family clients. Intended to give exclusion to adviser to one family office - NOT multiple family offices 2- m/b wholly owned by family clients and exclusively controlled by family mbrs or entities - it canNOT be owned or controlled by key employees 3- canNOT hold itself out as IA - thus it canNOT advertise or mkt itself to non-family clients EXEMPT: o intrastate exemption: adviser canNOT give advice to any security listed on a natl securities exchange since these transaxns occur "interstate" o adviser to insurance cos is exempt o Federal exemptions are different than State exemptions: State exemption fr regis for those advisers w/ NO office in State that give advice to "professional investors" such as banks, trusts, invest cos and ins cos is MUCH BROADER than Federal exemption o Federal registration w/ the SEC - only req'd for certain advisers: - $100+ million of assets: m/ register w/ SEC as "Federal Covered Advisers" and canNOT be req'd t/b registered in ea State, though they c/req a notice filing - advisers to investment cos SEC issued some interpretations: o SEC interprets that advisers that have btw $100 - $110 mill of AUM have option of Federal registration (or State) o mid-size adviser registration w/ SEC: w/ $25 mill+ of AUM - NOT req'd to regis in State where it has its prin off, M/ register w/ SEC - is req'd t/b registered in 15+ States m/choose to register w/ SEC rather than having to register separately in those 15+ States, truly "interstate" o Federal covered advisers: no regis req'd w/ State; 2012 Dodd-Frank did away w/ exemption for larger advisers to private funds/hedge funds - NOW m/make public disclosures about their operations o private fund advisers w/ $150 mill+ of assets MUST register w/ SEC: most often advisers to hedge funds, or private placement offerings under Reg D open to wealthy "qualified" investors and NOT to genl public and which have < 100 investors per fund; if > 100+, hedge fund m/register under Invest Co Act of 1940 as mgmt co o private fund qualified purchaser: ind or trust w/ < $5 mill of assets avail for invest or invest mgr or co w/ < $25 mill of assets avail for invest o private fund adviser w/ < $150 mill of assets MUST register in State where is is physically located and in any State where it solicits or conducts advisory bus: exempt fr SEC regis - - all AUM are counted, incl non-sec such as commodities or direct invest in RE - uncalled-for capital commitments are counted, b/c hedge funds are set up as ltd partnerships and have right to assess partners for more capital if needed - there is NO limit to # of private funds that c/b advised under exemption but total advised assets canNOT > $150 mill - all of adviser's clients m/b private funds o exempt reporting adviser: even if private fund adviser is exempt fr regis w/ SEC b/c < 4150 mill of AUM, it MUST still file rpts w/ SEC as "Exempt Reporting Adviser", m/ give detailed info about ea private fund they advise - < $25 mill AUM: MUST regis in State where is is physically located and in any State where it solicits or conducts advisory bus - > $25 mill AUM, but < $100 mill AUM: < 15 States, it must regis in ea State; => 15 States, has choice of either regis in ea State or regis w/ SEC - > $100 mill AUM: MUST regis w/ SEC, no State regis - unless "Private Fund Adviser Exemption" - Private Fund Adviser > $150 mill AUM: MUST regis w/ SEC, no State regis - Private Fund Adviser < $150 mill AUM: NO regis w/ SEC, MUST regis in State where it is physically located and in any State where bus is solicited or conducted; has public disclosure obligations "Exempt Reporting Adviser" o no SEC registration of adviser reps: ONLY IAs c/b req'd t/b SEC registered, States req regis of ea IAR whether assocd w/ "Federal Covered" adviser or State registered adviser

Investment advisers with assets of $110,000,000 or more must register: StatusA A. only with the State in which the investment adviser is incorporated StatusB B. in all of the States in which the investment adviser does business StatusC C. with the SEC and all of the States in which the investment adviser does business Correct D. with the SEC only D

Even though a Federal Covered adviser, which must register with the SEC, is defined as one with assets under management are $100MM or more, the SEC has issued an interpretation that advisers with between $100MM and $110MM of assets under management have a choice of either registering with the SEC or registering in each State where they do business. Thus, an investment adviser is only required to register with the SEC if it has assets under management of $110MM or more.

Under the Investment Advisers Act of 1940, which of the following persons managing assets of at least $100,000,000 MUST be registered with the SEC? I A person who gives advice solely about listed securities II A person who gives advice solely about municipal securities III A person who gives advice solely about U.S. Government securities StatusA A. I only Correct Answer B. I and II StatusC C. II and III Incorrect Answer D. I, II, III B

Excluded from the definition of an investment adviser is any person who renders advice solely about securities guaranteed by the U.S. Government - thus, no registration is required. Note, however, that this exclusion does not apply to persons who render advice about municipal securities; nor does it apply to persons who render advice about listed stocks. Finally, remember that only advisers with $100,000,000 of assets or more under management are required to register with the SEC; those advisers with less than $100,000,000 of assets under management only register with the State; and not with the SEC.

Form PF is required to be filed with the SEC by: StatusA A. state-registered advisers Correct B. private fund advisers StatusC C. exempt reporting advisers StatusD D. non-exempt reporting advisers B

Form PF is used to register "Private Fund" advisers with the SEC. These are advisers to hedge funds that have at least $150 million of assets under management.

An investment adviser has decided to move its headquarters into a new office building that is directly across the street from the existing office. The investment adviser should: StatusA A. move, followed up by the mailing of a letter to all of the adviser's clients disclosing the new address Correct B. mail a letter to all of the adviser's clients detailing the upcoming change of address and amend Form ADV disclosure document promptly StatusC C. mail a letter to all of the adviser's clients detailing the upcoming change of address, but there is no requirement to amend the adviser's Form ADV disclosure document StatusD D. amend its Form ADV disclosure document filing promptly, but there is no requirement to send notice of the address change to each of the adviser's clients B

If an investment adviser changes its street address, the Form ADV filed with either the SEC or State (depending on whether the adviser is Federal registered or State registered) must be amended. This is required because the regulators need to know the physical location of the adviser if they wish to audit or inspect the adviser's books and records; plus they need to know the address if the adviser is going to receive legal papers or other such notices. For Federal Covered advisers, the SEC rule is that the amendment must be filed "promptly, while the NASAA rule for filing an "other-than-annual" updating amendment by a State registered adviser is that it be filed in 30 days. While it is not stated in any rule that customers must be notified of a change of address, this one is common sense. Customers must know the adviser's current address (and it must be on any correspondence sent to customers) so they know where the correspondence came from, and where they can forward a response, if needed, to the communication.

Under the Investment Advisers Act of 1940, which of the following statements are TRUE regarding the investment adviser's relationship with a broker-dealer? I The investment adviser must disclose if it recommends the use of a specific broker-dealer to effect recommended trades II The investment adviser doesn't have to disclose if it recommends the use of a specific broker-dealer to effect recommended trades III The customer must effect trades through the broker-dealer of the investment adviser's choosing IV The customer doesn't have to effect trades through the broker-dealer of the investment adviser's choosing StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV B

If an investment adviser receives compensation from anyone other than the customer; related to the rendering of advisory services to that customer; this must be disclosed to the customer. If the investment adviser recommends the use of a broker-dealer to effect recommended trades, (which it will do if the broker-dealer compensates the adviser for these trades); it must inform the customer that any broker-dealer can perform these transactions. The customer does not have to effect these trades through the broker-dealer favored by the investment adviser.

If an investment adviser, for the first time, takes a $1,200 prepaid advisory fee, more than 6 months in advance of services rendered: StatusA A. the SEC will terminate the adviser's registration within 45 days StatusB B. an ADV Part 1 must be filed by the adviser promptly Correct C. an ADV Part 2A along with a balance sheet must be filed by the adviser promptly StatusD D. the investment adviser must obtain fidelity bonding coverage of at least $25,000 C

If an investment adviser takes a prepaid advisory fee of $1,200 or more, 6 months or more in advance of services rendered, the investment adviser is obligated to include an audited balance sheet in Part 2A of Form ADV. If this was not filed previously, then an amended Form ADV with a balance sheet must be filed with the SEC promptly.

All of the following must be disclosed by an investment adviser to a customer under the Investment Advisers Act of 1940 EXCEPT an investment adviser who: StatusA A. takes custody of client funds is having trouble paying its bills Correct Answer B. does not take custody of client funds is 6 months late paying the rent on the office space StatusC C. takes custody of client funds is expelled by FINRA Incorrect Answer D. does not take custody of client funds was convicted of embezzlement 7 years ago B

If an investment adviser takes custody of client funds; has discretionary accounts; or takes prepaid advisory fees of $1,200 or more, 6 months or more in advance of rendering services, then the adviser must disclose an impaired financial condition to the customer. ***If the adviser does not have access to client monies, then this disclosure is not required. *However, all advisers (whether or not they have access to client monies) are obligated to disclose to customers any convictions for law violations and disciplinary actions taken by the SEC, FINRA, etc.

Under SEC rules regarding taking custody of client funds: StatusA A. custody can only be taken for clients who have at least $1,000,000 under management; or a net worth of at least $2,000,000 Correct B. customers must be notified of the location where the funds are being held StatusC C. customers must receive semi-annual account statements StatusD D. the advisory firm must be audited, on a surprise basis, at least semi-annually B

If an investment adviser takes custody of customer funds, the adviser must: o segregate the customer funds and securities from those of the investment adviser. Note, however, that it is permitted for one customer's funds and securities to be "commingled" with those of other customers - this is the norm when an investment adviser opens an "omnibus" account at a broker-dealer. o maintain any account holding customer funds or securities in the name of the investment adviser as trustee for the customer(s). o notify the customer, in writing, of the place and manner in which funds and securities will be maintained. Any subsequent change in this requires written notice to the customer. o send to each customer, at least quarterly, an itemized account statement. o arrange for an independent public accountant to audit the firm annually; with the audit conducted on a "surprise" basis. The report of the independent accountant must be filed promptly with the SEC.

Under the Investment Advisers Act of 1940, which of the following MUST be disclosed to customers by an investment adviser? I An investment adviser takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is having financial difficulties II An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is having financial difficulties III An investment adviser that takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is the subject of a disciplinary or legal action IV An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is the subject of a disciplinary or legal action StatusA A. I and III only StatusB B. II and IV only Correct Answer C. I, III and IV Incorrect Answer D. I, II, III, IV C

If an investment adviser that takes custody of customer funds or securities; has discretionary accounts; or that accepts prepaid advisory fees of $1,200 or more, 6 months or more in advance of services rendered; is having financial difficulties, this must be disclosed to customers. ***This is not required for advisers that do not have their hands in the customers' pockets. The requirement to disclose to customers legal or disciplinary actions taken against the adviser applies to all investment advisers - it makes no difference if they take custody of client funds or not.

If an investment adviser wishes to use a paid solicitor, under the Investment Advisers Act of 1940, which of the following statements are TRUE? I The solicitor must provide the customer with a copy of the investment adviser's brochure II The solicitor cannot be subject to statutory disqualification under the Securities Acts III The solicitor must disclose to the customer any additional costs of providing advisory services, due to the nature of the relationship between the solicitor and the investment adviser IV The solicitor must register with the SEC as an investment adviser StatusA A. I and II Incorrect Answer B. III and IV Correct Answer C. I, II, III StatusD D. I, II, III, IV C

If an investment adviser uses a paid solicitor, there must be a written agreement between the solicitor and the adviser. ***The solicitor must provide the customer with a copy of the adviser's "Brochure" in addition to a copy of the solicitor's "Brochure," The solicitor must disclose to the customer any additional costs that the customer will pay due to the use of a solicitor. The solicitor canNOT be a person subject to statutory disqualification under the Securities Acts - e.g., convicted of a money or securities related offense within the past 10 years, expelled by FINRA, currently under suspension by FINRA, etc. *There is no requirement for the solicitor to register with the SEC; only the investment adviser is registered with the SEC. --However, in most States, the solicitor must be registered either as an adviser or as an adviser representative.

If an investment adviser wishes to use a paid solicitor, under the Investment Advisers Act of 1940, all of the following statements are true EXCEPT the: StatusA A. solicitor must provide the customer with a copy of the investment adviser's brochure StatusB B. solicitor cannot be subject to statutory disqualification under the Securities Acts StatusC C. solicitor must disclose to the customer any additional costs of providing advisory services, due to the nature of the relationship between the solicitor and the investment adviser Correct D. solicitor must register with the SEC as an investment adviser D

If an investment adviser uses a paid solicitor, there must be a written agreement between the solicitor and the adviser. The solicitor must provide the customer with a copy of the adviser's "Brochure" in addition to a copy of the solicitor's "Brochure." The solicitor must disclose to the customer any additional costs that the customer will pay due to the use of a solicitor. The solicitor cannot be a person subject to statutory disqualification under the Securities Acts - e.g., convicted of a money or securities related offense within the past 10 years, expelled by FINRA, currently under suspension by FINRA, etc. There is no requirement for the solicitor to register with the SEC; only the investment adviser is registered with the SEC. However, in most States, the solicitor must be registered either as an adviser or as an adviser representative.

Under the Investment Advisers Act of 1940, the renewal of an advisory contract under different terms than the preceding contract: StatusA A. is made by filing a Form ADV-S with the SEC within 90 days of year end StatusB B. requires that the customer be given a revised "Brochure" at least 48 hours prior to contract renewal Correct C. requires that a revised "Brochure" must be given to the customer at, prior to, contract renewal StatusD D. is prohibited unless the investment adviser files a Form ADV Part 2A and balance sheet with the SEC immediately C

If the adviser wishes to renew an advisory contract with a customer where the terms of the contract are changed, this requires that a revised "Brochure" be given to that customer. There is no requirement to file an ADV Part 2A with a balance sheet promptly, unless the adviser, for the first time, will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. The "2-Day Free Look" at the "Brochure" is only required under NASAA rules for customers that are signing an advisory contract with that adviser for the first time - so it only applies to State-registered advisers, not to Federal Covered Advisers. The Form ADV-S (Subsequent year) is a discontinued form.

Under the Investment Advisers Act of 1940, after receiving an investment adviser application, the SEC must grant a registration to an investment adviser; or start a proceeding denying registration, within how many days? StatusA A. 5 StatusB B. 20 Incorrect Answer C. 30 Correct Answer D. 45 D

Investment adviser registration applications filed with the Securities and Exchange Commission must be granted; or a proceeding started to deny registration; within 45 days of filing.

Under the Investment Advisers Act of 1940, an SEC registration application as an investment adviser must be granted; or a proceeding must be initiated denying registration, within: StatusA A. 10 days StatusB B. 30 days Correct C. 45 days StatusD D. 60 days C

Investment adviser registration applications filed with the Securities and Exchange Commission must be granted; or a proceeding started to deny registration; within 45 days of filing.

Investment advisers that have a broker-dealer entity are permitted to accept which of the following compensation items? I Commissions on trades effected for clients II Annual fees based on a percentage of assets under management III Monthly fees based on performance in the account IV Annual fees based on a fixed dollar amount StatusA A. I and IV StatusB B. I, II, III Correct C. I, II, IV StatusD D. II, III, IV C

Investment advisers cannot accept fees based on performance unless the client has at least $1,000,000 of assets under management or a $2,000,000 net worth. Fixed annual fees, wrap fees, fees based on a percentage of assets under management, and commissions on trades where the adviser has a separate broker-dealer entity, are all permitted compensation items.

An investment adviser that wishes to pay a solicitor a fee for bringing in new client money: I must be registered under the Act II must have a written agreement with the solicitor III cannot pay a fee to a solicitor that is subject to statutory disqualification under the Securities Exchange Act of 1934 or that is subject to an order, judgment, or decree under the Uniform Securities Act IV must obtain a written acknowledgement from the customer that he or she received both the investment adviser's and the solicitor's disclosure documents StatusA A. I and II StatusB B. III and IV StatusC C. II, III, IV Correct D. I, II, III, IV D

Investment advisers may hire solicitors to find them new business and can pay for the solicitation. To do so, the investment adviser must be registered (either with the SEC as a Federal Covered adviser or with the State); the adviser must have a written agreement with the solicitor; the adviser cannot pay the solicitor if the solicitor has violated the Securities Laws; and any client brought in by the solicitor must get a copy of both the investment adviser's brochure and the solicitor's brochure (this must be acknowledged in writing by the client).

If an investment adviser maintains an account that will hold customer securities positions at a broker-dealer, but the broker-dealer does not know who the individual customers are, this is a(n): StatusA A. violation of Federal law StatusB B. prime brokerage account Correct C. omnibus account StatusD D. discretionary account C

Investment advisers that take custody will typically open a brokerage account to hold all customer securities positions. If the investment adviser opens an "omnibus account," then the clients' funds and securities are held together in 1 account, where the broker-dealer does not know the identity of the IA's clients. In such an arrangement, it is the responsibility of the IA to send out customer account statements and trade confirmations, since the broker-dealer does not know who the individual customers are. Prime brokerage is used by hedge funds, where the hedge fund uses a clearing "prime broker" to settle all trades and maintain custody of the positions. However, the prime broker agrees to accept trade executions from a list of broker-dealers given up by the hedge fund. In this way, a hedge fund can route its trade executions to differing brokers in return for getting research and investment insight from those firms.

All of the following provisions would be found in an advisory contract EXCEPT: StatusA A. the term of the contract StatusB B. the requirement for customer approval if the contract is to be assigned to someone else Correct C. an exculpatory clause holding the adviser harmless for gross negligence or rule violations StatusD D. notification to customers if there is a change in the composition of the advisory partnership C

Investment advisory contracts must be in writing under the Investment Advisers Act of 1940; must detail the advisory fee; must provide for customer approval if the account is assigned to another investment adviser; and must provide for notice to the customer is there is a change in the composition of the advisory partnership (for those advisers that are partnerships). An "exculpatory" clause is legal language that the adviser cannot be held liable for negligence or rule violations, and such a "hedge" clause is not legally enforceable and is prohibited.

An investment adviser that has filed a Form ADV with the SEC may say that he or she is: StatusA A. approved by the Securities and Exchange Commission StatusB B. certified by the Securities and Exchange Commission Correct C. registered with the Securities and Exchange Commission StatusD D. endorsed by the Securities and Exchange Commission C

It cannot be stated that "registration" means that either the SEC or the State Administrator approves of the adviser, or endorses, recommends, or certifies the adviser. It can be stated that the adviser is "registered."

Sec Exchange Act of 1934: covered abuses in trading mkts, passed to restore public confidence in mkts - genl provisions:

M - manipulation: becomes fraud I - insiders: prohibited fr profiting fr inside information S - SEC created: to regulate mkts S - short sales rules: SEC Regulation SHO, rules for selling securities short (selling borrowed shares) P - proxy rules: outside proxies of sharehldrs became regulated to make takeover attempts fair to sharehldrs E - exchanges: must register w/ SEC and regulate themselves under SEC guidance, as must their mbrs R - reports: corp issuers must file annual and qtrly financial rpts which are public information M - margin: control over credit on securities was given to Federal Reserve M- MSRB: est'd to write rules for muni mkt participants, even though these are exempt issues S - stabilization: though manipulation is fraud, stabilization of a new issue in trading mkt is permitted under SEC rules o Act does NOT apply to exempt securities o fraud provisions apply to both exempt and non-exempt securities

An Investment Adviser wishes to refer its largest and most sophisticated customers to a third party market timer to maximize their investment returns. Which statement is TRUE? StatusA A. The use of market timers is prohibited under the NASAA Statement of Policy Correct B. Any arrangement between the IA and the market timing firm must be disclosed in the Form ADV Part 2A StatusC C. The arrangement between the IA and the market timing firm must be documented in a written contract StatusD D. The IA must review the performance of the market timing firm at least quarterly to evaluate its benefit to the referred customers B

Market timing firms use technical factors to determine when to buy or sell securities (e.g., time the market). Advisers can use timing services to help manage their clients' money - the argument being that an early sell signal given by a timing service reduces losses in a bear market and an early buy signal increases gains in a bull market. However, the market timing firm often pays the adviser for client referrals - and this creates an inherent conflict of interest. (Did the adviser refer the client to the timing firm because it was in the client's best interest, or did the adviser refer the client to the timing firm for the payment?) The ADV Part 2A must detail any business relationships that the adviser has that could result in potential conflicts of interest - so the relationship between the adviser and the timing firm must be disclosed in the ADV Part 2A that is given to the customer.

To register as an investment adviser under the Investment Advisers Act of 1940, all of the following are required EXCEPT: StatusA A. payment of a filing fee StatusB B. filing of a Form ADV Part 1 StatusC C. filing of a Form ADV Part 2 Correct D. posting of a surety bond D

Posting a surety bond is only required for State registration. To register as an investment adviser with the SEC, a Form ADV Part 1 and 2 must be filed, along with a non-refundable filing fee.

Under the Investment Advisers Act of 1940, which of the following statements are TRUE about the acceptance of prepaid advisory fees by an investment adviser? I The fees must be detailed in writing in the advisory contract II The fees cannot amount to more than 6 months' payment in advance III Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" IV Acceptance of a prepaid fee constitutes taking "custody" of customer funds Correct A. I and III only StatusB B. II and IV only StatusC C. I, II, III StatusD D. I, II, III, IV A

Prepaid advisory fees are permitted, as long as they are detailed in the advisory contract; and there is a refund of such fees if the contract is canceled prematurely. There is no restriction on the amount of prepaid fees that can be accepted - but remember that under the Statement of Policy on unethical practices, adviser fees must be similar to those charged by other advisers for comparable services. If an adviser accepts $1,200 or more of prepaid fees, for 6 months or more of service in advance, then a balance sheet must be included in the "Brochure" given to customers (the "Brochure" is Part 2A of Form ADV). Acceptance of prepaid fees is not the same as taking custody of customer funds or securities.

A private fund adviser with less than $150 million of assets under management: StatusA A. must register with the SEC Correct Answer B. must report to the SEC Incorrect Answer C. must register with, and report to, the SEC StatusD D. is neither required to register with, nor report to, the SEC B

Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. ***If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing.

An exempt reporting adviser must file: I Form PF with the SEC II Form BD with the SEC III Form ADV with the SEC IV Form RIA with the SEC StatusA A. I only Correct Answer B. III only Incorrect Answer C. I and III StatusD D. II and IV B

Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. To do so, it must file both Form PF (Private Fund adviser) and Form ADV. If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing. Broker-dealers file Form BD to register with the SEC. There is no such thing as Form RIA.

Who would be defined as an investment adviser under the Investment Advisers Act of 1940? Correct A. An attorney who gives advice to clients about investments for an additional fee StatusB B. An attorney who values securities holdings held in a deceased client's estate StatusC C. An accountant who prepares a client's federal tax return for a fee StatusD D. An accountant who gives advice to clients about tax saving strategies for an additional fee A

Professionals who only give incidental advice about investing in securities are excluded from the definition of an "Investment Adviser" under the 1940 Act. However, if that professional separately charges clients for investment advice, or holds itself out as being in the business of rendering investment advice, then it is not excluded and must register as an RIA. In Choice A, the attorney is giving advice about securities for an additional fee, so the attorney is not excluded. In Choice B, there is no mention of a separate fee charged, so the securities valuation is not considered to be giving investment advice for a fee. In Choices C and D, advice is being given about taxes, not securities or investing.

Which statement is NOT true about enforcement of the Investment Advisers Act of 1940? StatusA A. The SEC has the power to collect evidence, subpoena witnesses and to take oaths and affirmations StatusB B. The SEC can issue orders denying or revoking registration of an investment adviser StatusC C. Orders of the SEC may be appealed by filing a motion in the U.S. Court of Appeals Correct D. The State Court in which the defendant is located has primary jurisdiction in both criminal and civil suits brought under the Act D

Regarding the powers of the SEC, it can collect evidence, take oaths and subpoena witnesses; it can issue orders denying or revoking Federal registration (but not State registration, but once the SEC boots an adviser out, the State piles on and boots that guy out of State registration as well). An SEC order can be appealed to the U.S. Circuit Court of Appeals. Since the SEC is a Federal agency, any criminal prosecution comes under the Securities Exchange Act of 1934 and would be pursued in Federal court, not in State court.

Private Fund Advisers: StatusA A. are not required to register with the SEC Incorrect Answer B. must register with the SEC once assets under management reach $100 million Correct Answer C. must register with the SEC once assets under management reach $150 million StatusD D. must register with the SEC once assets under management reach $200 million C

Regular investment advisers must register with the SEC as "Federal Covered Advisers" once assets under management reach $100 million. Private Fund Advisers, who only advise pooled investment vehicles like hedge funds, were exempt from SEC registration until 2012. At that point, they were required to register with the SEC once their assets under management reached $150 million. The intent was to make sure that there was public disclosure about the world of hedge funds.

Private Fund Advisers: StatusA A. are not required to register with the SEC as long as they have no more than 5 clients StatusB B. are not required to register with the SEC because their clients are all "accredited investors" StatusC C. must register with the SEC once assets under management reach $100 million Correct D. must register with the SEC once assets under management reach $150 million D

Regulation D - private placements

Regulation D - private placement exemption: offered "privately", it is not considered t/b a "public" offering, exempt fr Federal regis requirements - maximum of 35 non-accredited investors / unltd number of accredited investors -- def of accredited investor, meets one of follg test: oo ind w/ NW of $1,000,000 exclusive of residence oo ind w/ ann income of $200,000/ year for past 2 years or cpl w/ joint income of $300,000 and reasonable expectation of continuing to earn that level of income oo person who is officer of director of issuer oo Fin Inst such as banks, ins cos, mutual funds w/ assets >$5,000,000 - accredited investor questionnaire - private placement offerings made only to *** accredited investors can be advertised - provide "Offering Circular", Offering Memorandum or PPM - Private Placement Memorandum - Rules 504-506: oo Rule 504: covers offerings of upto $5,000,000 (does NOT specify req'd investor discl and does NOT place any limit on # of investors, NO audit requirement for issuer's fin stmts - State(s) where issue is offered c/still req State regis oo Rule 505: Rescinded oo Rule 506: covers offerings > $5,000,000, usu rule used by everyone (req's detailed discl to investors, sim to prospectus, offer c/only b/made to max of 35 non-accredited investors; and to unltd # of accredited investors, issuer's fin stmts m/b audited - ***States canNOT req regis at the State level)

intrastate offerings - Rule 147

Rule 147 intrastate exemption: exempt fr Federal regis requirements - 100% of issue sold to State residents (canNOT b/sold to a non-resident) o issuer must be resident o 6-month resale restriction - only permitted to residents of State, canNOT b/ resold "interstate" til aft 6-mo waiting period

An investment adviser is looking to offer advisory services to new clients. Which statement is TRUE regarding delivery of the Brochure and Brochure Supplement? StatusA A. Only the Brochure is required to be delivered to a new customer at, or prior to, entering into an advisory contract StatusB B. Only the Brochure Supplement is required to be delivered to a new customer at, or prior to, entering into an advisory contract Correct C. Both the Brochure and the Brochure Supplement are required to be delivered to a new customer at, or prior to, entering into an advisory contract StatusD D. Neither the Brochure nor the Brochure Supplement are required to be delivered to a new customer at, or prior to, entering into an advisory contract C

The "Brochure Rule" obligates an investment adviser to give a potential customer the disclosure document (Part 2A of Form ADV) and the Brochure Supplement (Part 2B of Form ADV) at or prior to entering into a contract to provide advisory services.

Under the Investment Advisers Act of 1940 to satisfy the requirements of the "Brochure Rule," customers who wish to buy advisory services must receive a copy of the brochure: Incorrect Answer A. at least 48 hours prior to entering into an advisory contract Correct Answer B. at, or prior to, entering into an advisory contract StatusC C. within 48 hours of entering into an advisory contract StatusD D. within 10 days of entering into an advisory contract B

An investment adviser representative has solicited a new client over the phone to purchase advisory services, but no sale results and she takes no further action. The IAR knows this individual, who she has met at her kid's school PTA meetings. The IAR has no more interaction with the potential client, but at the next PTA meeting, the potential client tells the IAR that she has thought about it and is ready to sign the agreement right there. The IAR has a contract form in her briefcase, but does not have the brochure. Which statement is TRUE? Incorrect Answer A. The investment adviser representative can have the customer sign the contract as long as the brochure is delivered within 48 hours StatusB B. The investment adviser representative can have the customer sign the contract as long as the brochure is delivered within 5 business days Correct Answer C. The investment adviser representative cannot have the customer sign the contract unless a brochure is delivered at the same time StatusD D. The investment adviser representative can have the customer sign the contract as long as she does not cash the check until the brochure is delivered C

The Brochure Rule under the Investment Advisers Act of 1940 requires that the brochure be given to customers at, or prior to, entering into a contract to provide advisory services. The customer must be given the brochure first, not after the fact.

If an investment adviser wishes to charge a performance fee that allows it to share a percentage of capital gains in a customer account, then under the Investment Advisers Act of 1940: StatusA A. such an arrangement is prohibited because of the inherent conflict of interest between the investor and the adviser Correct B. the adviser must disclose to the customer that such an arrangement can give the adviser an incentive to increase the portfolio's risk exposure StatusC C. the adviser must disclose that if a fixed fee were charged, the customer would be paying a lower fee, but the adviser would have to make this up by increasing its charges StatusD D. such an arrangement is permitted as long as all fees are disclosed to customers B

The Investment Advisers Act of 1940 allows performance fees to be charged if a customer is wealthy ($1,000,000 of assets with the firm or a $2,000,000 net worth). However, such performance fees can give the adviser the incentive to take on higher levels of risk in order to increase portfolio return (and hence increase the adviser's compensation). Advisers must disclose all material information regarding their performance fees, including that the fee arrangement may cause the adviser to enter into more speculative investments than would be the case otherwise; and that the adviser will receive increased compensation based on realized and unrealized appreciation of the customer's securities.

Under the Investment Advisers Act of 1940, which of the following are requirements for a family office to be excluded from the definition of an Investment Adviser? I The family office must only provide investment advice to clients who are part of that family II The family office must be wholly owned by family clients and exclusively controlled by family members or entities III The family office cannot hold itself out as an investment adviser IV The family office must have less than $100 million of assets under management StatusA A. I and III StatusB B. II and IV Correct C. I, II, III StatusD D. I, II, III, IV C

The Investment Advisers Act of 1940 excludes "family offices" from the definition of an investment adviser, so they are not required to register. Regarding the "family office" exclusion, extremely wealthy persons often set up a "family" office to manage the finances of family members (think of very wealthy persons like Bill Gates or Jeff Bezos, where the family office would manage the assets of their spouses, children, parents, etc.). As part of its work, the family office often gives investment advice, and the employees of the family office are compensated, so they would fall into the "dragnet" of Investment Adviser registration. Because these are wealthy, "sophisticated," individuals, they are not in need of the "protection" given by SEC IA registration. The Investment Advisers Act includes a rule that details when these "family offices" will be excluded from the definition of an Investment Adviser, so no SEC registration is required. Under SEC Rule 202(a)(11)(G)-1 (the "Family Office Rule"), there are 3 basic requirements that must be met for the exclusion: o The family office must only provide investment advice to clients who are part of that family. o The family office must be wholly owned by family clients and exclusively controlled by family members or entities - it cannot be owned or controlled by the key employees (though key employees can make investments). o The family office cannot hold itself out as an investment adviser - thus it cannot advertise or market itself to non-family clients. Note that there is no asset size test for this exclusion.

The Investment Advisers Act of 1940 EXEMPTS from registration: Correct Answer A. persons who give advice solely to insurance companies StatusB B. persons who give advice solely to investment companies StatusC C. persons who give advice solely to depository institutions Incorrect Answer D. All of the above A

The Investment Advisers Act of 1940 exempts from registration advisers who solely render advice to insurance companies. The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an investment adviser, therefore such advisers are not required to register with the SEC. ***The Uniform Securities Act (State law) extends this exemption to most "professional investors" such as investment companies and banks. Note that the Investment Advisers Act of 1940 does not permit such an exemption for advisers who give advice to investment companies, banks, etc.

Which of the following are NOT required to register as investment advisers under the Investment Advisers Act of 1940? Persons who give advice: I on U.S. Government securities II solely to insurance companies III solely to investment companies IV to customers within one State, where the investment adviser is a resident of that State StatusA A. II and III StatusB B. III and IV Correct C. I, II, IV StatusD D. I, II, III, IV C

The Investment Advisers Act of 1940 exempts from registration, an adviser that gives advice to insurance companies. It does not exempt an adviser who gives advice to investment companies (which is true under State law). The Investment Advisers Act of 1940 also exempts from registration advisers who only give advice on U.S. Government securities; and advisers who wholly operate within one State, trading securities only in that State. Because such an "intrastate adviser" does not conduct business across State lines, the SEC does not have jurisdiction. For the SEC to have jurisdiction over an adviser, the adviser must operate "interstate."

Under the requirements of the Investment Advisers Act of 1940, the separate disclosure document that the solicitor must provide to a potential investment advisory client must include all of the following EXCEPT: StatusA A. the nature of the relationship between the solicitor and investment adviser StatusB B. a statement that the solicitor will be compensated by the investment adviser for the referral StatusC C. disclosure of the specific amount or percentage being paid to the solicitor by the investment adviser for the referral Correct D. a copy of the written agreement between the investment adviser and the solicitor D

The Investment Advisers Act of 1940 requires that any solicitor for an investment adviser provide the customer with a solicitor's brochure, in addition to the adviser's brochure. The solicitor's brochure must include the nature of the relationship between the solicitor and investment adviser; must include a statement that the solicitor will be compensated by the investment adviser for the referral; and must include disclosure of the specific amount or percentage being paid to the solicitor by the investment adviser for the referral.

Under the provisions of the Investment Advisers Act of 1940, if an adviser takes custody of customer funds or securities, account statements MUST be sent to the customer: StatusA A. upon written request StatusB B. monthly Correct C. quarterly StatusD D. semi-annually C

The Investment Advisers Act of 1940 requires that if an adviser takes custody of customer funds or securities; account statements must be sent to the customer by the adviser at least quarterly.

Under the Investment Advisers Act of 1940, all of the following statements about investment advisory contracts are true EXCEPT investment advisory contracts: StatusA A. must be in writing Correct B. must be filed with the SEC 10 days in advance of their effective date StatusC C. must provide for notification to customers if there is a change in the composition of the advisory partnership StatusD D. may provide for a fee that is partially based upon capital gains for customers who have at least $1,000,000 of assets invested; or who have a net worth of $2,000,000 B

The Investment Advisers Act of 1940 requires that investment advisory contracts be in writing; that customers must be notified if there is a change in the composition of the advisory partnership (for those advisers formed as partnerships); and that compensation cannot be based upon capital gains. However, an exception for compensation based upon capital gains is given for the accounts of wealthy customers - that is customers who have a net worth of at least $2,000,000, or who have at least $1,000,000 invested with the adviser. There is no requirement to prefile investment advisory contracts with the SEC.

Which of the following individuals will be denied federal registration as an investment adviser? StatusA A. A person who was convicted of misappropriation of funds 12 years ago StatusB B. A person who has been imprisoned for 3 months for "DUI" - driving under the influence Correct C. A person who, 11 years ago, was imprisoned for 18 months for counterfeiting StatusD D. None of the above C

The National Securities Markets Improvement Act of 1996 specifically requires the denial of SEC registration as an investment adviser to any person who has a criminal record and who has been imprisoned for 1 year or more.

The "Brochure Rule" applies to: StatusA A. oral advisory contracts only StatusB B. written advisory contracts only Correct C. both of the above StatusD D. none of the above C

The SEC states that the "Brochure Rule" it applies to both oral and written advisory contracts. Note that this does conflict with the Investment Adviser Act of 1940's requirement that advisory contracts be in writing; but this is a later rule, written by someone who wanted the broadest interpretation possible.

Under the Investment Advisers Act of 1940 which of the following is (are) disclosed in an investment adviser registration? I The approximate number of advisory clients II The approximate market value of the portfolios managed III The names and addresses of the adviser's clients IV The compensation basis to the adviser StatusA A. IV only StatusB B. I, II, III Correct C. I, II, IV StatusD D. I, II, III, IV C

The names and addresses of the adviser's clients are not in the Form ADV filed with the SEC. However, the approximate number of clients; approximate market value of portfolios managed; and the compensation basis to the adviser are all disclosed in the Form ADV.

ADAP Advisors is a State-registered adviser with 7 IARs. One of the IARs, Mark, leaves the employ of ADAP to join another advisory firm. His accounts are assigned by ADAP to the remaining 6 IARs at ADAP. By taking this action, ADAP: ncorrect Answer A. is required to notify each of Mark's customers of the change of IAR and get the customer's approval StatusB B. is required to send a negative consent letter to each of Mark's clients and if no response is received, the assignment is permitted StatusC C. has violated the Investment Advisers Act of 1940 because advisory contracts cannot be assigned Correct Answer D. is not required to take any further action D

The transfer of an investment adviser account to another investment adviser must be approved by the customer. However, this situation is different. The advisory client's account is being transferred to another IAR at the same firm. ***This is not an assignment of the account to another adviser. The customer's contract is with the advisory firm; not the IAR. *The firm can reassign customer accounts to any IAR at the same firm without notifying the customer.

Which of the following statements are TRUE regarding customer consent for certain actions taken by an investment adviser? I If the investment adviser and its accounts are acquired by another investment advisory firm, consent of the adviser's existing customers is required II If the investment adviser and its accounts are acquired by another investment advisory firm, consent of the adviser's existing customers is not required III If the investment adviser were to acquire another advisory firm, consent of the adviser's existing customers is required IV If the investment adviser were to acquire another advisory firm, consent of the adviser's existing customers is not required StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV B

The transfer of an investment adviser account to another investment adviser must be approved by the customer. If an investment adviser is "acquired" - its accounts are being transferred to another adviser and consent of each of the acquired adviser's clients is required. On the other hand, if an investment adviser acquires another advisory firm, it is the acquired firm's clients that must give consent. The acquiring firm's clients are not affected by such an action.

The filing of an updated Form ADV with the SEC by a Federal Covered Adviser at fiscal year end is: Incorrect Answer A. only required if there are material changes in the content compared to the information included in the previous year's filing StatusB B. only required the adviser will, for the first time, take custody of client funds StatusC C. only required if the adviser was registered with a state in the preceding year Correct Answer D. required for each Federal Covered Adviser without exception D

The updated Form ADV must be filed each year with the SEC by Federal Covered Advisers - there are no exceptions. The filing is due within 90 days of fiscal year end. *Note that the updating ADV amendment must be filed with NASAA under the same time frame for State-registered advisers.

A solicitor for a Registered Investment Adviser is compensated by earning a percentage of the advisory fee. Which statement is TRUE? StatusA A. The solicitor is required to be registered with the SEC as either an investment adviser or an investment adviser representative to receive such a payment Correct B. The solicitor is required to be registered in the State as either an investment adviser or an investment adviser representative to receive such a payment StatusC C. The solicitor must be registered with both the SEC and the State as either an investment adviser or an investment adviser representative to receive such a payment StatusD D. The solicitor is neither required to be registered with the SEC nor the State as an investment adviser or investment adviser representative to receive such a payment B

There is no SEC registration requirement for adviser representatives; only for "Federal Covered" advisers. At the State level, the State requires registration of advisers that are not "Federal Covered" and also requires registration of investment adviser representatives - whether they are associated with either Federal Covered advisers or State-registered advisers.

All of the following statements are true regarding the requirement that an independent public accountant verify the amount of customer funds and securities held in custody by an investment adviser, as required by the Investment Advisers Act of 1940, EXCEPT the: StatusA A. audit must be conducted at least annually StatusB B. audit must be completed on a surprise basis Correct C. auditor must choose the same date for making a periodic examination StatusD D. auditor must file a Form ADV-E with the SEC within 120 days of completing the exam C

Under Rule 206(4)-2 covering advisers that take custody of client funds, such advisers must submit to an annual surprise audit by an independent public accountant that verifies the funds and securities held in custody for customers. After completing the examination, the auditor must sign and file Form ADV-E (as in "Exam") with the SEC within 120 days. ***The auditor cannot choose the same date each year for doing the audit, since then it would no longer be a "surprise" when he or she showed up at the adviser's office!

An investment adviser is a private fund adviser that is not required to register with the SEC. In order to maintain its exempt adviser status, it can only solicit investors who are: StatusA A. sophisticated Correct B. qualified StatusC C. accredited StatusD D. registered B

Under the Investment Advisers Act of 1940, "private fund advisers" with less than $150 million of assets under management are exempt from registering with the SEC. A "private fund" is defined as one that would require registration with the SEC as an investment company, but it is not required to do so because either: o it does not publicly offer its securities and has 100 or fewer beneficial owners of its securities (this is the typical structure for a hedge fund); or o it does not publicly offer its securities and only limits its owners to qualified purchasers. To be a "qualified purchaser" is tougher than being an accredited investor under Regulation D. A qualified purchaser is an individual or trust with at least $5 million of assets available for investment; or an investment manager or company with at least $25 million of assets available for investment. In contrast, an accredited investor under the Regulation D Private Placement rule is an individual with $200,000 of annual income; a married couple with $300,000 of annual income; and individual with a net worth of $1,000,000; or an investment manager with at least $5,000,000 of assets available for investment.

Under the Investment Advisers Act of 1940, which of the following statements is TRUE? An investment adviser is defined as a person who gives advice about: StatusA A. real estate and receives compensation for this advice StatusB B. futures investments but receives no special compensation for this advice Incorrect Answer C. securities but does not charge a fee Correct Answer D. stocks in an index fund and receives compensation for this advice D

Under the Investment Advisers Act of 1940, an investment adviser is defined as a "person who receives compensation for advising others about securities, or about the advisability of investing in securities." If a person gives advice about securities, but does not charge a fee, then this person is not an investment adviser. If a person gives advice about investing in something other than a security for a fee (like real estate), this person is not defined as an investment adviser.

Under the Investment Advisers Act of 1940, which of the following persons is exempt from registration with the SEC? Correct A. An investment adviser whose only clients are insurance companies StatusB B. An investment adviser whose only clients are investment companies StatusC C. An investment adviser whose only clients are pension plans StatusD D. All of the above A

Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration. The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an investment adviser, therefore such advisers are not required to register with the SEC. ***This exemption does not extend to persons who give advice to investment companies or pension plans (note that under State law, the adviser to pension plans would be exempt from State registration if it had no office in the State; and the investment adviser to investment companies would be excluded from State registration since it is a federal covered adviser).

All of the following must be disclosed by an investment adviser to a customer EXCEPT: Incorrect Answer A. the President of the advisory firm pleaded "nolo contendere" in a civil action taken by a State Administrator Correct Answer B. an investment adviser representative of that firm was fined $1,500 by FINRA for making unsuitable recommendations StatusC C. a partner in the firm was suspended by FINRA for 1 year from engaging in the securities business StatusD D. a partner in the firm was convicted of misappropriation of funds 8 years ago B

Under the Investment Advisers Act of 1940, legal and disciplinary actions taken against an investment adviser that resulted in a guilty or "no contest" plea must be disclosed to customers; as must any disciplinary actions by self-regulatory organizations that resulted in suspension, expulsion, or the imposition of fines in excess of $2,500. *** Convictions for misdemeanors or felonies involving securities or monies that occurred within the last 10 years must be disclosed as well.

An Investment Adviser Representative (IAR) is also a registered broker-dealer. The IAR has a brokerage client who has a $1,200,000 account; and a net worth of $2,500,000. The client wants the IAR to take over the management of the account, with the IAR to be compensated on a performance basis. The IAR should tell this client that the account: StatusA A. cannot be traded on a performance basis Correct B. can be traded on a performance basis StatusC C. can be traded based only on a per trade commission charge StatusD D. must be closed B

Under the Investment Advisers Act of 1940, performance fees are only allowed for wealthy clients with at least $1,000,000 invested; or have a minimum $2,000,000 net worth - so this client qualifies.

Under the Investment Advisers Act of 1940, when a Registered Investment Adviser is renewing its annual contract with customers, which is NOT required to be disclosed? StatusA A. Business Address StatusB B. Fees Correct C. History of RIA StatusD D. Type of clients B

Under the Investment Advisers Act of 1940, upon entering into an advisory contract, the advisor must provide the customer with the "brochure" - which is Form ADV Part 2A. In addition, within 120 days of year end, the client must be sent a free updated brochure; or a summary of material changes that offers to provide the free updated brochure. The brochure includes: - Basic business contact information; - Material changes from previous year; - Description of the advisory firm and services offered including length of time in business; - Fees and compensation; - Types of clients; - Methods of analysis; - Disciplinary information; Code of ethics; - Brokerage practices; - Client referrals and compensation; - Custody, discretion, and voting of client securities; - IA financial information.

S - SEC created: to regulate mkts

aside fr writing its own rules, SEC approves of all rules written by SROs; composed of 5 commissioners appted by POTUS 5 commissioners w/ no more than 3 fr one political party

M- MSRB: est'd to write rules for muni mkt participants, even though these are exempt issues

created in 1975, has authority overt hose who trade muni securities - brokers, dealers and bank dealers; enforcement is performed by FINRA - munis trade OTC mkt

I - insiders: prohibited fr profiting fr inside information

insider rules: def as an officer, director or 10% sharehldr of a co; insiders are req'd to rpt their trades w/in 2 bus days to SEC - makes information public; lawyers, accountants o insiders canNOT trade own stock using material inside information (any short swing profits derived fr trades w/in 6 mo period in that stock m/b paid to corp) o insiders canNOT sell short co shares (except that they can "short against the box" at year end to lock in a gain and defer tax to next year but position against box n/b closed out w/in 20 days) o treble damages for violations (3X profit achieved / loss avoided as well as jail)

open-end mutual fund

o 100+ sharehldrs: m/b registered o min fund capital =$100,000: min Total Net Assets of its own o investment adviser o investment adviser contract: specifies mgmt fee t/b paid; init advisory contract c/b for 2 years w/ ann renewal thereafter approved by either Bd of D or majority vote of o/s shs o fully paid securities positions- mgmt cos canNOT buy sec on margin; full pymt is req'd, generally canNOT sell short ***mgmt cos are permitted to borrow fr banks upto 1/3 of Total Net Assets -but canNOT be secured by invest port o change objective req's majority sharehldr vote o sharehldr rights: vote for Bd of D, changes in invest obj, vote annually on invest adviser, rec' annual and semi-annual rpts o 40% of Bd of D MUST be "non-affilated" o restrictions on affiliated persons (fund's officers, employees, controlling persons and hldrs of 5%+ os shs of fund): - canNOT borrow monies fr fund - canNOT lend monies to fund - canNOT buy sec out of fund's port - canNOT sell sec to fund's port - can buy shs of fund o Rule 12b-1 o "12b-1" funds: only operating exp, ie, custodian fees, mgmt fees, audit fees etc c/b charged against invest income o sharehldrs pay for some selling and distribution expenses, w/in limits (advertising, mailing of prospectuses to persons oth than curr sharehldrs, printing and mailing of sales lit, and comp of sales personnel o FINRA sets maximum 12b-1 fees: .75% and if fund wishes to advertise itself as a "no-load" fund, it limits annual 12b-1 fee to .25% o mutual fund sh classes: - class A: up-front sales charge reduced by breakpts for larger purch and no, or very low, annual 12b-1 fees - class B: no up-front s/c, instead CDSC is imposed that declines towards "0" over 6-7 years, there are annual 12b-1 fees averaging .5% - class C: no up-front s/c, no CDSC, fund charges highest permitted annual 12b-1 fee of .75% o diversified fund (or "75/5/10" rule): - 75% or more of assets invested in securities - maximum of 5% of its assets invested in any one issuer - maximum holding of 10% of voting securities in any one issuer o non-diversified: does NOT meet diversified def o violations - $10,000 fine and upto 5 years jail

registration procedure: to regis w/ SEC as IA, m/file Form ADV

o ADV Part 1: incl genl info, name, addr, bus name, officer, sharehldrs, phone #, no of employees, no of clients, total amt AUM; lists all States in which adviser is registered or has filed a regis o statutory disqualification - if applicant or its officers: - h/b suspended or expelled fr any oth SRO - is subj of SEC order suspending or revoking regis - by his conduct while assocd w/ firm h/caused that firm's suspension or expulsion - willfully filed false or misleading application or has omitted to state material facts in app - h/b convicted of any sec or "money" related offense w/in last 10 years - h/ temp or perm enjoined fr engaging in sec bus - is subj of a current court proceeding that is not completed that could cause any of above to occur - h/ any unsatisfied judgments or liens, h/filed for bankruptcy, h/b denied by bonding co etc o ADV Part 2: - ADV Part 2A "Brochure": (details adviser's bus, fees, disciplinary issues and conflicts of interest) X bus contact info, X material changes in last year, X descr of adviser's bus, X fee disclosures, X prepaid fee disclosure, X oth compensation disclosure (such as brokerage comm and how these conflicts are addressed), X performance fee disclosure (only allowed for very wealthy clients, X how conflicts are addressed), X types of clients, X analytical methods and invest strats, X legal / disciplinary actions taken against IA, X material relationships w/ oth fin industry participants, X use of subadvisers, X code of ethics, fin interest in sec recomm (assocd conflicts and how conflicts are addressed), X method of selecting a broker t/d IAs trades, X soft dollar practices disclosure, X compensation paid for client referrals disclosure, X directed brokerage disclosure where adviser sends trades to specific b/d in return for rebate of comm charges (m/b disclosed that adviser m/NOT rec "best execution"), X trade aggregation policy disclosure, X frequency of review of client accts, X paid client referral disclosure, X adviser taking custody disclosure, X discretionary authority disclosure, X proxy voting disclosure, if adviser takes prepaid advisory fees of $1,200 or more, 6 mos in advance - audited bal sheet m/b incl'd, X impaired fin cond disclosure o Form ADV Part 2B "Brochure Supplement" / information about key personnel ("Supervised Persons") - details names, qualifications and disciplinary issues of individuals working at the firm who direct invest strat or manage accts: X name of supervised person X education and business background of each supervised person X professional designations X disciplinary actions taken X outside business activities X supervisor over each supervised person, incl name, title and tel no of his supervisor o SEC normally grants registration w/in 45 days o private fund adviser w/ $150 mill+ AUM registers by filing Form PF - m/ file Form ADV Parts 1 and 2 w/ SEC o no Form PF filing for exempt reporting advisers - portions of Form ADV MUST be filed: still file portions of Form ADV Parts 1 and 2 w/ SEC o anyone who has spent 1 year or more in prison (h/ criminal record) is denied registration o items requiring ***PROMPT amendment of Form ADV: - change of bus name, addr or phone # - change of bus form - disciplinary actions taken by State Admin, State or Federal Court or SRO - if adviser begins to take custody of client funds or sec for first time or for the first time w/accept prepaid advisory fees of $1,200+ for 6 mos in advance of rendering serv :. ***NASAA wording for State registered advisers is that amendment m/b filed w/in 30 days o annual ADV amendment filed electronically w/ either SEC (Federal Covered Advisers) or State using IARD w/in 90 days of fiscal year end o ADV-W (Withdrawal) / withdrawal effec in 60 days: SEC m/cancel regis even if ADV-W h/not b/filed if SEC determines that adviser h/ceased business operations; State is 30 days

SEC IA releases

o IA-770 (IA Release #770, 1981) o 3 prong test - m/b YES to all Q - Test 1: does this person give advice about a security - Test 2: is this person "in the business" of giving advice about securities (SEC d/ EXCLUDE anyone who only gives rare, isolated, non-periodic advice about sec) - Test 3: is this person compensated for giving advice about securities - pymt in any form to adviser for serv rendered or relief of liability of adviser by cust is compensation to adviser o IA-1092 (IA Release #1092, 1987) o 3 prong test: - Test 1: does this person give advice about a security o general financial planning o pension consultants o advisers to athletes and entertainers ***o firm that recommends advisers may itself have to register - Test 2: is this person "in the business" of giving advice about securities o "in the business" means rendering advice is a regular activity - needs t/b bus activity occurring w/ some regularity; canNOT get out of registering as IA if one set up advisory practice outside of one's work as repres of b/d by stating that "I'm a registered b/d, so I dont' h/ to register as IA" o statutory invest adviser - ..by setting up outside practice - Test 3: is this person compensated for giving advice about securities oo EXCLUDED fr def of IA: - banks or bank hldg cos - lawyers, accountants, engineers or teachers whose performance of such serv is solely incidental to practice of their profession -b/ds and RRs who advisory serv are solely incidental to sec bus and who rec no special compensation for making recomm - publishers of bona fide newspapers, mags or fin publications of genl and reg ciculation - any person who advises solely about US govt guaranteed obligations oo EXEMPT who are incld under def of IA: o intrastate exemption - canNOT give advice to any sec listed on natl sec exchange o adviser to insurance cos is exempt under anti-fraud provisions, canNOT defraud his clients: o MUST act as a fiduciary o disclose conflicts of interest o disclose that IA services are separate fr b/d services o disclose personal interest in recommendations o disclose that trades can be effected anywhere o inform cust if the only products offered are those of that firm o inform cust if the adviser takes the same positions as those recommended o disclose if IA takes inconsistent positions to those recommended o inform cust if the adviser rec's "soft dollar" compensation fr a broker to whom is directs trades :. content of these interpretaions is now a "moot point" b/c NSMIA "split" btw SEC (> $100 mill under mgmt) and States(everyone else) -- ***content of SEC "IA" notices till m/b known

paying for solicitation: is permitted to pay a cash fee to a person for soliciting advisory clients only if -

o adviser is registered w/ SEC AND o person soliciting accts h/ not b/ suspended, expelled, ltd or barred fr associating w/ IA by SEC, aka statutory disqualification :. IF fee is t/b paid: - there m/b agreement in writing btw adviser and solicitor - agreement m/ req that solicitor del to cust at time of solicitation a copy of adviser's disclosure doc - solicitor m/ deliver sep discl to cust that contains name of solicitor and name of adviser, nature of relationship btw 2, stmt that solicitor w/b paid by adviser, and specific amt above reg advisory fee that w/b charged d/t use of solicitor o signed and dated acknowledgment of receipt of brochure(s) - no later than time of entering into written or oral contract

other rules -

o anti-fraud rule: IAs prohibited fr using mail or any oth means of "interstate commerce" o written code of ethics: m/ addr - personal trading - req rpting of personal trading and sec hldgs of adviser personnel and - req pre-approval for adviser personnel to make certain invest - m/b kept in writing and described in Form ADV Part 2A - ea supervised employee m/sign acknowledgment that he recd Code of Ethics, and this m/b retained o invest adviser principal trans - it m/: - disclose, prior to completion of trans that adviser is acting in capacity of b/d and - m/ obtain consent of client for trans o agency cross trans - it m/: - recomm trans to only 1 side of cross, ie, one of custs in trans canNOT h/b solicited, IF both custs h/b solicited, trans is prohibited - act in best possible interests of client to obtain best possible price - obtain written consent fr cust to effect agency cross trans that discloses that adviser w/b acting as broker for both buyer and seller that a commission w/b rec'd by adviser fr both parties and that potential conflict of interest exists - send to ea client at least annually, written discl stmt identifying total # of agency cross trans and total commissions rec'd fr these trans during past year o req'd disclosures to cust - m/ disclose to custs any prior disciplinary problems or financial problems: - impaired financial condition for advisers that have access to cust monies - req'd ONLY for adviser's that take custody of clients' funds or sec; h/ discretionary authority; or who accept prepaid advisory fees of $1,200+, 6 mos+ in advance o conviction w/in the past 10 years - any civil or criminal action taken against adviser where adviser was convicted, pleaded guilty or pleaded no-contest o securities law violations o court orders barring IA fr securities business - judgment or decree enjoining .. o suspension / expulsion by State Admin or SEC o suspension or expulsion by SRO or resulted in imposition of fines of > $2,500 o SEC may suspend or revoke registration - appeal to Federal court w/in 60 days o violations - upto $10,000 fine and upto 5 years in prison, either or both

Sec Act of 1933: to curb excesses found t/b present in new issue mkt, req'd that new issue purchases be provided w/ detailed prospectus bef a purchase was completed, banned margin to limit speculation in new issues

o applies to non-exempt issues: - registration stmt - issuer's responsibility, usu copy of proposed prospectus -- genl character of bus, -- uses of proceeds of the offering -- historical audited fin stmts, -- biographical data on officer and directors as well as their percentage holdings, -- legal issues, and any oth relevant information o 20 day cooling off period / "full and fair disclosure" o prohibitions during cooling off period -- issue canNOT b/sold -- canNOT be advertised -- recomm of issue are prohibited and -- solicitation of orders to buy is prohibited o allowed activities during cooling off period - u/ws distr "red herring", "taking indications of interest" o effec date / prospectus delivered at or prior to confirmation o prospectus delivered for 90 day period follg effec date - primary distr / "quiet period"/- aft 90 days, issuer is req'd to make its first financial filings w/ SEC o "omission of misstmt of material fact is fraud" - for all those individuals involved in offering (the issuer, u/ws, accountants & lawyers) o due diligence - offering materials are reviewed for "full disclosure", adequate and truthful

recordkeeping rules

o basic records to be kept: - cash receipts and disbursements ledger, gl - order tkt copies, showing name of person recomm trans, name of exec b/d, cust acct for whom order was entered - copies of all commun sent and rec'd by IA (however if sent to more than 10 persons, IA does NOT have to keep record of names and addresses to whom commun was sent, but if this commun is distr'd to any persons named on any list, a copy of advertisement along w/ memo describing list m/b retained - copies of all advertising, notices, circulars distr'd to 10+ persons - signed acknowledgment by cust of receipt of adviser's brochure o records to be kept if custody is taken - sec rec'd and delivered ledger - purch and sales ledger - trade ledger - sec record - ea aggregate sec position held, broken down by ea cust owning part of position and physical loca of that position - confirmation copies of all cust trades - cust acct stmts show all purchases, sales, sec positions and cash DRs and CRs o records to be kept if invest mgmt services are offered - record by cust of sec purch'd and sold w/ date, amt and price of ea trade - sec record that shows name of ea cust and amt held for ea sec position ***o retain records for 5 years w/ immed preceding 2 years records kept readily accessible for inspection = State law

E - exchanges: must register w/ SEC and regulate themselves under SEC guidance, as must their mbrs

o exchange and mbr firm registration w/ SEC: - stock exchanges incl NASDAQ that trade non-exempt sec m/ register SEC and b/come self regulatory - mbr firms m/ register as must their sales related employees oo net capital rule: req'd to meet min "liquid capital" standards oo segregation of fully paid securities: m/b place in safekeeping, canNOT b/commingled oo notification of free credit balances by b/d - rec' qtrly notice: - amt of free CR balance - funds are avail upon cust request - funds are NOT segregated fr oth brokerage firm cash bal oo notification of b/d financial condition - m/send semi-annual fin stmts: - bal sheet ( audited for year end stmt, unaudited for mid-year) - net capital computation oo statutory disqualification: - h/b suspended or expelled fr any oth SRO - is subj of an order issued by SEC suspending or revoking registration - by his conduct while associated w/ firm h/caused firm's suspension or expulsion - willfully file false or misleading application or has omitted to state material facts in application - h/b convicted of any sec or "money" related offense, embezzlement w/in past 10 years - h/b temporarily or permanently enjoined fr engaging in sec bus oo securities information processors - collects, processes and distributes quotes or trade rpts for trades in non-exempt sec: - ie, Bloomberg, Reuters - excld: genl circulation newspapers, mags oo clearing agencies and transfer agents - m/b registered!

the "brochure rule"

o investor brochure Form ADV Part 2A / brochure supplement Form ADV Part 2B - either c/b delivered o brochure delivery to new clients - at, or prior to entering into advisory agreement, oral agreements count ***o cust signs that brochure was rec'd - m/b retained by IA (NASAA rule is completely different - m/b delivered 2 bus days bef or cust c/sign and m/b given 5 bus days to rescind w/out cost) o annual brochure update if there are changes - w/in 120 days of fiscal year end - curr Brochure OR - "Summary of Material Changes" :. applies to Brochure and NOT to Supplement o prompt delivery of Brochure or Supplement if changed due to disciplinary actions - m/b delivered to clients promptly along w/ stmt describing material facts relating to change in disciplinary info - del of brochure NOT req'd when IA is contracting to sell to invest cos OR so-called "impersonal advisory serv" of <$500 OR to clients who are officers or employees of adviser or any oth person related to adviser "impersonal advisory serv": written or oral commun about investing that are NOT directed at specific client situ

R - reports: corp issuers must file annual and qtrly financial rpts which are public information

o issuers register w/ SEC / 10K Report (audited) / 10Q Report (unaudited) o Sarbanes Oxley / CEO and CFO certify financial stmts: take personal liability for misstmts; inc stmt, bal sheet, stmt of changes to retained earnings, sources and used of funds o 8K Report: filing must be made by issuer w/ SEC if issuer declares bankruptcy, changes composition of Bd of D, proposes merger or divestiture, or if oth major corp events occur - must be filed w/in 4 days of event o 13D filing when person accumulates 5% equity position: MUST be made w/in 10 bus days of the date that the 5% threshold is reached, w/ copies sent to SEC, the issuer and the exchange trading the issue o 13G filing: if person intends to remain a passive investor, "13G" filing can be made instead of 13D, no later than 45 days aft year end o 13F filing (Report of Holdings): req's institutional invest mgrs to file if mgr exercises discretion over accts of cust who collectively hold $100 mill, or more, of equity securities, due w/in 45 days of qtr ending where, at any month end, $100 mill dollar limit was reached

M - margin: control over credit on securities was given to Federal Reserve

o margin regulation: - Regulation T: extended fr broker to cust - Regulation U: fr bank to broker o init margin / loan value: - for stocks at 50% - for long-term listed options, LEAPS at 75% o only Exchange and NASDAQ listed issues are marginable - NOT marginable are OTCBB or Pink Sheet issues o new issues - no margin for 30 days

management company: invest co organized as corp, issuing shares of stock

o open-end "mutual fund", redeemable, non-negotiable o closed-end "publicly traded" fund, not redeemable, negotiable

OVERVIEW: (15%) ***Invest Advisers Act of 1940: main thrust was to register advisers to mutual funds w/ SEC and limit their compensation

o securities Act of 1933 / primary mkt o securities exchange act of 1934 / secondary mkt o invest co act of 1940 / invest advisers act of 1940

Regulation A - sm dollar offerings - Tier 1: maximum of $20 mill raised w/in 12 mo period - audited fin stmts are NOT req'd - Tier 2: maximum of $50 mill raised w/in 12 mo period - audited fin stmts m/b filed

o simplified registration Form S1-A ("Abbreviated") / 20 day cooling off period / offering circular (vs. prospectus): the issue is "qualified" (a legally simpler version of a registration b/coming "effective") o exempt issues: US govt issues o exempt trans: if comm stock issue, a non-exempt sec is sold in "private placement", regis is NOT req'd b/c this trans is exempt o exempt issues - govt and muni issues - issuers already regulated under oth laws - non-profit issues - oth exempt issues oo banker's acceptances, commercial paper < 270 days oo issues of small business invest cos ***this listing differs fr exempt sec incld in State law: -- exchange listed sec are exempt under State but are NOT exempt under Federal law -- comm paper is exempt under State law if it is invest grade and sold in min units of $50,000 in addition to having 9 mo max life o exempt trans: unless these sec are offered in exempt trans, they m/b registered and offered thru prospectus under '33 Act - the major exempt trans are intrastate offerings under Rule 147 and private placements under Reg D

M - manipulation: becomes fraud

prohibited activities: o wash trades: buying and selling same security to create "appearance" of trading activity o trading pools: investors grouping together and trading same security among themselves at successively higher prices w/out true change of ownership. As the price inflates, oth investors take notice and buy, thus the pool is able to unload stock at artificially inflated price o matched trades: prearranging for ano person to buy when one wishes to sell; or vice-versa; so that there is appearance of trading, when, in fact this is not occurring o circulating rumors: that are of sch a sensational nature that they will likely affect stock's price Rule 10b5: "Catch-all fraud Rule 10b-5" - if you do something Act didn't specify, and it is wrong, it can be considered as "fraud"

Investment Company Act of 1940 (diversification, professional selection)

regulates functions of invest cos; defines 3 types of cos: o face-amount certificate co o mgmt co o unit invest trust

S - short sales rules: SEC Regulation SHO, rules for selling securities short (selling borrowed shares)

to ensure that there is NOT a fail to deliver, broker MUST "locate" the shares and deliver them on settlement if there is a fail, mandatory buy-in is req'd w/in ltd time frame if a stock drops 10% or more, for remainder of that trading day and entire next day, the stock can only be sold short on an upbid

Which ratio would be used to measure the financial leverage of a broker-dealer? StatusA A. Assets to Net Capital Correct Answer B. Loans to Net Capital Incorrect Answer C. Assets to Liabilities StatusD D. Net Income to Revenue B

"Leverage" is the use of debt in the capital base of a business. The standard measure of leverage for a business is the Debt to Equity ratio. ***For a broker-dealer, equity is often measured by the firm's "liquid" equity, called net capital. It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. The ratio of debt to net capital would be a leverage measure for a broker-dealer.

The financial leverage of a broker-dealer would be measured by its: StatusA A. Net Capital amount StatusB B. Aggregate Loan amount Correct C. Ratio of Loans to Net Capital StatusD D. Ratio of Income to Net Capital C

"Leverage" is the use of debt in the capital base of a business. The standard measure of leverage for a business is the Debt to Equity ratio. For a broker-dealer, equity is often measured by the firm's "liquid" equity, called net capital. It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. The ratio of debt to net capital would be a leverage measure for a broker-dealer.

Criminal violations of the Investment Advisers Act of 1940 are punishable by: Incorrect Answer A. $5,000 fine and 3 years in jail StatusB B. $10,000 fine and 3 years in jail StatusC C. $5,000 fine and 5 years in jail Correct Answer D. $10,000 fine and 5 years in jail D

***Criminal violations of the Federal securities laws are punishable by a fine of $10,000 and up to 5 years in jail. In contrast, the criminal penalties under Uniform State law are a fine of up to $5,000 and 3 years in jail.

Under SEC Release IA-1092, which of the following would be required to register with the SEC as investment advisers? I A Certified Financial Planner who only provides general financial planning for a fee; but who does not take commissions on recommended transactions II An attorney who manages the business affairs of athletes for a fee III An accountant who manages the business affairs of entertainers for a fee IV An economist who gives advice to pension plans for a fee on the outlook for the securities markets StatusA A. II and III only Incorrect Answer B. I and IV only StatusC C. II, III, IV Correct Answer D. I, II, III, IV D

***Investment adviser Release IA-1092 specifically includes advisers to entertainers and athletes, and advisers to pension plans, as investment advisers that must register with the SEC. In addition, the SEC in this release, states that a financial planner that provides general financial planning for a fee comes under the definition and must register with the SEC. It makes no difference whether or not the financial planner takes commissions on recommended trades - if this person gives general "non-specific" advice for a fee, he or she is still considered to be an "investment adviser" that must register.

Investment advisers that have separate broker-dealer entities are permitted to accept which of the following compensation items? I Fixed annual fees II Fees based on a percentage of assets under management III Commissions based on trades IV Fees based on the capital appreciation of the securities in the portfolio StatusA A. II only StatusB B. I and IV Correct Answer C. I, II, III Incorrect Answer D. I, II, III, IV C

***Investment advisers cannot accept fees based on performance unless the client has at least $1,000,000 of assets under management or a $2,000,000 net worth. Fixed annual fees, wrap fees, fees based on a percentage of assets under management, and commissions on trades where the adviser has a separate broker-dealer entity, are all permitted compensation items.

If an investment adviser acquires a 5% or greater holding in a publicly held company, it MUST file a 13d report: Incorrect Answer A. only if the purchases were for its proprietary account and it intends to exercise control over that issuer StatusB B. only if the purchases were for its customer accounts and it intends to exercise control over that issuer Correct Answer C. if the purchases were for either its proprietary account or its customer accounts and it intends to exercise control over that issuer StatusD D. if the purchases were for either its proprietary account or its customer accounts and it intends to remain a passive investor C

A 13d filing is required with the SEC if any one person (or an entity controlled by that person) acquires a 5% or greater holding in a publicly held company with the intention of exercising control (e.g., kicking out that company's existing management). The filing must be made within 10 business days of crossing the 5% threshold. An adviser "controls" purchases made in both its proprietary and customer accounts, so these are aggregated when determining if the 5% threshold is reached.

A "market maker," as defined under the Securities Exchange Act of 1934: StatusA A. effects securities trades for the account of others on an agency basis StatusB B. effects securities trades for the account of others on a principal basis Correct C. effects trades with others out of his or her own account StatusD D. effects trades on a discretionary basis for the account of customers C

A market maker is a firm that sells securities out of its own account or buys securities into its own account. Broker-dealers effect trades for the account of customers. Broker-dealers can effect trades either on an agency basis, where the firm acts as a middleman, charging a commission to the customer; or on a principal basis, where the firm sells a security from its inventory to the customer with a markup.

A securities firm that stands ready to buy and sell a security for its own account is a(n): Correct Answer A. Market maker StatusB B. Broker StatusC C. Agent Incorrect Answer D. Principal A

A market maker or dealer is a firm that sells securities out of its own account or buys securities into its own account on a principal basis. The profit to the market maker is the "spread" (the difference) between the market maker's buy price and sell price. You could argue that principal is a true answer as well, but "market maker" is the better choice since this is a definitional question. Brokers effect trades for the account of customers on an agency basis, where the firm acts as a middleman, charging a commission to the customer.

An open-end management company is a: Correct A. mutual fund StatusB B. publicly traded fund StatusC C. fixed unit investment trust StatusD D. real estate investment trust A

A mutual fund portfolio is managed by an investment adviser and the fund continuously issues and redeems its common shares - so it is an "open-end" management company.

All of the following are considered to be "giving advice about securities" under SEC Release IA-1092 EXCEPT a person who: StatusA A. issues reports about securities to customers StatusB B. develops an overall financial plan for customers StatusC C. advises customers on the selection of an investment adviser Correct D. advises customers on the selection of a broker-dealer D

A person who advises customers on the selection of a broker-dealer to effect their recommended trades is not an investment adviser. However, a person who recommends other investment advisers to customers can be considered by the SEC to be an investment adviser that must register; as can a person who issues reports about securities (for years, the SEC has chased subscription investment newsletters to register as investment advisers - the newsletters claim that they are excluded under the "general circulation publication" exclusion; the SEC claims that they are not a "general circulation newsletter," but rather are circulated only to those buying their investment advice, and thus they should register!) Finally, anyone developing financial plans for customers for a fee, of which securities investments may be a minor part, is defined as an "investment adviser" that must register.

What is the difference between Class A and Class B stock in a pooled investment vehicle? Incorrect Answer A. Class A stock distributes dividends only while Class B stock distributes capital gains only StatusB B. Class A stock is negotiable while Class B stock is redeemable ***C. Class A stock offers breakpoints while Class B stock does not StatusD D. Class A stock is more marketable than Class B stock C

A pooled investment vehicle is an investment fund. Mutual funds offer share classes to investors, with different ways of imposing sales charges: Class A: An up-front sales charge reduced by breakpoints for larger purchases and no, or very low, annual 12b-1 fees. Class B: No up-front sales charge, instead a CDSC -Contingent Deferred Sales Charge is imposed that declines towards "0" over 6-7 years, however there are annual 12b-1 fees averaging .50%. Class C: No up front sales charge, usually no CDSC, but the fund charges the highest permitted annual 12b-1 fee of .75% annually. All share classes buy into the same exact mutual fund and receive the same distributions from the fund. Long-term investors, and investors with large dollar amounts, are usually better off with the "A" shares. Intermediate-term investors (6-7 years) with moderate amounts to invest are usually better off with the "B" shares. Short-term investors are better off with the "C" shares.

What is the difference between Class A and Class B stock in a pooled investment vehicle? StatusA A. Class A stock is preferred stock while Class B stock is common stock Correct B. Class B stock charges higher 12(b)-1 fees than Class A stock StatusC C. Class A stock has no up-front sales charge while Class B stock has an up-front sale charge StatusD D. Class A stock receives dividends only while Class B stock receives capital gains only B

A pooled investment vehicle is an investment fund. Mutual funds offer share classes to investors, with different ways of imposing sales charges: Class A: An up-front sales charge reduced by breakpoints for larger purchases and no, or very low, annual 12b-1 fees. Class B: No up-front sales charge, instead a CDSC - Contingent Deferred Sales Charge is imposed that declines towards "0" over 6-7 years, however there are annual 12b-1 fees averaging .50%. Class C: No up front sales charge, usually no CDSC, but the fund charges the highest permitted annual 12b-1 fee of .75% annually. All share classes buy into the same exact mutual fund and receive the same distributions from the fund. Long-term investors, and investors with large dollar amounts, are usually better off with the "A" shares. Intermediate-term investors (6-7 years) with moderate amounts to invest are usually better off with the "B" shares. Short-term investors are better off with the "C" shares.

An investment adviser to a hedge fund with $200 million of AUM has invested 50% of fund assets in gold, anticipating a stock market decline and flight to safety by investors. The investment adviser must register: Correct A. with the SEC StatusB B. with the CFTC StatusC C. in the State where the IA is physically located StatusD D. with the SEC, CFTC and the State where the IA is physically located A

A private fund adviser with at least $150 million of assets under management (AUM) must register with the SEC, and therefore will not register with any State. ***When counting AUM, all assets are counted, regardless of how they are invested. The CFTC is the Commodities Futures Trading Commission - never an answer on these exams!

Which of the following are considered to be "compensation" to an investment adviser under the Investment Advisers Act of 1940? I Commissions paid to the investment adviser for executing recommended securities transactions II Commissions paid to the adviser on recommended insurance purchases III Payments made by the issuer to the adviser for recommending the issuer's securities IV Profits on securities positions held by the adviser where the adviser recommended those securities to its customers StatusA A. I and II only StatusB B. III and IV only Correct C. I, II, III StatusD D. I, II, III, IV C

Advisers' compensation is defined broadly and includes payments received from the sale of advisory services; payments received for referring customers to other advisers or broker-dealers; commission payments received for executing customer portfolio trades through an affiliated broker-dealer; commission payments received for selling that customer non-securities products like insurance or real estate; and payments made by issuers to the adviser to recommend that issuer's securities (though this is illegal, it is still compensation to the adviser). Profits on securities positions held by the adviser are specifically excluded from adviser compensation.

Under the Investment Company Act of 1940, an affiliated person may: StatusA A. borrow money from the fund StatusB B. borrow securities from the fund StatusC C. sell securities personally to the fund Correct D. buy shares of the fund D

Affiliated persons of investment companies (the officers, employees, and 5% shareholders of the fund) are prohibited from borrowing monies from the fund; from borrowing securities from the fund; or from buying securities personally from the fund's portfolio or selling securities personally to the fund's portfolio. In all of these instances, the affiliated person is in a position to effect such transactions at overly favorable terms - since there is no "arm's length." There is no prohibition on these persons buying the shares of the fund - in this case they buy at Net Asset Value (plus a sales charge, if any) - just like any other customer.

Violations of the Investment Company Act of 1940 are punishable by: StatusA A. 3 years in jail and a $5,000 fine StatusB B. 3 years in jail and a $10,000 fine StatusC C. 5 years in jail and a $5,000 fine Correct D. 5 years in jail and a $10,000 fine D

All of the Federal securities laws stipulate that violations are punishable by up to 5 years in jail and a $10,000 fine. This differs from Uniform State law, which imposes a maximum $5,000 fine and 3 years in jail for violations.

An investment adviser is called by a customer who wishes to sell a security; and then the adviser solicits another customer to buy that same security. Which of the following statements are TRUE? I This is a "principal transaction" II This is an "agency cross transaction" III This transaction is permitted only if the customer is informed of the circumstances and consents to the transaction IV This transaction is prohibited StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV C

An "agency cross transaction" occurs when an investment adviser recommends that a client buy a security from another client who is selling the same security. If an investment adviser effects an agency cross transaction with the customers, it must: recommend the transaction to only 1 side of the cross (i.e., only one of the customers could have been solicited); act in the best interest of both clients and obtain the best price; obtain written consent from the customer that discloses that the adviser will be acting as broker for both the buyer and seller; that a commission will be received from both parties by the adviser; and that a potential conflict exists. Also, the adviser must send to each client, at least annually, a written disclosure statement, identifying the total number of agency cross transactions and total commissions received from these transactions during the past year.

If the SEC sends a deficiency letter to the issuer regarding an issue in registration, which of the following statements are TRUE? I Disclosure in the registration documents is not complete II The issuer must file an amendment with the SEC to cure the deficiency III The 20-day cooling off period starts again once the amendment is filed IV The SEC can issue subsequent deficiency letters after amendments are reviewed StatusA A. I and III StatusB B. II and IV StatusC C. I, II, III Correct D. I, II, III, IV D

An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the registration to be effective. Once the amendment is filed, the 20-day cooling off period starts counting again from the beginning. If the SEC finds that there is not adequate disclosure after the amendment is filed, it can issue subsequent deficiency letters. Thus, the registration for the issue may never "go effective."

Which of the following is (are) defined as "affiliated persons" under the Investment Company Act of 1940? I Officer of the management company II Employee of the management company III A 5% holder of the management company's shares StatusA A. I only StatusB B. II only StatusC C. I and III Correct D. I, II, III D

An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company. The Board of Directors of a management company cannot consist of more than 60% of these affiliated persons. Other persons that the fund compensates, such as accountants and lawyers for the fund, are termed "interested" persons.

An indication of interest for a new stock offering is normally taken: Incorrect Answer A. before the 20 day cooling off period Correct Answer B. during the 20 day cooling off period StatusC C. after the 20 day cooling off period StatusD D. either before, during, or after the 20 day cooling off period B

An indication of interest is taken during the 20 day cooling off period before a new issue's registration becomes effective. The underwriters use the indications collected as one of the determinants for pricing the issue (this happens at the very end of the cooling off period).

An investment adviser is considered to be "in the business" of rendering investment advice under SEC Release IA-1092 if: StatusA A. advice is rendered on non-exempt securities Incorrect Answer B. giving advice on securities is one of the businesses of the firm Correct Answer C. the firm advertises its services StatusD D. the firm prepares economic reports or analyses C

An investment adviser is considered to be "in the business" if it advertises itself as an investment adviser; or if giving advice about securities for compensation is a regular business of the firm. It makes no difference if the advice is rendered on exempt or non-exempt securities (with the 1 exception that an adviser who solely gives advice about U.S. Government guaranteed securities is excluded from the definition of an adviser under the Investment Advisers Act of 1940, but not under the Uniform Securities Act).

Which statement is TRUE regarding mutual funds? StatusA A. That day's opening price is the basis for fund purchase price and redemption computations StatusB B. The next day's opening price is the basis for fund purchase price and redemption computations Correct C. That day's closing price is the basis for fund purchase price and redemption computations StatusD D. The next day's closing price is the basis for fund purchase price and redemption computations C

An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees. If the fund is no load, there's no sales charge.

If a person accumulates a 5% or greater holding in a publicly held company with the intention of exercising control: StatusA A. Form d must be filed within 5 business days Correct B. Form 13d must be filed within 10 business days StatusC C. Form 10k must be filed within 10 business days StatusD D. Form S-l must be filed promptly B

Anyone who accumulates a 5% position in one company must make a 13d filing with the SEC within 10 business days.

A registered representative with a broker-dealer makes recommendations of securities to a customer, and charges a commission on each trade. Which statement is TRUE? StatusA A. This person must register with the State as an investment adviser representative StatusB B. This person must register with the State as an investment adviser Correct C. This person is excluded from the definition of an investment adviser StatusD D. This person is defined as an investment adviser, but is exempt from registration C

Broker-dealers and their registered representatives are excluded from the definition of an investment adviser as long as they do not charge separately for advisory services. Thus, a broker-dealer can charge a commission on each recommended trade and not be defined as an investment adviser that must register in the State (note however, that it must still register as a broker-dealer in that State).

Under IA-1092, which of the following are defined as "giving advice about securities"? A person who: I advises on the selection of an investment adviser II prepares a list of securities that may be purchased without making specific recommendations III prepares an asset allocation plan that specifies percentage investments in stocks, bonds, real estate and insurance IV charts the price movements of stocks and distributes them to subscribers StatusA A. I only Incorrect Answer B. III and IV Correct Answer C. I, II, III StatusD D. I, II, III, IV C

Charting of the price movements of stock is not "investment advice." An investment adviser, under the Investment Advisers Act of 1940, is "a person who receives compensation for advising others about securities, or about the advisability of investing in securities." Under the SEC's interpretations, a person who prepares a "list" of securities is making an implicit recommendation of these securities and is giving advice; a person who prepares asset allocation plans is also giving advice (if one of the assets included is securities). ***Furthermore, a person who recommends investment advisers is also one who gives advice! *A person who prepares and distributes charts of stock price movements is not giving advice. Note, however, that if this information is used by the preparer to determine which securities to buy or sell, it would be considered to be "investment advice."

Acco Fund (a closed-end management company) has a current net asset value of $10.82 per share and has an ask price of $10.54. Which statement is TRUE regarding the relationship between Acco Fund's net asset value and ask price per share? StatusA A. The ask price is lower than the net asset value because fund redemptions are exceeding purchases StatusB B. The ask price is lower than the net asset value because of the redemption fee the fund charges its investors Correct C. The ask price is lower than the net asset value because sellers exceed buyers on the exchange floor StatusD D. The ask price is lower than the net asset value because buyers exceed sellers on the exchange floor C

Closed-end fund shares trade in the market like any other stock. They can trade at a discount to net asset value when investors become disenchanted with the fund. This will occur if the company gives an inferior return. In this case, sellers will exceed buyers. This pushes the market price lower than the net asset value. A similar thing happens to regular company stocks when they sell below book value.

Which statement concerning closed-end investment companies is TRUE? Shares are: StatusA A. issued continually to investors StatusB B. redeemed continually from investors StatusC C. redeemed at net asset value Correct D. traded over-the-counter or on the stock exchanges D

Closed-end management companies have a 1-time stock issuance; the books of the company are closed to new investment; and then the shares are listed and trade like any other stock. In contrast, shares of open-end companies are issued continually by the fund and are redeemable with the fund. They do not trade on the secondary market.

Commercial paper is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed: StatusA A. 30 days StatusB B. 90 days StatusC C. 180 days Correct D. 270 days D

Commercial paper is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed 270 days. If the maturity is longer than this, it is non-exempt and must be registered and sold with a prospectus.

n connection with a new issue offering, a broker-dealer would be permitted to send which of the following to a customer if it were accompanied by a copy of the final prospectus? StatusA A. An internal report prepared by the issuer that projects increasing product line market share over the next 3 years StatusB B. Copies of advertisements used by the issuer to promote its products during the past year StatusC C. An advance copy of the broker-dealer's research report on that issuer that will be released after the restriction period ends Correct D. A copy of the tombstone announcement prepared by the underwriter in connection with the offering of the issue D

Delivery of prospectuses cannot be accompanied by promotional material of any type. The only information that can accompany a prospectus would be a "tombstone;" or information that has been filed with the SEC - such as audited financial reports.

Which of the following securities is (are) exempt under the Securities Act of 1933? I U.S. Treasury Bills II General Obligation Bonds III Water Authority Bonds issued by the city of Rochester, Minnesota StatusA A. I only StatusB B. I and II StatusC C. II and III Correct D. I, II, III D

Exempt securities under the Securities Act of 1933 include U.S. Government securities (such as Treasury bills); and municipal securities (such as general obligation bonds and revenue bonds - a water authority bond issue is a revenue bond).

A broker-dealer participates in the distribution of a new issue on a best efforts basis, receiving an underwriting fee from the issuer. The broker-dealer is: I acting as agent for the issuer II acting as a principal III the underwriter of the securities IV the investment adviser to the issuer Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

Firms that handle new issue distributions for issuers are underwriters. The underwriter can either act as a principal or agent in the underwriting. A firm commitment underwriting obligates the underwriter to buy the issue from the issuer - the underwriter takes full financial liability. A best efforts underwriting means that the underwriter acts as agent, using its best efforts to sell the issue to the public, taking no liability. For this, it earns an underwriting fee on each share or bond sold.

A broker-dealer participates in the distribution of a new issue on a best efforts basis, receiving an underwriting fee from the issuer. The broker-dealer is: StatusA A. acting as agent for the issuer and as an investment adviser to the purchasers Incorrect Answer B. acting as principal for the issuer and as an investment adviser to the purchasers Correct Answer C. acting as agent for the issuer and as an underwriter of the securities StatusD D. acting as a principal for the issuer and as an underwriter of the securities C

Under the Securities Act of 1933, omissions or misstatements of material fact in a registration statement can be considered to be fraudulent for the: I Officers of the issuer II Lawyers for the issuer III Accountants for the issuer IV Board of Directors of the issuer StatusA A. I and IV only StatusB B. II and III only StatusC C. I, II, III Correct D. I, II, III, IV D

Fraud is fraud is fraud. Omissions or misstatements of material fact in a registration statement or prospectus for an issue registered under the Securities Act of 1933 can be fraud for everyone involved. The officers of the issuer and the members of the Board of Directors who sign the registration statement are liable; as are the accountants who certify the financial statements; as are the lawyers who prepare the legal filings.

An investment adviser makes an offer to send, by mail, a "free" analysis covering his top 50 stock picks in an advertisement. In order for an individual to get the report, the adviser could require that individual to: Incorrect Answer A. fill out a questionnaire detailing that individual's financial resources StatusB B. pay a shipping and handling fee of $38 to get the report sent out StatusC C. provide the names and addresses of 3 other persons who would be interested in the adviser's reports Correct Answer D. telephone the adviser and listen to a brief sales pitch before taking the mailing information D

Free means just that - free. Charging a high shipping fee for the "free" report means that it is not free, so this is prohibited. The offer of a free service cannot be made conditional, so requiring the customer to complete a detailed financial questionnaire crosses the line; as does asking for 3 customer references in order to get the "free" report. ***Making the individual call the adviser to get the "free" report is OK; and making the customer listen to a brief sales pitch to get the report is OK as well.

All of the following are required to be disclosed by investment advisers to their clients under the NASAA Statement of Policy EXCEPT that the: StatusA A. broker-dealer that effects recommended securities trades compensates the investment adviser with commissions StatusB B. investment company whose shares are recommended by the investment adviser compensates the investment adviser with management fees Correct C. investment adviser will buy back any recommended securities at the original purchase price upon request StatusD D. investment adviser will be buying recommended securities for his personal account C

Guarantees of customer accounts are prohibited under the NASAA Statement of Policy. IA-1092 requires that disclosure be given to customers if anyone other than the customer will compensate the investment adviser for transactions that result from the investment adviser giving advice to that client - so if the investment adviser will get commissions on recommended trades, this must be disclosed; and if the investment adviser is paid management fees by an investment company whose shares are recommended, this must be disclosed as well. If an investment adviser takes the same securities position personally as that recommended to customers, this must be disclosed; and if the investment adviser is selling a security position that he is recommending that a customer buy; this must be disclosed as well.

Under IA-1092, all of the following are considered to be investment advisers EXCEPT: StatusA A. pension consultants Correct B. estate planners StatusC C. advisers to athletes StatusD D. advisers to entertainers B

IA-1092 specifically includes pension consultants and advisers to entertainers and athletes as investment advisers that must register. It makes no mention of estate planners.

A publicly held corporation has 100,000,000 shares outstanding. A wealthy investor that buys 8,000,000 shares of the company as a passive investor: StatusA A. must file a 13d report with the SEC Correct B. must file a 13g report with the SEC StatusC C. must file a 13f report with the SEC StatusD D. is not required to file a report with the SEC B

If a 5% or greater holding is accumulated in a publicly held company, and the purchaser does not intend to exercise control over that company (that is, will be a passive investor), then a 13g filing is made with the SEC. If the purchaser intends to exercise control, then a 13d filing is made.

An individual who is a registered representative with a broker-dealer prepares financial plans for customers under the supervision of the broker-dealer and does not charge for the plans. The individual takes commissions on transactions that result from the implementation of the recommendations included in the plans. Under SEC Release IA-1092: Incorrect Answer A. both the individual and the broker-dealer must register with the SEC as an investment adviser representative and an investment adviser, respectively Correct Answer B. neither the individual nor the broker-dealer need register with the SEC as an investment adviser representative and an investment adviser, respectively StatusC C. the individual must register with the SEC as an investment adviser representative; the broker-dealer is not required to register with the SEC as an investment adviser StatusD D. the individual need not register with the SEC as an investment adviser representative; the broker-dealer is required to register with the SEC as an investment adviser B

If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".

All of the following are forms of compensation to an investment adviser EXCEPT: Incorrect Answer A. commissions taken on securities transactions for customers StatusB B. sales charges earned on investment company sales to customers StatusC C. asset management fees taken on customer wrap accounts Correct Answer D. bid-ask spread on securities transactions for customers D

Investment advisers do not earn bid-ask spreads - these are earned by the market makers who are in the business of buying and selling securities for their own account. Commissions, sales charges, and wrap fees are all sources of income to investment advisers.

Under the Investment Advisers Act of 1940, if an investment adviser wishes to effect an agency cross transaction for a customer, which of the following statements are TRUE? I Agency cross transactions cannot have been recommended to both the buyer and seller by the investment adviser II Each client must be sent an annual statement identifying the total number of agency cross transactions effected; and the remuneration received by the adviser for these transactions III Each client must be sent a monthly account statement detailing activity in the account for that period IV To effect an agency cross transaction, written consent from the client must be obtained StatusA A. I and III Correct B. I, II, IV StatusC C. II, III, IV StatusD D. I, II, III, IV B

If an investment adviser wishes to effect an agency cross transaction for a customer, it cannot have recommended the transaction to both the buyer and the seller. To effect the transaction, the adviser must obtain written consent of the customer; must disclose the remuneration that will be received from the transaction; and must send the customer an annual statement identifying the total number of agency cross transactions effected by the adviser and the remuneration received. There is no requirement to send monthly statements to customers.

All of the following statements are true about "agency cross transactions" under the Investment Advisers Act of 1940 EXCEPT: StatusA A. to effect an agency cross transaction, written consent from the client must be obtained Incorrect Answer B. agency cross transactions cannot have been recommended to both the buyer and seller by the investment adviser Correct Answer C. each client must be sent a quarterly account statement detailing activity in the account for that period StatusD D. each client must be sent an annual statement identifying the total number of agency cross transactions effected; and the remuneration received by the adviser for these transactions C

Under the Investment Advisers Act of 1940, an investment adviser is prohibited from borrowing money from which of the following? Incorrect Answer A. Broker-dealer StatusB B. Investment adviser affiliate StatusC C. Insurance company Correct Answer D. Small manufacturing company D

Investment advisers cannot borrow money from "customers" - which are defined, in this instance, as anyone who is not in the business of lending money. Broker-dealers lend money where securities are collateral under the provisions of Regulation T of the Federal Reserve Board. Insurance companies lend monies under the provisions of Regulation G of the Federal Reserve Board. An investment adviser borrowing from an affiliate is basically borrowing from itself, so this is permitted. ***An investment adviser borrowing from a small manufacturing company is borrowing from a business that is not permitted under Federal and State law to lend monies - this is the same as borrowing from a "customer."

Investment companies are obligated to send their financial statement to shareholders: StatusA A. annually Correct B. semi-annually StatusC C. quarterly StatusD D. monthly B

Investment companies must send their financial statements to shareholders semi-annually.

Reports filed by issuers with the SEC under the Securities Exchange Act of 1934 are made available to: I research analysts II securities attorneys III shareholders IV general public StatusA A. I and II StatusB B. III and IV StatusC C. I, III and IV Correct D. I, II, III, IV D

Issuer filings (10K, 10Q, 8K reports) filed with the SEC are made public immediately, to anyone that wants to see them. The SEC has a website from which these can be accessed; and has a reading room in Washington, D.C. where these reports are made available to the public when the filing is received from the issuer.

Under the Securities Exchange Act of 1934, all of the following issuers must report to the SEC EXCEPT: StatusA A. Corporations StatusB B. Investment Companies StatusC C. Master Limited Partnerships Correct D. Municipalities D

Publicly traded corporations and limited partnerships, as well as investment companies, file reports with the SEC. Municipal and federal issuers are exempt from the Act of 1934.

Management companies are permitted to: StatusA A. buy securities on margin StatusB B. sell securities short Correct C. borrow from banks StatusD D. lend monies to shareholders C

Management companies may borrow up to 1/3 of their total net assets from a bank. However, they cannot buy securities on margin; cannot lend monies to shareholders; and cannot sell securities short (which requires margin to do so).

Which securities can be purchased on margin? Correct A. NASDAQ issues StatusB B. Pink Sheet issues StatusC C. Options StatusD D. Open End Fund Shares A

NYSE, AMEX (NYSE-MKT) and NASDAQ listed issues are marginable. These are actively traded stocks. New issues are not marginable for 30 days, and every share of a mutual fund (an open-end fund) is a newly issued share. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

Once registration is effective for a non-exempt new issue, customers that previously received a preliminary prospectus during the 20-day cooling off period are: StatusA A. automatically confirmed with a purchase of the issue Correct B. contacted by the underwriter to see if they wish to purchase the issue StatusC C. obligated to buy an amount of the issue determined by the underwriter StatusD D. permitted to make a competitive bid for the issue B

Once registration is effective, customers, who previously received a preliminary prospectus during the 20-day cooling off period, may be contacted by the underwriter to see if they wish to purchase the issue

Which of the following investment companies can adopt a 12b-1 plan? Correct A. Mutual fund StatusB B. Closed end fund StatusC C. Unit trust StatusD D. Face amount certificate company A

Only mutual funds (open-end management companies) have sales loads and 12b-1 distribution fees. Closed-end fund share trade like any stock - the only cost of investing is the commission charge for buying or selling shares. Unit trusts and face amount certificate companies also cannot adopt 12b-1 plans.

An order to buy a new issue that has not been registered with the SEC can be accepted if the issue is: Correct A. exempt StatusB B. non-exempt StatusC C. sold to professional investors StatusD D. offered in no more than 5 States A

Orders to buy a new issue that is not registered with the SEC can only be accepted if the security is exempt; or if the security is sold in an exempt transaction, such as a private placement. There is no professional investor exemption; nor is there a federal exemption available if the offering is sold in no more than 5 States.

When preparing an advertisement, an investment adviser whose principal business is rendering advice to customers about securities, is prohibited from: StatusA A. showing past performance Correct B. using a paid testimonial StatusC C. using illustrative performance charts StatusD D. using the term "investment counsel" B

Paid testimonials are prohibited in investment adviser advertising. Past performance may be shown, as long as there is the disclaimer that "past performance does not predict future results." Specific prior recommendations cannot be shown, however, illustrative charts can be used; and the term "investment counsel" can be used as long as the principal business of the advisory firm is the rendering of investment advice.

A Registered Investment Adviser uses past performance in an advertisement. The results shown must be based on: StatusA A. Gross investment income before any deductions StatusB B. Investment income after the deduction of expenses StatusC C. Investment income after the deduction of management fees Correct D. Investment income after the deduction of management fees and expenses D

Performance charts must show investment results with all expenses deducted out.

An investment adviser includes a list of its "Top Ten" recommendations made over the last year in its advertising. Under the Investment Advisers Act of 1940, which statement is TRUE? StatusA A. This is permitted if the adviser gets the permission of the issuers to use their names StatusB B. This is permitted if the adviser files the advertisement in advance with the SEC StatusC C. This is permitted without restriction Correct D. This is a violation of the Act and is fraudulent D

Prior recommendations cannot be shown in investment adviser advertising - doing so is a violation of the Investment Advisers Act of 1940 (but the advertisement can offer to provide a list of prior recommendations upon request, as long as such list shows ALL recommendations made over the last 12 months; the date of the recommendation; the price at that time; the current market price; accompanied by a statement to the effect that "the performance of prior recommendations is not a predictor of future performance").

Which of the following activities are allowed prior to the filing of a registration statement? I Solicitations of indications of interest II Solicitations of orders III Sending a preliminary prospectus IV Publishing a tombstone announcement StatusA A. I and II Incorrect Answer B. III and IV StatusC C. I, II, III, IV Correct Answer D. None of the above D

Prior to the filing of a registration statement for a new issue, nothing can be done. Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be accepted; and a "tombstone" announcement can be published. Once the registration is effective, orders can be accepted if customers receive the final prospectus, at or prior to, confirmation of sale.

Prior to the filing of a registration statement, which of the following activities is (are) permitted? I A member firm signing a syndicate agreement to become part of the underwriting group for the issue II A member firm distributing preliminary prospectuses for the issue to customers III A member firm taking indications of interest for the issue from customers IV A member firm selling the issue to customers Correct A. I only StatusB B. II and III only StatusC C. I, II, III StatusD D. I, II, III, IV A

Prior to the filing of a registration statement, the issue cannot be promoted in any manner - so the use of a preliminary prospectus to take indications of interest is prohibited; as is selling the issue. Once the registration statement is filed, the issue enters the 20-day cooling off period. At this point, a preliminary prospectus can be used to take indications of interest, but the issue cannot be sold. Once the registration is effective, the issue can be sold with the prospectus. There is no prohibition on the underwriter joining the syndicate or selling group prior to the filing of the registration statement, since this does not involve offering the issue to the public.

To claim a private placement exemption: StatusA A. a registration statement must be filed with the SEC Correct B. a Form D must be filed with the SEC StatusC C. a Form 144 must be filed with the SEC StatusD D. no filing is required with the SEC B

Private placements are exempt transactions under the Securities Act of 1933. No registration is required. The issuer must file a Form D with the SEC no later than 15 days after the sale to claim the exemption. The filing of Form D is not a registration. It simply notifies the SEC that the issue is being offered in compliance with the exemption.

ll of the following are covered under the Securities Exchange Act of 1934 EXCEPT: Correct A. registration of new issues StatusB B. registration of broker-dealers StatusC C. registration of insiders StatusD D. registration of securities information processors A

Registration of new issues comes under the Securities Act of 1933, which regulates new issue offerings. The Securities Exchange Act of 1934 requires the registration of exchanges, member firms, salespersons, transfer agents, clearing organizations, securities depositories and securities information processors. It also requires that "insiders" (officers, directors and holders of 10% or more of a publicly held company) file notices with the SEC.

An offering of securities in an amount that does not exceed $50,000,000, is given a simple method of registration under the Securities Act of 1933's: Correct A. Regulation A StatusB B. Rule 147 StatusC C. Regulation D StatusD D. Rule 144 A

Regulation A under the Securities Act of 1933 gives an "EZ" registration method to issues of no more than $50,000,000. Rule 147 is the SEC's "intrastate" exemption; while Regulation D is the SEC's "private placement" exemption.

Private placements are exempt transactions under the Securities Act of 1933 under the provisions of: StatusA A. Regulation A StatusB B. Regulation B StatusC C. Regulation C Correct D. Regulation D D

Regulation D of the Securities Act of 1933 allows a "private placement" exemption if an issue is sold to a maximum of 35 "non-accredited" investors. The issue can be sold to an unlimited number of "accredited" investors under this exemption and still be considered a private placement.

For a sale of securities to be exempt under Regulation D under the Securities Act of 1933, there must be a limit on the: StatusA A. dollar amount of the offering StatusB B. number of States where the security is offered Correct C. number of non-accredited investors to whom the security is offered StatusD D. number of accredited investors to whom the security is offered C

Regulation D under the Securities Act of 1933 gives a "private placement" exemption for securities that are sold to no more than 35 "non-accredited" investors. There is no limit on the dollar amount sold; on the number of States in which the issue is sold; or on the number of accredited investors (wealthy investors) to whom the issue is sold.

Rule 147 offerings under the Securities Act of 1933 are exempt from: Correct A. SEC registration StatusB B. State registration StatusC C. Both of the above StatusD D. Neither of the above A

Rule 147 under the Securities Act of 1933 exempts intrastate offerings from SEC registration - since the transaction never crosses a State line, the SEC does not have jurisdiction. However, such an offering must still be registered in that State.

Under IA-1092, a person is "in the business" of rendering investment advice if that person: StatusA A. advertises that it gives advice StatusB B. is compensated for giving advice about securities StatusC C. regularly gives advice about securities Correct D. all of the above D

SEC Release IA-1092 states that if a person is "in the business" of giving advice about securities, then he or she must register with the SEC as an investment adviser. If one holds oneself out as an investment adviser (that is, advertises); this constitutes being "in the business." If one is compensated for giving advice about securities (unless this is an isolated event), this person is "in the business." If one gives advice about securities on a regular basis, one is "in the business" as well.

SEC Rule 12b-1 allows open-end investment companies to charge an annual fee for soliciting new investment into the fund against: StatusA A. any shares issued as of the date of the adoption of the plan StatusB B. any shares redeemed as of the date of the adoption of the plan Correct Answer C. total net assets of the fund Incorrect Answer D. total income of the fund C

SEC Rule 12b-1 allows management companies to charge against total net assets, an annual fee for the cost of soliciting new investors to the fund.

12b-1 fees are assessed by investment companies: StatusA A. when shares are purchased StatusB B. when shares are redeemed StatusC C. when shares are exchanged Correct D. as shares are held D

SEC Rule 12b-1 allows management companies to charge against total net assets, an annual fee for the cost of soliciting new investors to the fund. In reality, though the fee is expressed as an annual percentage of total net assets, it is imposed pro-rata for every day that the investor holds the shares.

Under the Investment Advisers Act of 1940, the SEC policy regarding emails maintains that: I business related emails are required to be recorded and maintained II both business related and personal emails are required to be recorded and maintained III records must be retained for 3 years IV records must be retained for 5 years StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV D

SEC rules require that both personal and business emails must be retained by investment advisers as a required record. Their view is that it is too easy for someone to send a business email from a personal electronic device or vice-versa. All records must be retained for 5 years under the Act.

Under the Securities Exchange Act of 1934, all of the following are defined as "securities information processors" EXCEPT: StatusA A. NYSE TRF StatusB B. NASDAQ TRF StatusC C. Pink Sheets Correct D. MSRB D

Securities information processors (SIPs) collect and disseminate price quotes and transaction prices in non-exempt securities. Each exchange has a "TRF" - a Trade Reporting Facility - that is a registered SIP. The NYSE TRF reports trades of NYSE listed stocks, wherever the trade occurred. The NASDAQ TRF reports trades of NASDAQ-listed stocks, where the trade occurred. The Pink Sheets is an SIP that distributes bid and ask quotes for over-the-counter stock issues, as does the OTCBB - the Over-The-Counter Bulletin Board. The MSRB is the Municipal Securities Rulemaking Board - which regulates municipal market participants.

To determine the "loan value" of marginable equity securities, one would: Correct Answer A. multiply the market value by 50% Incorrect Answer B. divide the market value by 50% StatusC C. multiply by the Rule of 72 StatusD D. divide by the Rule of 72 A

Since the margin to buy stock is set at 50% by Regulation T, this means that 50% of the value can be lent to customers

A securities analyst of a major brokerage firm is having dinner with his best friend, a portfolio manager of a large mutual fund. The analyst, after a few drinks, tells the portfolio manager that he is about to issue an extremely favorable research report on PDQ Corp. that will place a "Buy Now" recommendation on the stock. The portfolio manager has been under pressure to produce better returns for his mutual fund this year, as the market has generally declined. The portfolio manager buys a large block of PDQ stock that he allocates pro-rata across his own account and the account of the mutual fund that he manages. The next day, the research report is issued and the stock goes up by 15%. Which statement is TRUE regarding this situation? StatusA A. Because the information was not received directly from the issuer, the mutual fund manager was permitted to buy the stock in advance of the release of the research report StatusB B. Since the analyst created the report using publicly available sources of information, the mutual fund manager can buy the stock in advance of the release of the research report Correct C. The mutual fund manager's action is a violation of the "trading ahead of research" prohibitions StatusD D. The mutual fund manager's action is a conflict of interest because he bought the stock for his personal account as well as for the mutual fund's account C

Since the research report has not been released, the portfolio manager that got the "buy" recommendation before it was released to the public and then who went out and bought that stock, has violated the "trading ahead of research" prohibition.

Administration of the Investment Advisers Act of 1940 is done by: StatusA A. FINRA StatusB B. CFTC StatusC C. NASAA Correct D. SEC D

The Investment Advisers Act of 1940 is administered by the SEC. FINRA only regulates broker-dealers, not investment advisers. The CFTC (Commodities Futures Trading Commission) regulates the commodities and futures markets. NASAA is the North American Securities Administrators Association. Each State Administrator administers the Uniform Securities Act - the State "Blue Sky Laws" that require registration of broker-dealers, their agents, non-federal covered advisers, and investment adviser representatives, in each State where they deal with the public.

The term "loan value" when applied to equity securities, is the: I percentage of the purchase price that must be deposited when the securities are bought II percentage of the purchase price that can be borrowed when securities are bought III reciprocal of the Regulation T requirement IV complement of the Regulation T requirement StatusA A. I and III StatusB B. I and IV Incorrect Answer C. II and III Correct Answer D. II and IV D

The "loan value" of a security is the amount that may be borrowed against the position under the margin rules as set forth under Regulation T of the Federal Reserve for non-exempt securities. For example, if a security has a Regulation T requirement of 60%, then its loan value is 40%. If a security has a Regulation T requirement of 50%, then its loan value is 50%. The "loan value" is the "complement" of the Regulation T requirement. The complement of a fraction is the remaining fraction that makes both add to "1". (The reciprocal is "1" divided by the fraction.)

The Regulation T requirement to buy stock is 50% and the Minimum Maintenance Margin requirement is 25%. The "loan value" of the stock is: StatusA A. 25% Correct B. 50% StatusC C. 75% StatusD D. 100% B

The "loan value" of a security is the amount that may be borrowed when the position is purchased. If Regulation T requires a 50% deposit, then the remaining 50% can be borrowed from the broker to buy the stock. This is the "loan value". Maintenance margins are irrelevant when computing the "loan value" of a security.

All of the following filings are made by corporations with the SEC EXCEPT: StatusA A. 10K StatusB B. 8K Correct C. 13D StatusD D. 10Q C

The 10K is a corporation's annual audited financial statements. The 10Q is a corporation's quarterly unaudited financial statements. The 8K is a corporation's special report of significant events, such as a change in the board of directors, a merger or a divestiture. A 13D is a filing by anyone who accumulates a 5% or greater holding in a company with the intention of exercising control.

The States in which an investment adviser is registered would: Correct A. be found in Form ADV Part 1 StatusB B. be found in Form ADV Part 2 StatusC C. be found in both Form ADV Part 1 and Form ADV Part 2 StatusD D. not be found in either Form ADV Part 1 or Form ADV Part 2 A

The ADV Part 1 is the basic registration information filed with the SEC - such as name of firm, address, phone number, officers, shareholders, States where the adviser is registered, etc. The ADV Part 2 is broken down into 2 parts. Part 2A is the "Brochure" that must be delivered to customers. It describes the investment adviser's policies, fees, education, types of investments, types of clients, method of analysis used, conflicts of interest, etc. Part 2B is the "Brochure Supplement" which details the educational and work background of the key personnel who make investment decisions or manage accounts.

Each of the following is defined as a statutory "insider" EXCEPT a(n): StatusA A. officer of a company StatusB B. holder of 10% of the equity securities of a company Correct C. holder of 10% of the debt of a company StatusD D. director of a company C

The Securities Exchange Act of 1934 defines an "insider" as any officer; director; or 10% shareholder of the equity securities of the issuer.

An Investment Adviser obtains a list of the 30 members of the local rotary club and sends each a letter that includes a coupon that gives a 20% discount to club members if they purchase the adviser's services. Which statement is TRUE under the provisions of the Investment Advisers Act of 1940? StatusA A. This is a fraudulent and prohibited practice Correct B. A adviser must keep a record of the letter and a memorandum describing the mailing list StatusC C. The adviser is only required to keep a record of any rotary club members that use the coupon StatusD D. The adviser is not required to keep copies of prospecting letters B

The Investment Advisers Act of 1940 covers this situation under Rule 204-2. It requires that if an adviser sends any notice, circular or advertisement, it must keep a record of the names and addresses of the persons to whom the communication was sent. If the communication is sent to more than 10 persons, this detailed record is not required to be kept, however if the communication is sent to a list of individuals (as in this case), a copy of the letter, along with a memorandum describing the list and its source, must be retained.

Which statements are TRUE about the recordkeeping requirements for communications sent to potential clients under the provisions of the Investment Advisers Act of 1940 I A record of the name and address of each person to whom the communication is sent must be retained II A record of the name and address of each person to whom the communication is sent is not required for communications sent to more than 10 persons III For communications sent to a list of individuals, a memorandum describing the list and its source must be retained IV Proof of mailing in the form of a postal receipt must be retained for each printed communication that is distributed Incorrect Answer A. I and III only StatusB B. II and IV only Correct Answer C. I, II, III StatusD D. I, II, III, IV C

The Investment Advisers Act of 1940 covers this situation under Rule 204-2. It requires that if an adviser sends any notice, circular or advertisement, it must keep a record of the names and addresses of the persons to whom the communication was sent. If the communication is sent to more than 10 persons, this detailed record is not required to be kept, however if the communication is sent to a list of individuals, a copy of the communication, along with a memorandum describing the list and its source, must be retained. There is no requirement to retain proof of mailing or distribution of the communication.

Under the Investment Advisers Act of 1940, copies of all advertising, notices and circulars must be retained: I if distributed to at least 1 person II if distributed to at least 10 people III for a minimum of 3 years IV for a minimum of 5 years StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV D

The Investment Advisers Act of 1940 requires that copies of advertising, notices and circulars be retained as a record for 5 years if distributed to 10 or more people.

Under the Investment Advisers Act of 1940, which statement is TRUE about copies of all advertising, notices and circulars? Incorrect Answer A. Advertising, notices and circulars must be retained as a record for 5 years if distributed to 5 or more people. Correct Answer B. Advertising, notices and circulars must be retained as a record for 5 years if distributed to 10 or more people. StatusC C. Advertising, notices and circulars must be retained as a record for 10 years if distributed to 5 or more people. StatusD D. Advertising, notices and circulars must be retained as a record for 10 years if distributed to 10 or more people. B

The Investment Advisers Act of 1940 requires that copies of advertising, notices and circulars be retained as a record for 5 years if distributed to 10 or more people.

Under the Investment Advisers Act of 1940, records MUST be retained for: StatusA A. 1 year StatusB B. 2 years StatusC C. 3 years Correct D. 5 years D

The Investment Advisers Act of 1940 requires that records be maintained for 5 years. Note that NASAA has the same 5 year rule for State-registered advisers. (Also note that broker-dealer record retention rules are set under the Securities Exchange Act of 1934 and are generally 3 years, with the exception of customer account statements, which must be retained for 6 years.)

All of the following are defined as investment companies under the Investment Company Act of 1940 EXCEPT: StatusA A. Management Companies StatusB B. Face Amount Certificate Companies StatusC C. Unit Investment Trusts Correct D. Collateralized Mortgage Obligation D

The Investment Company Act of 1940 requires that investment companies (management companies, unit investment trusts and face amount certificate companies) register with the SEC.

The Investment Company Act of 1940 requires that which of the following register with the SEC as an investment company? Correct A. Management companies StatusB B. Investment advisers StatusC C. Investment managers StatusD D. Investment counsels A

The Investment Company Act of 1940 requires that investment companies (management companies, unit investment trusts and face amount certificate companies) register with the SEC.

Which of the following statements are TRUE about the Investment Company Act of 1940's requirements for management companies? I At least 40% of the Board of Directors must be "non-interested" persons II At least 60% of the Board of Directors must be non-interested III To establish a fund, a minimum of $10,000 of Total Net Assets is required IV To establish a fund, a minimum of $100,000 of Total Net Assets is required StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV B

The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000. It also requires that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group.

A company is formed with 120 shareholders and $20,000,000 of capital with the purpose of investing in securities. Which statement is TRUE? Correct A. This company must be registered as an investment company under the 1940 Act StatusB B. This company must be registered with the Securities and Exchange Commission under the 1933 Act StatusC C. This company is exempt from registration under the Investment Company Act of 1940 StatusD D. This company is exempt from registration under the Securities Act of 1933 A

The Investment Company Act of 1940 requires the registration of investment companies that have 100 or more shareholders; and which have $100,000 or more initial capital.

If a company has 100 shareholders and $100,000 of initial capital with the purpose of investing in securities, this company: StatusA A. is exempt from registration under the Investment Company Act of 1940 StatusB B. is exempt from registration under the Securities Act of 1933 Correct Answer C. must be registered as an investment company under the Investment Company Act of 1940 Incorrect Answer D. must be registered with the Securities and Exchange Commission under the Securities Act of 1933 C

The Investment Company Act of 1940 requires the registration of investment companies that have 100 or more shareholders; and which have $100,000 or more initial capital.

The maximum permitted dollar amount that can be raised in a Private Placement under Rule 504 of Regulation D is: StatusA A. $1,000,000 Correct B. $5,000,000 StatusC C. $50,000,000 StatusD D. Unlimited B

The Regulation D Private Placement exemption consists of Rules 501-506. Rules 501-503 are definitional rules, basically explaining who is an accredited investor and who is a "sophisticated" investor. The actual permitted offerings are detailed under Rules 504-506. Rule 504 is for small offerings, and is pretty much obsolete (but still tested!). Rule 505 has been rescinded. Rule 506 is the one everyone uses and can be used to raise any dollar amount. Rule 504: Covers offerings of up to $5,000,000. For such very small offerings, the rule does not specify required investor disclosures, and does not place any limit on the number of investors. Also, there is no audit requirement for the issuer's financial statements. While there is no Federal registration required, the State(s) where the issue is offered can still require State registration. Rule 505: Rescinded. ***Rule 506: Covers offerings of more than $5,000,000: This is the private placement rule used by pretty much everyone. The rule requires detailed disclosure to investors, similar to that required in a prospectus. The offer can only be made to a maximum of 35 non-accredited investors; and to an unlimited number of accredited investors. However, the States cannot require registration at the State level - a big financial benefit.

Which statement is TRUE regarding the appointment of SEC commissioners? StatusA A. Each commissioner holds the office for a term of 3 years StatusB B. Political party affiliation is irrelevant to the choice of commissioners Correct C. Commissioners are not permitted to engage in any other business or employment StatusD D. Commissioners are not permitted to engage in securities transactions unless they are publicly disclosed C

The SEC has 5 commissioners appointed by the President of the United States, with the advice and consent of the Senate. Each commissioner is appointed for a term of 5 years. No more than 3 Commissioners can be from 1 political party. During his or her term, each Commissioner cannot have any another job; and cannot effect securities transactions (whether disclosed or not!).

The Securities Exchange Act of 1934 is NOT concerned with: Correct A. full and fair disclosure relating to new securities issues sold to the public StatusB B. fair trading practices on securities exchanges used by the public StatusC C. curbing insider trading abuses StatusD D. registration of broker-dealers that participate in the securities markets C

The Securities Act of 1933 concerns the primary market - it requires that non-exempt new issues be registered with the SEC and sold with a prospectus that gives "full and fair" disclosure to investors. In contrast, the Securities Exchange Act of 1934 is a group of rules and regulations to curb abuses in the secondary (trading) market. Included among the Act of 34's provisions are insider trading prohibitions; registration requirements for broker-dealers and exchanges; and prohibitions on various manipulative trading practices.

If the mails or other means of interstate commerce are used to offer securities, then the Securities Act of 1933 requires that: Correct A. non-exempt securities be registered with the SEC StatusB B. exempt securities be registered with the SEC StatusC C. both non-exempt and exempt securities be registered with the SEC StatusD D. the persons offering the securities be registered with the SEC A

The Securities Act of 1933 regulates the new issue market and requires that non-exempt new issues be registered with the SEC and sold with a prospectus giving full disclosure to investors. The provisions of the 1933 Act do not apply to exempt securities, however. The Securities Exchange Act of 1934 is a broad ranging law to curb abuses in the trading (secondary) markets, and, among its many provisions, requires registration of broker-dealers that offer non-exempt securities to the public.

The Securities Act of 1933: I prevents fraud in the sale of new issue securities to the public II prevents fraud in the trading of securities in the secondary market III provisions apply to non-exempt securities only StatusA A. I and II Correct B. I and III StatusC C. II and III StatusD D. I, II, III B

The Securities Act of 1933 regulates the primary (new issue) market. It requires non-exempt new issues to be registered with the SEC and sold with a prospectus that gives full disclosure to investors. The Act states that "omissions or misstatements of material fact in a registration statement or prospectus are fraud." Exempt securities such as Treasuries and Municipals are exempt from the provisions of this Act.

Under the Securities Exchange Act of 1934, the power to set margins on securities is given to the: StatusA A. Securities and Exchange Commission StatusB B. Federal Deposit Insurance Corporation StatusC C. Office of the Comptroller of Currency Correct D. Federal Reserve Board D

The Securities Exchange Act of 1934 gives the Federal Reserve Board (FRB) the power to control the extension of credit on securities transactions. Regulation T of the FRB controls credit on securities from broker to customer. Regulation U of the FRB control credit on securities extended by banks to their customers, including institutions and brokers.

The Securities Exchange Act of 1934: I prevents fraud in the sale of new issue securities to the public II prevents fraud in the trading of securities in the secondary market III anti-fraud provisions apply to both exempt and non-exempt securities StatusA A. I only StatusB B. I and II Correct Answer C. II and III Incorrect Answer D. I, II, III C

The Securities Exchange Act of 1934 regulates the secondary (trading) market. Under this Act, any manipulative activity can be fraudulent. The 1934 Act's anti-fraud rules apply to both exempt and non-exempt issues. Therefore, if a person manipulates the government or municipal bond market, it is still fraud under the 1934 Act, even though the securities are "exempt."

Under the Securities Exchange Act of 1934, an investment manager that has discretion over $100,000,000 or more of customer assets must file Form: StatusA A. 10K StatusB B. 10Q StatusC C. 13D Correct D. 13F D

The Securities Exchange Act of 1934 requires investment managers that have discretion over $100,000,000 or more of customer assets to file a Form 13F with the SEC. The Form 13F is filed 45 days after the quarter ending where the adviser, at the end of any month in that quarter, had $100,000,000 or more of customer assets with discretionary authority.

Which of the following are national securities exchanges that MUST register with the SEC? I NYSE II AMEX (NYSE-MKT) III PHLX IV CBOE StatusA A. I only StatusB B. I and II StatusC C. III and IV Correct D. I, II, III, IV D

The Securities Exchange Act of 1934 requires that each national securities exchange register with the SEC. Such exchanges include the NYSE, AMEX (NYSE-MKT), CBOE, PHLX, etc. These exchanges become "self-regulatory organizations" under SEC oversight. They must have their rules approved by the SEC; and they enforce their own rules under SEC oversight.

Under the Securities Exchange Act of 1934, all of the following must register with the Securities and Exchange Commission EXCEPT: StatusA A. Broker-Dealers StatusB B. National Securities Exchanges Correct C. Investment Advisers StatusD D. Securities Information Processors C

The Securities Exchange Act of 1934 requires the registration of exchanges and makes them "self-regulatory organizations" under SEC oversight. The Act also requires the registration of broker-dealers, their officers, and their sales personnel. Note that the 1934 Act does not require the registration of investment advisers - instead this is required under the Investment Advisers Act of 1940. Finally, the Act requires the registration of securities information processors.

Under the Securities Exchange Act of 1934, which of the following MUST register with the Securities and Exchange Commission? I Broker-Dealers II National Securities Exchanges III Investment Advisers IV Securities Information Processors StatusA A. II and III StatusB B. I and III Correct Answer C. I, II and IV Incorrect Answer D. I, II, III, IV C

All of the following are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 EXCEPT: Incorrect Answer A. Issuers of securities listed on exchanges StatusB B. Transfer agents StatusC C. Securities information processors Correct Answer D. Securities administrators D

The State securities administrators are not registered with the SEC. The SEC requires the registration of the exchanges; transfer agents; clearing agencies; securities information processors; and issuers of publicly traded securities.

An independent investment adviser is talking to a brokerage firm's research analyst about XYZ company. The analyst tells the adviser that she is going to issue a report stating that the company will miss its revenue projections. The adviser was planning to add the stock to her portfolio. What should the adviser do? Incorrect Answer A. The adviser cannot act on the information because it is "inside information" StatusB B. The adviser must purchase the stock as planned Correct Answer C. The adviser can change her mind about buying the stock StatusD D. The adviser must report the conversation to the State Administrator C

The adviser was planning to buy the stock; and the analyst thinks the stock isn't a good investment right now. There is no "inside information" here, so the adviser can take the opinion of the analyst and change her decision to buy the stock. Note, however, that if the adviser and the research analyst worked for the same parent company, then the answer would change. The restrictions on "trading ahead of a research report" would apply to all employees of the parent company and the stock could not be purchased or sold prior to the public release of the report.

The anti-fraud provisions of the Securities Exchange Act of 1934 apply to: I Individuals trading exempt securities II Individuals trading non-exempt securities III Investment adviser firms trading exempt securities IV Investment adviser firms trading non-exempt securities StatusA A. II and IV StatusB B. I and II StatusC C. III and IV Correct D. I, II, III, IV D

The anti-fraud provisions of the Exchange Act of 1934 apply to the trading of both exempt and non-exempt securities. Both individuals and firms are subject to the rules.

Which of the following is NOT a form of compensation to an investment adviser? StatusA A. Soft dollar arrangements StatusB B. Commissions StatusC C. Wrap fees Correct D. Bid-ask spreads D

The bid-ask spread is earned by the market marker in a security; it is not earned by the adviser. Forms of compensation to an adviser are commissions earned on portfolio trades performed; management fees earned; wrap fees earned; and so-called "soft dollar" arrangements, for example where investment research is given free to the investment adviser by a brokerage firm in return for the adviser directing its portfolio trades to that broker.

Under the Investment Company Act of 1940, the investment adviser's contract must be renewed by a majority vote of the fund's: StatusA A. Board of Directors StatusB B. outstanding shares Correct C. Board of Directors or the outstanding shares StatusD D. unaffiliated Directors C

The investment adviser contract, under the Investment Company Act of 1940, must be renewed annually by either a majority vote of the management company's Board of Directors; or a majority vote of the outstanding shares.

In order to promote its services, an investment adviser that normally charges a $100 initial consultation fee wishes to publish an advertisement offering "an initial consultation and a free evaluation of the tax status of the customer's portfolio for $150." Which statement is TRUE? StatusA A. Prior to publishing the advertisement in the news media, a copy must be filed with the State Administrator Correct B. The advertisement can be published if the word "free" is removed from the statement StatusC C. The advertisement can be published if the terms of the offer are made to the adviser's existing customers as well as to new customers StatusD D. The advertisement can only be published if the date when the offer becomes void is prominently displayed B

The problem here is that the tax analysis is not free - the adviser is charging an extra $50 for that analysis. If the word "free" is taken out of the advertisement, then it no longer is untruthful.

Which of the following records of an investment adviser that takes custody of customer funds is NOT required to be retained under the provisions of the Investment Advisers Act of 1940? StatusA A. Cash receipts and disbursements journal StatusB B. Statement of financial position StatusC C. Customer account statements Correct D. Beneficiary designations for each customer account D

The records required to be retained by an investment adviser that takes custody include: o Cash receipts and disbursements ledger and general ledger o Securities received and delivered ledger o Purchase and sales ledger (trade ledger) o Securities record (a record of each aggregate security position held, broken down by each customer owning part of the position and the physical location of that position) o Confirmation copies of all customer trades o Customer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account Note that there is no requirement for beneficiary designations to be retained for customer accounts - in most cases, the beneficiary is named in the will when a customer dies.

An issuer has filed a registration statement with the SEC, but the registration is not yet effective. The issuer subsequently files additional documentation with the SEC to meet its "full and fair disclosure" obligation. Any agent that is contacting a potential customer to buy the issue must provide the customer with the: I Preliminary prospectus II Prospectus supplement III Offering price and spread StatusA A. I only Correct B. I and II only StatusC C. II and III only StatusD D. I, II, III B

The registration for this issue is not yet effective, so it cannot be sold. The POP (Public Offering Price) is not yet set (this happens just prior to the effective date), so there is no disclosure of the POP. The agent can distribute the preliminary prospectus to obtain indications of interest from clients. If there is a supplement to the filing, this must be distributed as well. The final prospectus with the POP and spread is not available until the effective date.

Under the Securities Act of 1933, all of the following signatures are obtained and found in a registration statement for a new issue offering EXCEPT the signature of the: StatusA A. Chief Executive Officer of the issuer StatusB B. Chief Financial Officer of the issuer Correct C. Initial purchasers of the issue StatusD D. Lawyers for the issuer C

The registration statement is signed by the Officers of the issuer; the Board of Directors of the issuer; and the accountants and lawyers for the issue sign their respective accounting and legal opinions. The names of the initial investors in the issue are not found in the registration statement.

The use of customer names by an investment adviser to promote the sale of the firm's advisory services is: Incorrect Answer A. prohibited in all circumstances StatusB B. permitted if the adviser notifies each client of its intentions Correct Answer C. permitted if the adviser notifies each client of its intentions and the clients consent to such disclosure StatusD D. permitted if the adviser notifies the State Administrator that the client names will be used C

The use of customer names by an investment adviser to promote the sale of the firm's advisory services is prohibited, unless the customer consents to such disclosure. ***The only disclosure of customer information that may be made without customer consent is required disclosures to governmental bodies such as the IRS.

An investment adviser is permitted to identify the names of clients in communications to potential new customers: StatusA A. if the clients are compensated by the investment adviser StatusB B. if the clients are public figures Correct C. if the clients have consented StatusD D. under no circumstance C

The use of customer names by an investment adviser to promote the sale of the firm's advisory services is prohibited, unless the customer consents to such disclosure. The only disclosure of customer information that may be made without customer consent is required disclosures to governmental bodies such as the IRS.

Which of the following would be defined as "being in the business" of giving investment advice? Correct A. A market timing service that does not recommend securities but which gives customers "buy" and "sell" signals on heavily traded ETFs based on technical factors StatusB B. A newsletter that discusses in general terms, the advisability of investing in securities, as part of a broad discussion of the future direction of the U.S. economy StatusC C. A lecturer that is hired to give an annual talk to the employees of an investment adviser, where the merits of specific Blue Chip stocks are discussed StatusD D. A consultant, who, on a rare and isolated basis, prepares reports or analyses on asset allocation across various asset classes A

There are advisers that specialize in offering market timing services (of about 8,000 SEC registered advisers, there are 200 or so of these firms). They are considered to be "in the business" of giving investment advice for a fee and must register. A newsletter that discusses investing in securities in general terms as part of a broad discussion of the U.S. economy is not giving advice about investing in securities. The giving of isolated advice means that one is NOT "in the business" of giving advice (Choices C and D).

A Registered Investment Adviser plans on offering options strategies as part of his services. For this added investment strategy, he will charge .6% of assets monthly. This information is added to the RIA's disclosure statement and the RIA tells all of his clients of the fees orally in seminars. Each of his clients signs an agreement regarding the options strategies and fees. Which statement is TRUE? Correct A. The actions taken by the RIA are permitted because clients got full disclosure of all strategies and fees and agreed to such in writing StatusB B. The actions taken by the RIA are permitted because the fees charged to clients do not exceed 10% annually StatusC C. The actions taken by the RIA are prohibited because clients cannot be charged separately for options transactions StatusD D. The actions taken by the RIA are prohibited because options strategies are prohibited in managed accounts unless they conform to ERISA standards A

This RIA made full disclosure, both verbally and in writing, to his clients, of the options strategies to be employed and the fees involved. This is the right way to do it!

An investment adviser places an advertisement that reads: "Over the last year, our top ten stock picks produced a 40% return. We can guarantee that an investment with us will produce the same or better results." Beneath this statement is the following: "Required Disclosure: Assumptions can not be made regarding future investment performance or profits." Which statement is TRUE? StatusA A. This advertisement is permitted because it includes the required disclaimer that past performance does not predict future results StatusB B. This advertisement is permitted because it is truthful and in good taste Correct C. This advertisement is not permitted because it is misleading to make a "guarantee" of future results when investing in stocks StatusD D. This advertisement is not permitted because the word guarantee can only be used for advertisements relating to U.S. Government guaranteed obligations C

This advertisement guarantees a 40% return or better. Even though it has the disclaimer that "prior performance does not predict future results," guarantees of investment performance are prohibited.

An investment adviser has an institutional customer that wishes to sell 5,000 shares of ABC Stock. The adviser believes that ABC Stock would be a suitable investment for another institutional client. The adviser wishes to arrange a trade between the 2 institutions at the current market price, for which the adviser would charge a token fee. Because there will be no brokerage commissions, the institutional customers will get a better execution price. Which statement is TRUE about this? Correct Answer A. This is permitted only if the adviser discloses that it is acting as a broker, discloses its fee and gets written consent from each client StatusB B. This is not permitted because of the conflict of interest that exists if an investment adviser that recommends a transaction as a fiduciary then acts as the broker, executing that transaction for a fee Incorrect Answer C. This is permitted because both of the customers are getting a better execution than if they went to the market for a fill StatusD D. This is not permitted because a fee is being charged A

This is an agency cross transaction. If an investment adviser wishes to effect an agency cross transaction for a customer, it canNOT have recommended the transaction to both the buyer and the seller - which is the case here. ***To effect the transaction, the adviser must obtain written consent of the customer; must disclose the remuneration that will be received from the transaction; and must send the customer an annual statement identifying the total number of agency cross transactions effected by the adviser and the remuneration received.

The President of an investment club makes recommendations of securities to the club's members. The securities to be purchased are chosen by a majority vote of the club's members. The President is not paid for this; but does get to eat free snacks that are bought by the other members at the monthly meetings The President is: StatusA A. defined as an investment adviser under IA-1092 Correct B. not defined as an investment adviser under IA-1092 StatusC C. "in the business" of giving investment advice StatusD D. "compensated" for giving investment advice B

This one is slightly judgmental, but getting a "free snack" does not meet the compensation test to be considered to be "in the business" of giving investment advice under IA-1092.

Which of the following is an accredited investor under Regulation D? Correct Answer A. A trust with over $5 million under management Incorrect Answer B. An individual with $2 million in securities StatusC C. An investment adviser with over $40 million under management StatusD D. A limited partnership with over $5 million to invest formed of individuals where each has a net worth of $500,000 A

This question is not immediately obvious! An individual with $2 million of securities does not mean that he or she has a net worth of $1,000,000 (the minimum requirement to be accredited). He or she may have a margin loan against the securities, with the loan amount in excess of $1,000,000! For an investment adviser to be "accredited," each of the customers whose monies are being invested in the private placement would need to be accredited, making Choice C wrong. For a limited partnership to be accredited, each of the limited partners must meet the minimum $1,000,000 net worth test. ***However, employee benefit plans and trusts that have over $5,000,000 under management are accredited investors under Regulation D!

To be defined as a diversified management company, the maximum percentage of the portfolio's assets that can be invested in a single issuer is: Correct A. 5% StatusB B. 10% StatusC C. 25% StatusD D. 75% A

To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.

Under IA-1092, all of the following persons are considered to "give advice about investing in securities" EXCEPT one who, for compensation: StatusA A. prepares financial plans for customers that include investments in stocks, bonds, insurance and real estate Incorrect Answer B. issues research reports solely relating to mutual fund investments StatusC C. advises customers on their selection of an investment adviser Correct Answer D. advises customers on their selection of a broker-dealer D

To be defined as an "investment adviser," advice must be given relating to securities, making Choices A and B correct. A person that selects an investment adviser for a customer is also defined as an "investment adviser." A person who helps a customer choose a broker-dealer does not fall under the definition.

A person who is in the business of giving advice about which of the following is defined as an "investment adviser" under SEC Release IA-770? I Stocks II Corporate bonds III Commodities IV Real Estate StatusA A. I only Correct B. I and II StatusC C. III and IV StatusD D. I, II, III, IV B

To be defined as an investment adviser that must register with the SEC, one must be giving advice about securities. Stocks and bonds are securities. Commodities and real estate are not securities. If one gives advice about commodities or real estate, that person is NOT an investment adviser.

Which of the following are exempt securities under BOTH the Securities Act of 1933 and under State Blue Sky Laws? I U.S. Government bonds II Municipal bonds III Commercial paper IV Listed stocks StatusA A. I and III StatusB B. II and IV Correct C. I, II, III StatusD D. I, II, III, IV C

U.S. Government bonds, municipal bonds, and commercial paper are all exempt securities under the Securities Act of 1933 and under State registration laws. Listed stocks are required to be registered with the SEC under the Securities Act of 1933. They are "federal covered securities" under State law, meaning that they cannot come under State registration requirements (this stops duplicate regulation at both the Federal and State level).

Under the provisions of Regulation D, which of the following are accredited investors? I Bank II Individual with a $100,000 annual income III Individual with $1,000,000 net worth exclusive of residence IV Investment company StatusA A. I and IV StatusB B. II and III Correct C. I, III, IV StatusD D. I, II, III, IV C

Under Regulation D of the Securities Act of 1933, and accredited investor in a private placement is a person who earns at least $200,000 per year; or who has a net worth of at least $1,000,000 exclusive of residence; or is an institution; or is an officer or director of the issuer. A private placement may be sold to an unlimited number of accredited investors under Federal law; but can only be sold to 35 non-accredited investors (also, please note that the State definition of a private placement is very different).

An investment adviser is permitted to accept all of the following from broker-dealers in return for directing their portfolio trades (and thus paying full commissions) to that broker-dealer EXCEPT: StatusA A. research reports provided by the broker-dealer StatusB B. Monte Carlo simulation software provided by the broker-dealer StatusC C. reimbursement for the cost of attending an investment seminar Correct D. reimbursement for the cost of hiring an administrative assistant D

Under so-called "soft-dollar" arrangements, investment advisers can direct their portfolio trades (and hence their commission payments) to broker-dealers that give them products and services that help them manage their investments. Thus, the broker-dealers are "paying" for the trades directed to them by giving the advisers "soft dollars." The SEC is not too keen on this, but permits it as long as the services and products provided by the broker-dealer to the adviser directly benefit the investors whose money is being managed by the adviser - the soft dollar products and services cannot solely benefit the adviser. A broker-dealer providing research reports to the adviser, providing Monte Carlo simulation software to the adviser, or paying for the adviser to attend an investment (where the adviser would presumably be learning about how to be a better investment manager), in return for order flow, all directly benefit the adviser's clients and are permitted. Reimbursing the cost of an administrative assistant benefits the adviser; not the adviser's clients.

Under the Investment Adviser Act of 1940, which statement is TRUE regarding an investment adviser who wishes to show past performance? StatusA A. The adviser can be deliberately selective as to the client performance that is shown as long as the clients consent to this; and the adviser mentions the market conditions during the time period shown StatusB B. The adviser can use the names of specific clients when showing past performance as long as the clients benefited from the adviser's services Correct C. The adviser can show past performance as long as the adviser is not deliberately selective; and the adviser mentions the market conditions during the time period shown StatusD D. The investment adviser is prohibiting from showing past performance. C

Under the Investment Advisers Act of 1940, advertisements by advisers can show past performance, as long as the adviser is not deliberately selective in which clients' results are shown. In addition, market conditions during that period must be disclosed (e.g., "This was a period when the market was generally rising."); and the disclaimer that past performance does not predict future results must be displayed. Specific customer names cannot be used in advertising unless the customer consents. Testimonials are prohibited in advertising. There is no requirement to show a minimum 10 year performance history when showing past performance in investment adviser advertising.

Under the Investment Advisers Act of 1940, which statements is (are) TRUE regarding the use of advertising? I Past performance may be shown in advertising II Prior recommendations may be shown in advertising III Testimonials may be shown in advertising Correct Answer A. I only Incorrect Answer B. I and II StatusC C. II and III StatusD D. I, II, III A

Under the Investment Advisers Act of 1940, testimonials are prohibited in advertising; and the showing of prior recommendations is prohibited in advertising. However, past performance can be shown in advertising as long as there is an accompanying statement about general market conditions during this period; and a disclaimer is included that "past performance does not predict future results."

Under the Investment Company Act of 1940, which statement is TRUE regarding the composition of a management company's Board of Directors? Incorrect Answer A. 40% of the Board of Directors can be affiliated persons; 60% of the Board of Directors must be unaffiliated persons Correct Answer B. 40% of the Board of Directors must be unaffiliated persons; 60% of the Board of Directors can be affiliated persons StatusC C. 100% of the Board of Directors must be unaffiliated persons StatusD D. 100% of the Board of Directors can be affiliated persons B

Under the Investment Company Act of 1940, at least 40% of a management company's Board of Directors must be "non-affiliated" persons. Thus, up to 60% of the Board can be "affiliated" persons. An "affiliated" person is basically someone who is financially remunerated by the investment company, such as the management company's lawyers or accountants; or someone who is both an employee of a broker-dealer and an affiliated investment company.

Under the Securities Exchange Act of 1934, registration with the SEC as a broker-dealer may be revoked for all of the following reasons EXCEPT the broker-dealer fails to: StatusA A. maintain minimum net capital StatusB B. send its financial statements to customers StatusC C. be audited annually Correct D. report its net income to customers D

Under the Securities Exchange Act of 1934, broker-dealers must maintain minimum net capital; must send their financial statements (the requirement here is for a balance sheet only; there is no requirement to send an income statement) to customers semi-annually; and must be audited annually. Failure to comply with these will result in the broker-dealer's registration being revoked.

Which statement is TRUE regarding the ability of the Securities and Exchange Commission to suspend trading on a national securities exchange? StatusA A. The SEC can suspend trading if a majority of the Commissioners approve StatusB B. The SEC can suspend trading with the advice and consent of the Senate Correct C. The SEC can suspend trading with prior notification to the President StatusD D. The SEC cannot suspend trading C

Under the Securities Exchange Act of 1934, the SEC can suspend trading in the securities markets if it gives prior notice to the President of the United States of this action; and if the President does not disagree with this action.

Violations of the Investment Advisers Act of 1940 are punishable by which of the following? StatusA A. Fines of up to $10,000 only StatusB B. Fines of up to $15,000 only Correct C. Fines of up to $10,000; and up to 5 years in jail StatusD D. Fines of up to $15,000; and up to 5 years in jail C

Violations of the Investment Advisers Act of 1940 are punishable by fines of up to $10,000; and up to 5 years in jail. (Note that this differs from Uniform State Law, which imposes fines of $5,000 and jail for up to 3 years for violations.)

An agent of a broker-dealer is solicited by the general partner of an oil and gas income program being offered as a private placement only to accredited investors. The general partner explains that for each customer that the agent brings to the general partner, he will pay a finder's fee of 10% of the amount invested. The agent gets 20 copies of a full-color brochure from the general partner and distributes them to his largest customers for their consideration. Based on this information, you should be LEAST concerned about: StatusA A. a potential violation of Regulation D Incorrect Answer B. whether the investment is defined as a security Correct Answer C. the track record of the general partner StatusD D. the information disclosed in the brochure C

Well, the immediate violation that is present here and NOT addressed in the choices is that the agent is "selling away from his firm." There is no mention that the firm knows what the agent is doing. The agent's customers think they are buying the partnership unit from the broker-dealer, when, in fact, they are not. Rather, the agent has made himself a "statutory broker-dealer" by doing this and is in violation of State law by not being registered as such in the State. However, based on the choices offered, this question really is about private placements under Regulation D of the Securities Act of 1933. First - Is the partnership a "security?" - which it sounds like it is, since the general partner is the manager and the limited partners are passive investors. Second, this is an offering only to accredited (wealthy investors), but there is no mention that the agent checked to see if the customers to whom he sent the brochures were accredited. Third, does the brochure give the disclosures required under Regulation D? These are all legal issues that must be looked at first (remember, this is a test largely written by securities attorneys). The track record of the general partner is a business issue, and while important, will never take precedence over legal issues in a test written by lawyers!

If an issuer files a registration statement with the SEC under the Securities Act of 1933, registration is effective: StatusA A. immediately StatusB B. no earlier than 10 days from the filing date Correct Answer C. no earlier than 20 days from the filing date Incorrect Answer D. no earlier than 30 days from the filing date C

When a registration statement is filed with the SEC for a new issue under the Securities Act of 1933, the issue enters the "20 day cooling off period," during which time the SEC reviews the filing for full disclosure. Thus, registration cannot be effective until this period elapses.

A securities analyst employed by a major regional brokerage house tells a portfolio manager at a mutual fund managed by that firm to look for him on television being interviewed on CNBC that afternoon. He tells the portfolio manager that he will be putting a "buy" recommendation on ABCD stock, which the portfolio manager has been considering purchasing for the fund that he manages. Which statement is TRUE? StatusA A. Because the analyst and the portfolio manager are employed by the same broker-dealer, the portfolio is permitted to buy the stock immediately Incorrect Answer B. The portfolio manager is permitted to buy the stock immediately because he had previously been considering the purchase of ABCD shares Correct Answer C. The portfolio manager is prohibited from buying the stock immediately under the "trading ahead of research" prohibition but can buy the stock once the television interview has been broadcast StatusD D. The portfolio manager is prohibited from buying the stock immediately unless he contacts all of his customers that own shares in the fund that he manages and discloses the information to them C

When a securities firm is going to issue a research report on a security, the firm and its employees are prohibited from trading that stock until the research report is broadly disseminated to the public. Technically, the firm and its employees are treated as "insiders." Trading ahead of a research report is a prohibited practice. Note that once the report has been distributed, then it would be acceptable for the firm and its employees to trade that stock.

An investment adviser is under the fiduciary responsibility to disclose all material facts in any: Correct A. communication to a customer that makes a recommendation StatusB B. advertising intended for the general public that shows past performance StatusC C. meeting with the State Administrator about the adviser's operations StatusD D. phone conversation that employees of the adviser have with the public A

When recommending a security to a customer, an investment adviser must disclose any conflicts of interest (for example, the executing broker that will receive a commission for handling the recommended transaction is an affiliate of the investment adviser). Disclosure of conflicts of interest by investment advisers is not required in advertising; nor in conversations with the public or with the Administrator (unless the adviser is asked about these, of course!)

A broker-dealer MUST maintain physical possession of which of the following? StatusA A. Securities issued by municipalities StatusB B. Securities traded in an omnibus trading account Correct C. Securities held as collateral for derivative trading components StatusD D. Securities that are unregistered and non-exempt C

When securities are purchased for a customer by a broker-dealer, they can be held in custody of the broker-dealer (or the broker-dealer's clearing firm); or they can be held by a custodian bank; or they can be transferred and shipped to the customer (some customers still want to put physical certificates under their mattresses!) ***However, if a customer buys a derivative security (such as a CMO created from underlying mortgage backed pass through securities), he or she cannot get the underlying physical security - it must be held in custody.

Which of the following is NOT an exempt security under the Securities Act of 1933? StatusA A. Shares in a federal credit union Incorrect Answer B. Municipal bonds StatusC C. Treasury bonds Correct Answer D. Shares in a bank holding company D

While bank issues are exempt securities under both Federal and State law, issues of bank holding companies are non-exempt and must be registered. Securities issued by federal credit unions; municipal bonds; and Treasury bonds; are all exempt issues.

P - proxy rules: outside proxies of sharehldrs became regulated to make takeover attempts fair to sharehldrs

copies must be filed with SEC 10 days before date they are mailed to sharehldrs

face- amount certificate co: invests in highest quality obligations such as US govt debt and AAA muni and corp debt, promises guar rate of return

these certificates were used in conjunction w/ bank mortgage loans - cust could get bank loan, paying interest only, w/ full principal amt due at maturity - bank would req cust to buy face amt cert in principal amt of loan w/ same maturity

S - stabilization: though manipulation is fraud, stabilization of a new issue in trading mkt is permitted under SEC rules

when new issue commences trading in secondary mkt, the managing u/w is allowed to maintain stabilizing bid til offering is complete - this stops oth mkt mkrs fr knocking down price of issue and hurting new issue purchasers stabilization requirements: o only one stabilizing bid is allowed, placed by mgr o bid can be placed at or below the POP, never above o "Notice of Stabilization" MUST appear in prospectus, informing potential purchasers of this activity

Investment Advisers Act of 1940

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