PP Series 66 Chapter 2

An investment adviser registered with the SEC under the Investment Advisers Act of 1940 changes from an S Corporation to a C Corporation. Which statement is TRUE? A An amendment to Form ADVmust be filed promptly with the SEC B An amendment to Form ADV must be filed with the SEC within 15 days C An amendment to Form ADV must be filed with the SEC within 30 days D An amendment to Form ADV must be filed with the SEC within 90 days

The best answer is A. A change in business form for an investment adviser would require a prompt amendment of the Form ADV filed with the SEC. Note, in contrast, that the NASAA rule for an "other-than-annual" updating amendment is that it be filed in 30 days; as opposed to the SEC rule requiring the amendment to be filed "promptly."

A private fund 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 A I and III B I and IV C II and III D II and IV

The best answer is A. A private fund adviser (such as a hedge fund adviser) with at least $150 million of AUM (assets under management) is required to register with the SEC. This is accomplished by filing Form PF - as in Private Fund adviser. In addition, private fund advisers must file Form ADV Parts 1 and 2 with the SEC and update these annually. These are all public documents. Broker-dealers file Form BD to register with the SEC. There is no such thing as Form RIA.

Which of the following investment companies can adopt a 12b-1 plan? I Mutual fund II Closed end fund III Unit trust IV Face amount certificate company A I only B I and II only C III and IV only D I, II, III, IV

The best answer is 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.

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

The best answer is 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.

An adviser that charges a performance fee to clients must disclose that such a fee arrangement: A will give the adviser increased compensation based on realized and unrealized appreciation of the customer's securities B better aligns the customer's interests with those of the investment adviser C is only permitted if the customer signs a liability waiver in the advisory contract D negates the fiduciary duty that the adviser has to the customer

The best answer is A. 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 $2,100,000 net worth). (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.) 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.

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: A with the SEC B with the CFTC C in the State where the IA is physically located D with the SEC, CFTC and the State where the IA is physically located

The best answer is 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!

Licensing of investment adviser representatives occurs at the: A State level only B Federal level only C Both the Federal and State level D Neither the Federal nor State level

The best answer is A. 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.

Under SEC rules, an "access person" must report all personal securities transactions: A quarterly within 30 calendar days of quarter end B quarterly within 45 calendar days of quarter end C annually within 30 calendar days of year end D annually within 45 calendar days of year end

The best answer is A. An "access person" at an investment advisory firm has access to nonpublic information and is in a position to use it for personal profit (which is illegal, of course). Access persons must report all personal transactions to the IA in a quarterly report within 30 calendar days of quarter end; and must file an annual report of all securities holdings (positions) within 45 days of the account statement used to prepare the report.

Which statements are TRUE regarding mutual funds? I That day's closing price is the basis for fund purchase price computations II That day's closing price is the basis for fund redemption price computations III The next day's closing price is the basis for fund purchase price computations IV The preceding day's closing price is the basis for redemption price computations A I and II B III and IV C I and IV D II and III

The best answer is A. 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.

A customer wishes to place a buy order for a security that has not been registered with the SEC. The purchase order can be filled if the security: A is exempt from SEC registration B is traded by at least 2 market makers C has been trading in the market for at least 1 year D is sold to professional investors

The best answer is A. Generally, securities can only be purchased if they are registered with the SEC; or an exemption is available. For example, government and municipal securities do not have to be registered with the SEC; and may be purchased by individuals. There is no exemption offered from federal registration for securities trading for at least 1 year; or securities traded by at least 2 market makers; or for securities that will be sold only to professional investors.

If an investment adviser is recommending that a customer buy a security, that the adviser will sell to the customer out of its own inventory, 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 A I and III B I and IV C II and III D II and IV

The best answer is A. If an investment adviser is recommending that a customer buy a security that the adviser will sell to the customer out of its inventory (or vice-versa), this is a principal transaction (the adviser is the "principal," buying the security into its own investment portfolio, or selling the security to the customer from its own investment portfolio). If the adviser is going to act as the principal in a transaction recommended to a customer, it must disclose this fact to the customer prior to the completion of the transaction, and must obtain the consent of the customer to the transaction.

Prior to the filing of a registration statement, which activity is permitted? A member firm: A signing a syndicate agreementto become part of the underwriting group for the issue B distributing preliminary prospectusesfor the issue to customers C taking indications of interestfor the issue from customers D selling the issue to customers

The best answer is 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.

Under the Investment Advisers Act of 1940, publishers of market newsletters with a general circulation that do not render specific advice are: A excluded from the definition of an investment adviser B included in the definition of an investment adviser C are excluded from the definition of an investment adviser if their advice is limited to securities that are exempt D excluded from the definition of an investment adviser as long as the subscription fee is $500 or less per year

The best answer is A. The Investment Advisers Act of 1940 excludes from the definition of an investment adviser, publishers of bona fide newspapers, magazines, or financial publications of a general and regular circulation.

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

The best answer is 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.

A hedge fund wishes to make a seed capital investment in a start-up company under Rule 504 of Regulation D. The maximum permitted investment by the hedge fund is: A $5,000,000 B $10,000,000 C $20,000,000 D $50,000,000

The best answer is A. 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.

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: A cannot be traded on a performance basis B can be traded on a performance basis C can be traded based only on a per trade commission charge D must be closed

The best answer is 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 $2,100,000 net worth - so this client qualifies. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.)

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

The best answer is 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.

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

The best answer is 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 (under $100,000,000 of assets under management) are only required to be registered at the State level.

Under SEC rules regarding taking custody of client funds: A custody can only be taken for clients who have at least $1,000,000 under management; or a net worth of at least $2,100,000 B customers must be notified of the location where the funds are being held C customers must receive semi-annual account statements D the advisory firm must be audited, on a surprise basis, at least semi-annually

The best answer is B. If an investment adviser takes custody of customer funds, the adviser must: 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. maintain any account holding customer funds or securities in the name of the investment adviser as trustee for the customer(s). 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. send to each customer, at least quarterly, an itemized account statement. 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 is NOT required to be disclosed to customers by an investment adviser? A An investment adviser takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is having financial difficulties B An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is having financial difficulties C 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 D 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

The best answer is B. 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.

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 A I and III B I, II, IV C II, III, IV D I, II, III, IV

The best answer is 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.

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

The best answer is 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 private fund adviser with less than $150 million of assets under management: A must register with the SEC B must report to the SEC C must register with, and report to, the SEC D is neither required to register with, nor report to, the SEC

The best answer is 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.

On an annual basis, an investment adviser must give which of the following to his client? A A copy of the U-4 Form of the Investment Adviser Representative servicing the client B A copy of the ADV Part 2, also called the brochure or disclosure document, if there are material changes C An audited financial statement of the Investment Adviser D A list of customer complaints received by the Investment Adviser over the past year

The best answer is B. The Investment Adviser must give each customer a copy of the ADV Part 2A (the "brochure") at account opening and, if there are material changes, must send it to existing customers within 120 days of fiscal year-end. This is a requirement of the Investment Advisers Act of 1940. Note that Choice C is not as good - the only advisers that must provide an audited balance sheet to clients annually are those that take custody. It is not a requirement if an adviser does not take custody.

The Securities Exchange Act of 1934 was enacted to: A provide full and fair disclosure in new issue offerings B prevent manipulation and fraud in the secondary market C require registration of securities and exchanges with each State D require registration of individuals associated with broker-dealers in each State

The best answer is B. The Securities Exchange Act of 1934 is Federal legislation aimed at preventing manipulation and fraud in the secondary (trading) market. The Securities Act of 1933 is the Federal law that regulates the issuance of new securities. State securities laws are established by the Uniform Securities Act.

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? A: Prior to publishing the advertisement in the news media, a copy must be filed with the State Administrator B: The advertisement can be published if the word "free" is removed from the statement 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 D: The advertisement can only be published if the date when the offer becomes void is prominently displayed

The best answer is 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.

To determine if a person is "in the business" of giving investment advice under the Investment Advisers Act of 1940, which of the following are considered? I That the individual regularly gives advice on securities II That more than 50% of the individual's earnings are derived from making investment recommendations III That the individual receives compensation for giving advice on securities A I only B I and III only C II and III only D I, II, III

The best answer is B. To be "in the business" of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice.

Which of the following is a conflict of interest for an affiliated person on the Board of Directors of a mutual fund? A The affiliated person being compensated by the fund for being a member of the Board of Directors of the fund B The affiliated person voting for choice of an investment manager for the fund C The affiliated person being compensated by the broker-dealer that the fund uses to execute portfolio transactions D The affiliated person voting on the implementation of a 12b-1 plan for the fund

The best answer is C. An affiliated person on a mutual fund Board of Directors is someone who works for the fund; or who works for the fund's attorneys, accountants, advisers, or broker-dealers used to execute portfolio trades (among many possibilities). These persons can have an inherent conflict of interest - for example, an attorney who is being paid by the fund to sit on the Board might not be that objective when the Board of Directors is deciding whether the renew the contract that the fund has with the law firm (for whom this attorney works). The clear conflict of interest in this example is the affiliated person being compensated by the broker-dealer to whom the fund directs its portfolio trades. When it comes time for the Board to vote on who the fund will use to execute its portfolio transactions, the fact that the broker-dealer is compensating this individual can clearly influence his or her decision on how to vote! There is no prohibition on a fund compensating persons who are on its board - how else would it get people to do this? There is no conflict with Board members voting on typical business decisions, such as who the fund will choose as its manager; or whether the fund will adopt a 12b-1 plan (Such a plan allows the fund to charge to current shareholders, an annual fee for the cost of soliciting new investment into the fund. This is permitted under SEC Rule 12b-1.)

Investment advisers that have a broker-dealer entity are permitted to accept all of the following compensation items EXCEPT: A commissions on trades effected for clients B annual fees based on a percentage of assets under management C monthly fees based on performance in the account D annual fees based on a fixed dollar amount

The best answer is C. Investment advisers cannot accept fees based on performance unless the client has at least $1,000,000 of assets under management or a $2,100,000 net worth. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.) Fixed annual fees, wrap fees, fees based on a percentage of assets under management, and commissions on trades where the trades are executed by a separate broker-dealer entity, are all permitted compensation items.

Which of the following can be purchased on margin? A Mutual fund shares B Options C Futures D OTCBB issues

The best answer is C. NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. In contrast, the futures markets are not subject to Regulation T and have their own margin requirements, which are quite low. Futures contracts can be purchased on margin. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

An exempt reporting adviser must file: A Form PF with the SEC B Form BD with the SEC C Form ADV with the SEC D Form RIA with the SEC

The best answer is C. 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.

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 A I and III B II and IV C I, II, III D I, II, III, IV

The best answer is 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: The family office must only provide investment advice to clients who are part of that family. 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). 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.

A private fund adviser: A must file Form PF with the SEC B must file Form ADV with the SEC C must file both Form PF and Form ADV with the SEC D is neither required to file Form PF nor Form ADV with the SEC

The best answer is C. A private fund adviser (such as a hedge fund adviser) with at least $150 million of AUM (assets under management) is required to register with the SEC. This is accomplished by filing Form PF - as in Private Fund adviser. In addition, private fund advisers must file Form ADV Parts 1 and 2 with the SEC and update these annually. These are all public documents.

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

The best answer is 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).

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 A I and III B I and IV C II and III D II and IV

The best answer is 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 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 A I only B III and IV C I, II, III D I, II, III, IV

The best answer is 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."

All of the following are generally considered to be investment advisers under Federal law EXCEPT: A financial planners B advisers to pension plans C market newsletters D investment newsletters

The best answer is C. IA-1092 essentially defines financial planners; and specifically defines pension consultants; as investment advisers that must register. In addition, investment newsletters can be defined as an investment adviser that must register under Federal law if they make recommendations of securities (The SEC keeps attempting to get these newsletters to register as IAs; and they keep resisting). Of the choices given, the one least likely to be considered to be an investment adviser is a "market newsletter" - which would typically make general market predictions; as opposed to making specific investment recommendations.

All of the following statements are true regarding an investment adviser that wishes to take custody of clients funds under the Investment Advisers Act of 1940 EXCEPT the investment adviser: A must send an itemized statement of account to each customer at least quarterly B must be audited, on a surprise basis, at least annually C must segregate each customer's funds from those of other customers D need not comply with the custody rules if the firm is already a registered broker-dealer

The best answer is C. If an investment adviser wishes to take custody of client funds or securities, under the Investment Advisers Act of 1940, the investment adviser must deposit customer funds and securities in an account that is separate from the adviser's account. It is permitted to "commingle" all customer positions together in one account, as long that there is a record of each customer's individual positions. However, customer securities positions cannot be commingled with the investment adviser's positions. Each customer must get a quarterly account statement; and the adviser must be audited, on a surprise basis, at least annually. If the investment adviser is already a broker-dealer, it is complying with these requirements under a similar SEC rule for broker-dealers (SEC Rule 8c-1); so this is not required for investment advisers that are also registered as broker-dealers.

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

The best answer is 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."

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

The best answer is 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.

Broker-dealer registration is required under: A the Securities Act of 1933 B Section 10 of the Securities Exchange Act of 1934 C Section 15 of the Securities Exchange Act of 1934 D the Investment Advisers Act of 1940

The best answer is C. Section 15 of the Securities Exchange Act of 1934 covers broker-dealer rules, including registration.

Which of the following individuals will be denied federal registration as an investment adviser? A person who: I was suspended from FINRA II caused a suspension of a firm for which he formerly worked III was imprisoned for 2 years for counterfeiting IV is the subject of a current court proceeding that might cause the person's suspension if found guilty A I and II B III and IV C I, II, III D I, II, III, IV

The best answer is C. Statutory Disqualification of an individual from becoming an investment adviser will occur if the applicant or its officers: has been suspended or expelled from another Self Regulatory Organization; is the subject of an SEC order suspending or revoking registration; while associated with a firm caused that firm's suspension or expulsion; willfully filed a misleading or false application; has been convicted of any securities or money related fraud within the past 10 years; or has been temporarily or permanently enjoined from engaging in the securities business. Also, any person who has a criminal record and has spent 1 year or more in prison will be denied registration. Note that the current court proceeding is not a reason for statutory disqualification unless that individual is actually found to be guilty.

All of the following are tests that are considered to determine if one is defined as an "investment adviser" that must register with the SEC EXCEPT whether that person: A: gives advice about securities B: is compensated for giving advice about securities C: has previously been registered with the SEC D: is "in the business" of giving investment advice

The best answer is C. The "3-prong" test to determine if one must register with the SEC as an investment adviser consists of "Yes" answers to 3 questions. These questions are: Is advice being given about a security? Is compensation being received for such advice? Is the person giving advice "in the business" of doing so? There is no test regarding previous registration with the SEC as an adviser.

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 A I and III only B II and IV only C I, II, III D I, II, III, IV

The best answer is 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.

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

The best answer is 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.

The provisions of the Securities Exchange Act of 1934 apply to which of the following activities? I Trading rules for exempt securities II Trading rules for non-exempt securities III Anti-fraud rules for exempt securities IV Anti-fraud rules for non-exempt securities A I and II B III and IV C II, III, IV D I, II, III, IV

The best answer is C. The Securities Exchange Act of 1934 relates to the secondary (trading) market. The provisions of the Act apply to non-exempt securities only, with the exception of the "anti-fraud" provisions of the Act. The "anti-fraud" provisions apply to both exempt and non-exempt securities.

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

The best answer is 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.

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: A Chief Executive Officer of the issuer B Chief Financial Officer of the issuer C Initial purchasers of the issue D Lawyers for the issuer

The best answer is 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.

In order for a person to be "in the business" of giving investment advice, rendering advice about securities: A must be the sole activity of that person B must be the principal activity of that person C must be a regular activity of that person D need only be an isolated activity of that person

The best answer is C. The test for being "in the business" of rendering investment advice is that this be a "regular" activity of the firm - it does not have to be the principal or sole activity of that firm.

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

The best answer is 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.

Under the Investment Company Act of 1940, what percentage of a management company's Board of Directors can be affiliated with the investment company? A 0% B 40% C 60% D 100%

The best answer is C. 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 Act of 1933, which statements is (are) TRUE regarding private placements of securities? I No commissions can be paid II No more than 10 prospective investors may be contacted III General advertising is prohibited A I only B I and II C III only D I, II, III

The best answer is C. Under the Uniform Securities Act, a private placement is an offering to no more than 10 persons, where no advertising is permitted; and no commissions can be paid for selling the issue. Note that the definition of a private placement under the Securities Act of 1933 is very different. Regulation D under the 1933 Act states that a private placement is an offering to a maximum of 35 non-accredited investors and an unlimited number of accredited investors. There is no prohibition against paying commissions for selling private placements under the 1933 Act. Similar to State law, Federal law also prohibits advertisements of private placements. (Note that an exception to the "no advertising" prohibition is given if an offering is only made to accredited investors - however, this is not mentioned in the question and cannot be assumed.)

All of the following are disclosed in Form ADV Part 2A EXCEPT: A investment policies of the adviser B type of investments made by the adviser C investment practices of the adviser D states in which the adviser is registered

The best answer is D. The Form ADV Part 2 is broken down into Part 2A, which details the adviser's business, analytic methods, types of clients, assets under management, fees, conflicts of interest, etc. Part 2A must include a balance sheet of the firm if it will take custody of customer funds or securities; or will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. This is the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract. Part 2B is the "Brochure Supplement" that must be delivered to new customers at the same time as Part 2A. Part 2B details the educational and work background of the key personnel who set investment strategy or manage accounts. 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

Under the Investment Advisers Act of 1940, all of the following are defined as "investment advisers" EXCEPT a firm that prepares: A research reports about the NYSE market B research reports about the municipal securities market C asset allocationreports covering securities, real estate, commodity and insurance investments D reports on the outlook for the U.S. economy

The best answer is D. 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: A Investment adviserscan be required to be registered in each State B Investment advisers can be required to be registered with the SEC C Investment adviser representativescan be required to be registered in each State D Investment adviser representatives can be required to be registered with the SEC

The best answer is 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.

Which of the following are "federal covered" advisers? I Investment adviser to an investment company with $2,500,000 of assets under management II Investment adviser to an investment company with $25,000,000 of assets under management III Investment adviser to an investment company with $100,000,000 of assets under management A I only B II and III only C III only D I, II, III

The best answer is 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. 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 are included in the Form ADV filed to register as an investment adviser with the SEC? I Compensation to be received II Conflict of interest disclosure III Whether the adviser has discretion IV The firm's business history A I and II only B III and IV only C I, II, III only D I, II, III, IV

The best answer is D. Consider this to be a learning question. The ADV includes the adviser compensation; disclosure of adviser conflicts of interest; whether the adviser has discretionary authority and the firm's business history (among a myriad of other information).

All of the following activities are prohibited during the "cooling off" period EXCEPT: A: accepting an order for the issue in registration B: confirming a certain amount of the issue to a customer C: accepting a check from a customer for the part of the issue D: accepting an indication of interest from the customer for part of the issue

The best answer is D. During the cooling off period, under the Securities Act of 1933, an offer or sale of the issue is prohibited. Sending a preliminary prospectus or accepting an indication of interest does not constitute an "offer" under the Act of 1933. Accepting an order, confirming a certain amount of the issue, or accepting a check from a customer are all considered to be "sales" and are prohibited until registration is effective.

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

The best answer is 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 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: A the nature of the relationship between the solicitor and investment adviser B a statement that the solicitor will be compensated by the investment adviser for the referral C disclosure of the specific amount or percentage being paid to the solicitor by the investment adviser for the referral D a copy of the written agreement between the investment adviser and the solicitor

The best answer is 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.

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: A solicitor must provide the customer with a copy of the investment adviser's brochure B solicitor cannot be subject to statutory disqualification under the Securities Acts 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 D solicitor must register with the SECas an investment adviser

The best answer is 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.

If the SEC suspends or revokes the registration of an investment adviser registered under the Investment Advisers Act of 1940: A the action is binding and non-appealable B the adviser can take the case to binding arbitration C an appeal may be filed with the State Administratorwithin 60 days D an appeal may be filed in Federal Court within 60 days

The best answer is D. If the SEC suspends or revokes an adviser's registration under the Investment Advisers Act of 1940, an appeal may be filed in Federal Court within 60 days.

Under the Investment Advisers Act of 1940, if the SEC suspends or revokes the registration of an investment adviser, an appeal may be filed: I in State Court II in Federal Court III within 30 days IV within 60 days A I and III B I and IV C II and III D II and IV

The best answer is D. If the SEC suspends or revokes an adviser's registration under the Investment Advisers Act of 1940, an appeal may be filed in Federal Court within 60 days.

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

The best answer is 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 Securities Act of 1933, liability for omissions or misstatements of material fact in a registration statement or prospectus rests with: A the accountants for the issuer B the officers of the issuer C the lawyers for the issuer D every person who signed the documents or who gave an opinion related to the documents

The best answer is D. Liability for omissions or misstatements of material fact in a registration statement or prospectus rests with every person who signed the documents or who gave an opinion related to the documents. Thus, officers of the issuer (who sign the registration statement) are liable; accountants who give certifying opinions on the issue are liable; and lawyers who render legal opinions on the issue are liable. The issuer itself can be held liable as well - since it received the funds from the securities offering that was made illegally; and these funds must be paid back to the investors.

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

The best answer is D. Performance charts must show investment results with all expenses deducted out.

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

The best answer is 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.

The SEC policy regarding emails maintains that: A personal emails must be retained by investment advisers B business-related emails that are solicitations must be retained by investment advisers C all business-related emails must be retained by investment advisers D both personal and business related e-mails are required to be recorded and maintained

The best answer is 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 Investment Advisers Act of 1940, a testimonial may be used in advertising: A only if it is disclosed that the maker of the testimonial is paid B only if it is disclosed that the firm solicited the testimonial from the maker C only if the testimonial is unpaid D under no circumstances

The best answer is D. The Investment Advisers Act of 1940 prohibits testimonials in investment adviser advertising.

Under the Investment Advisers Act of 1940, a solicitor that contacts a customer to purchase the services of an investment adviser must, upon entering into a written contract: A give the customer the adviser's brochure B give the customer both the adviser's brochure and the solicitor's brochure C obtain a signed and dated statement from the customer acknowledging receipt of the adviser's brochure D obtain a signed and dated statement from the customer acknowledging receipt of both the adviser's brochure and the solicitor's brochure

The best answer is D. The Investment Advisers Act of 1940 requires that a solicitor that is referring clients to an investment adviser provide the customer with both a copy of the written investment adviser brochure and the solicitor's brochure no later than the time of entering into a written contract for advisory services. This must be evidenced by the customer signing and dating that he or she received both brochures; and this signed and dated acknowledgment is a record that must be retained by the investment adviser.

Which of the following records of an investment adviser that takes custody of customer funds is NOTrequired to be retained under the provisions of the Investment Advisers Act of 1940? A Cash receipts and disbursements journal B Statement of financial position C Customer account statements D Beneficiary designations for each customer account

The best answer is D. The records required to be retained by an investment adviser that takes custody include: Cash receipts and disbursements ledger and general ledger Securities received and delivered ledger Purchase and sales ledger (trade ledger) 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) Confirmation copies of all customer trades 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.

Investment advisers are permitted to accept which of the following from broker-dealers in return for directing their portfolio trades to that broker-dealer? I Asset allocation software provided by the broker-dealer II Recommendations of securities made by that broker-dealer III Research reports provided by the broker-dealer A II only B III only C II and III D I, II, III

The best answer is 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 asset allocation software, recommendations, and research reports to the adviser in return for order flow all directly benefit the adviser's clients and are permitted.

Under so-called "soft dollar" arrangements, investment advisers are permitted to accept all of the following from broker-dealers in return for directing their portfolio trades (and thus paying commissions) to that broker-dealer EXCEPT: A research reports provided by the broker-dealer B asset allocationsoftware provided by the broker-dealer C recommendations of securities made by that broker-dealer D computer equipment provided by that broker-dealer

The best answer is 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, recommendations and asset allocation software to the adviser in return for order flow all directly benefit the adviser's clients and are permitted.