Series 65 Unit 5

Under the Investment Advisers Act of 1940, if an investment adviser's sales literature describes an investment system, the description must include the length of time the system has been used the difficulties and limitations of using the system the performance history of the system A) I and III B) I, II, and III C) II only D) II and III

C.

Mark is a client of Gibraltar Investment Advisers. Gibraltar sells its investment advisory business to Alpha advisers. Which of the following best describes Mark's relationship to Alpha? A) Mark may become a client of Alpha if he chooses to do so. B) Mark is automatically a client of Alpha. C) The investment advisory contract Mark made with Gibraltar continues with Alpha. D) Mark may not become a client of Alpha.

A.

Under the Investment Adviser's Act of 1940, which of the following is NOT true with regard to advertising? A) The advertisement may not make offers of free service. B) The advertisement may not refer to any formula, charting device, or graphing method without disclosing the difficulties or limitations in their use. C) The advertisement may not refer to specific past recommendations. D) The advertisement may not use testimonials from clients.

A.

Which of the following statements regarding the Investment Adviser Act of 1940 and the adviser's brochure are CORRECT? A) Each client must receive the brochure no later than the entering into the advisory contract. B) Annual delivery of a summary of material changes relieves the adviser of the obligation to deliver a brochure. C) Each client must receive the brochure no later than 48 hours after entering into the advisory contract. D) Advisers must deliver the brochure to clients for whom they offer impersonal advisory service only when the annual charge does not reach $500.

A.

What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A) Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received. B) Proceed with the account, but make a supervisory person aware of this. C) Only unsolicited orders may be accepted until the signed receipt is received. D) Proceed with the account; the signature is not required.

B.

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed promptly to all customers by amending the brochure B) disclosed promptly only to those customers who will be affected by the change through an amended brochure C) disclosed promptly to the Administrator of the state where the IA maintains its principal office D) disclosed in the summary of material changes in the annual updating amendment to the SEC

B. Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.

Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) sent a brochure within 150 days of the end of AT's fiscal year B) did not send an annual brochure to its clients if there was no material change from the previous year C) filed a brochure with the Administrator, noting that it was available to clients upon request D) sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT's fiscal year

B. The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Part 2A and 2B.

In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940, this activity requires written A) disclosure to the client B) disclosure to the client and consent prior to completion of the transaction C) consent of and the disclosure to the client prior to execution of the transaction D) consent of the client

B. Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA- 1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.

Which of the following would be a violation of the NASAA Contents of Investment Advisory Contract Model Rule? A) Indicating a performance-based contract that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee B) An investment adviser permits clients to renew their investment advisory contracts by email. C) An investment adviser organized as a partnership has the practice of notifying clients of any change in the membership of the partnership within a reasonable time after the change. D) Without the consent of advisory contract holders, the owner of a majority of the stock of the advisory firm pledges that stock to a bank as collateral for a loan enabling the firm to acquire better cybersecurity technology.

D. The NASAA Contents of Investment Advisory Contract Model Rule states that no direct or indirect assignment or transfer of the contract may be made by the investment adviser without the consent of the client or other party to the contract. Pledging a majority interest in the company as collateral for a loan to the business is considered an indirect assignment; the reason for the loan is of no significance. All contract renewals for state-registered advisers must be in writing and email is considered written communication. Notification of changes to members of the partnership and warning of the incentive in a performance-based contract are requirements of the Model Rule.

An investment adviser representative has uncovered an unusual investment opportunity that she believes is perfect for one of her clients. When presenting the recommendation to the client, it becomes clear that the client is concerned about the potential of loss. To alleviate that concern, the IAR tells the client that she agrees to repurchase the security from the client anytime within the next 60 days at the original purchase price. In so doing, the IAR A) has committed the unethical business practice of recommending a wash sale. B) has acted ethically because she has not guaranteed a profit to the client. C) has acted ethically because her actions are in the client's best interest, not her own. D) has committed the unethical business practice of guaranteeing against loss.

D. The unethical business practice of guaranteeing against loss can take several forms. This is one of them - offering to buy back a security at the purchase price. A wash sale involves an investor repurchasing a security sold at a loss and has no relevance to this question - it is a tax issue. The prohibition against guarantees does not require that the client be assured a profit, only that there is no loss. Even when an IAR is confident that an investment is in the client's best interest, a guarantee may not be offered.

A client of an investment adviser is thrilled with her portfolio's results and posts a note on her bridge club's cork board suggesting that some of the other members would probably benefit from the adviser's skills. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) this would be permissible because it was done without the knowledge of the adviser B) if the investment adviser learns of the posting, it is not necessary to ask the client to remove it C) this would not be permissible because it is clearly a testimonial D) cork boards are not considered social media and that is the only place where testimonials are prohibited

A.

With regard to a state-registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that A) it is filed through the IARD system B) if requested by a client, it must be sent within 5 days of the request C) it must be delivered to all new clients D) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client

A. The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered.

Under the Uniform Securities Act, the Administrator has the authority to issue stop orders approve new issues review standard registration forms A) I and II B) I and III C) I, II, and III D) II and III

B.

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if results do not reflect the deduction of fees actual market conditions during the referenced period are not disclosed the advertisement did not reflect performance for a minimum period of 3 years the advertisement did not disclose that it applied to only a specific group of clients A) II and IV B) I, II, III, and IV C) I, II, and IV D) I and II

C.

An investment adviser is a member of a country club and provides substantial fee reductions to those members who become clients. The adviser justifies this because these club members are known for great referrals. The IA charges regular clients a fee that was larger for the same services because they were not members of the country club. Is this permissible? A) It is not permissible because the firm is charging other clients fees that are excessive in nature compared with the fees charged to country club members. B) It is not permissible because all clients must be charged at the same rate. C) This is permissible as long as proper disclosure is made in the adviser's brochure. D) It is permissible as long as the offer is not published as an inducement to join the country club.

C.

If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is TRUE? A) The sale must be approved by each customer of the selling adviser. B) The sale must be approved by the Administrator. C) The sale must be approved by the SEC. D) No approvals are required.

D.