Series 65 Unit 9

A person may not engage in business as an investment adviser in a state unless A) the person is registered as an investment adviser or is otherwise exempt from registration. B) the person's only accounts are investment companies. C) the person is registered as a broker-dealer. D) organized as a corporation or partnership.

A A person must register as an investment adviser in order to engage in business as an adviser, unless a specific exemption or exclusion applies. If the adviser only manages investment companies, it is federal covered and, therefore, exempt from state registration, but that choice would suggest that that is the only way one could act as an investment adviser. The form of business can be anything from a sole proprietorship to a C corporation.

Under the Investment Advisers Act of 1940 (as amended by the NSMIA of 1996 and the Dodd-Frank Act of 2010), an adviser is required to be registered with the SEC if A) the adviser's clients are investment companies registered under the Investment Company Act of 1940. B) the adviser is the publisher of a news magazine of general and regular circulation. C) the adviser's clientele is exclusively federal credit unions and the adviser has less than $100 million in assets under management. D) the adviser's advice relates solely to securities issued or guaranteed by the U.S. government.

A Advisers to registered investment companies are required to be SEC-registered. Under the Advisers Act, as modified by the Dodd-Frank Act, advisers are exempt from SEC registration if they manage less than $100 million in assets and have no investment company clients. Persons are excluded from the Advisers Act definition of investment adviser if they are publishers of news or business/financial publications of general and regular circulation or if their advice relates solely to U.S. government securities.

As defined in the Uniform Securities Act, the term person includes which of these? I. A limited partnership II. A political subdivision III.MAn unincorporated association IV. The executor of an estate for a deceased individual A) I, II, III, and IV B) II and III C) I and IV D) I, II, and III

A All of these would be included in the USA's definition of person. Not included are minors, deceased individuals, or individuals judged mentally incompetent.

The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice: I. relates solely to municipal issues. II. relates solely to issues issued by or guaranteed by the U.S. Treasury. III. is solely incidental to their professional practice as an aeronautical engineer. IV. is limited to insurance companies only. A) II and III. B) I, II, III, and IV. C) III and IV. D) I, II, and IV.

A Among the exclusions from the definition of" investment adviser "under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions. Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government issued or guaranteed issues. Advice to solely insurance companies qualifies one for an exemption from registration, but does not exclude the person from the definition of IA.

Sam wants to start his own registered investment adviser firm, independent of the brokerage firm where he is registered as an agent. He plans to provide financial planning services, which will include investment advice as an integral part of his business. Which statements are true? I Sam must file with either the state securities Administrator or with the Securities Exchange Commission as a registered investment adviser by filing the appropriate Form ADV. II. Sam must file Form ADV with his current brokerage firm. III. Sam must notify his current brokerage firm and receive permission to operate independently from the firm as a registered investment adviser. IV. Sam must do nothing and begin performing investment advisory services without regard to his current brokerage firm. A) I and III B) I and IV C) II and III D) II and IV

A Any registered person acting on behalf of a brokerage firm must receive that firm's permission to act as a registered investment adviser apart from the control of the brokerage firm. A brokerage firm may deny a registered person's ability to start his own advisory firm if the brokerage firm deems it to be a conflict of interest. An individual or a firm can start a registered investment adviser firm by filing an ADV form with the state or with the SEC. A person working for a registered investment adviser would have to pass either a Series 65 or Series 66 exam to become a registered investment adviser representative. It is important to recognize the difference between the firm (the registered investment adviser) and the person working for the firm in giving investment advice (the registered investment adviser representative).

Which of the following is required to register in a state under the Uniform Securities Act? A) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers B) ABC State Bank, which provides investment advice in its branches throughout the state C) An investment adviser who has no place of business in the state and communicates with only five advisory clients in the state for the year D) A broker-dealer who has no place of business in the state and whose only clients in the state are limited to insurance companies, banks, and broker-dealers

A Because the investment adviser has a place of business within the state and is acting as investment adviser in the state, it must register, regardless of the fact that the only clients are financial institutions. Notice that the state registration rules are different for broker-dealers and investment advisers. Banks are exempt from registration as broker-dealers or as investment advisers, as are investment advisers with no place of business in the state and fewer than six clients in the state in a 12-month period (de minimis standard).

Shibboleth Research Associates (SRA) meets the definition of an investment adviser and wishes to register with the Securities and Exchange Commission. Assuming the firm meets the requirements, registration is accomplished by filing A) Form ADV Part 1A. B) Form ADV-W. C) Form ADV Part 1A and Part 1B. D) Form ADV Parts 1 and 2.

A Form ADV Part 1A is the form filed by all applicants for registration as an investment adviser. If the applicant is registering on the state level, Part 1B is also required. Part 2A is the brochure, and Part 2B is the brochure supplement. Both Part 2A and 2B are filed with the Administrator when registering in a state. But when registering with the SEC, those forms are not filed with the SEC but are maintained in the principal office of the adviser. Form ADV-W is used when withdrawing from registration.

Which of the following is not considered to be in the business of investment advising? A) An insurance agent who discusses the merits of whole life insurance verses nonsecurities financial instruments and who receives commissions on the sale of life insurance only B) A person who prepares reports about securities in general C) An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business D) A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance

A Please note that this question is not asking, "Who is an investment adviser?" It is asking about one of the three prongs—being in the "business." The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser, nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.

One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they are not registered as investment companies. B) they have no more than 100 investors. C) their advisers are exempt from filing reports on Form ADV. D) they have assets of less than $150 million.

A Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file Form ADV Part 1 answering most of the questions on the form.

The document that gives the Administrator the right to process complaints against a registrant is known as A) a consent to service of process. B) a writ of habeas corpus. C) a durable power of attorney. D) an injunction.

A The consent to service of process gives the Administrator the right to process legal complaints against the applicant.

All of the following have legal standing as persons under the Uniform Securities Act except A) minor children. B) trusts where the interests of the beneficiaries are evidenced by a security. C) unincorporated organizations. D) joint-stock companies.

A The definition of a person under the act includes, among others, individuals, joint-stock companies, unincorporated organizations, and trusts where the interests of the beneficiaries are evidenced by a security. Minor children are not persons under the act.

The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following except A) a record by security showing each client's interest and the location thereof. B) emails. C) bank records. D) a list of discretionary accounts.

A The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets.

Under the Investment Advisers Act of 1940, persons who provide a variety of services, including investment advisory services, are considered to have received compensation for their advice when they receive which of these? I. Any economic benefit II. A fee paid directly for the investment advice portion of their services III. A commission on the sale of real estate when the agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists A) I, II, and III B) I and II C) I and III D) II and III

A The question is not asking, "Who is an investment adviser?" It is focusing on the compensation prong. Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. An example of that holds for the real estate agent—she doesn't give advice unless you list your home with her.

Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employee pension fund with assets of $4 billion. What are this firm's registration requirements? A) It may choose to register with either the D.C. Administrator or the SEC. B) It must register with the SEC because the AUM is so high. C) It does not have to register because its only client is the U.S. government. D) It can only register with the SEC because the District of Columbia is not a state.

A Under the provisions of the Dodd-Frank Act of 2010, pension consultants providing advisory services to employee benefit plans having at least $200 million of assets may register with the SEC (even though the consultant does not itself have those assets under management). JAW's only client has $4 billion in assets, well in excess of the minimum of $200 million required to allow the firm to choose between state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client.

As defined in the Uniform Securities Act, which of these is not an investment adviser? I. A broker-dealer who charges for investment advice II. A publisher of a financial newspaper III. A person who sells security analyses IV. A CPA who, as an incidental part of his practice, suggests certain tax-sheltered investments to his affluent clients A) I and II B) II and IV C) II and III D) III and IV

B A publisher of a financial newspaper and a CPA who, as an incidental part of his practice, suggests tax-sheltered investments are not investment advisers. Once a broker-dealer is compensated for investment advice, usually referred to as special compensation in the rules, the exclusion from the definition is lost. This answer would be the same under either the USA or federal law.

A broker-dealer with an office in this state would be defined as an investment adviser if it charges which of these? I. Commissions for selling securities II. Commissions for selling securities while offering investment advice incidental to the sale of the securities III. A fee for selling investment research and additional fees in the form of commissions for the sale of securities IV. Fees for investment research sold exclusively to institutions located in this state A) I and II B) III and IV C) II and III D) I and IV

B A broker-dealer would be considered an investment adviser if it has a place of business in this state and if it charges a fee for selling investment research or any other form of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm meets the definition of an investment adviser. If a broker-dealer charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the broker-dealer is not an investment adviser because it is not compensated for the research.

Under SEC Release IA-1092, who of the following would be considered to be in the business of rendering investment advice? A) Agents of a broker-dealer who recommend trades to their clients and receive commissions based on transactions B) A financial planner who charges no fee for developing a financial plan but takes commissions on recommended trades C) An accountant who provides investment advice to clients as an incidental part of the business D) An individual who provides investment advice to family members but receives no compensation

B A financial planner who takes commissions from a broker-dealer on recommended trades is considered to be compensated for giving advice and is therefore in the business of rendering investment advice. Agents and broker-dealers who do not charge separately for advice are excluded from the definition of investment adviser. Lawyers, accountants, teachers, and engineers are not considered to be in the business of rendering investment advice, as long as any advice given is incidental to the practice of the profession.

When referring to a federal covered investment adviser, all of the following are supervised persons except A) an investment adviser representative. B) an individual contracted to promote the firm to potential advisory clients. C) the receptionist who works for the investment adviser and analyzes client financial profiles. D) the chief securities analyst.

B All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted promoters are not employees of the adviser; therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the promoter complies with the federal law. Please be careful because this is not so under the USA. That act considers promoters (solicitors) to be supervised persons, whether employed by the adviser or not, and requires IAR registration.

Under the Uniform Securities Act, which of the following is an investment adviser? A) Jane advises customers regarding the value of gold and silver coins. B) Jill is an attorney specializing in estate planning who, as a side job, structures portfolios for the beneficiaries of her deceased clients at a reduced fee. C) Tom writes a newspaper column that analyzes and recommends securities. D) The trust department of ABC Bank provides investment advice to its clients.

B Although an attorney is generally excluded, Jill is giving investment advice for a fee in a manner that is not incidental to her legal practice. Jane's advice does not concern securities; banks are excluded from the definition; and Tom's advice is not specific on the basis of the situation of each client (impersonal advice).

The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, or investment adviser involved in any securities sale that violates the Uniform Securities Act is A) the agreement to actionable offenses. B) the consent to service of process. C) the right of rescission. D) the right of retribution.

B Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally.

On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions is required for Alpha? A) Withdraw from SEC registration immediately. B) Withdraw from SEC registration within 180 days of the adviser's fiscal year-end. C) Do nothing and continue as a federal covered adviser. D) Withdraw from SEC registration within 90 days of the adviser's fiscal year-end.

B If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements.

On April 15, ABC Advisers, Inc., made application for registration as an investment adviser with State X. Absent a denial or stop order, registration will become effective A) April 30. B) May 15. C) April 15. D) May 1.

B If no denials or stop orders are in effect and no proceedings are pending to do so, registration automatically takes effect at noon on the 30th day after the application was filed.

Which of the following would NASAA consider to be a substantial prepayment of fees? A) $600 covering the next calendar quarter B) $600 covering the entire contract year C) $500 covering the next six months D) $1,000 covering the next month

B NASAA defines a substantial prepayment of fees to be more than $500 six or more months in advance. A payment of $600 covering a full year qualifies on both points; it is more than $500 and for more than six months. A payment of $500 covering the next six months meets the time requirement, but it is not more than $500. Payments of $600 for the next quarter or $1,000 for the next month meet the dollar amount but not the time requirement.

Which of the following investment advisers (IAs) would be required to register with the state? A) An IA who expects to have $132 million in AUM within 120 days B) An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million C) An IA whose annual updating amendment showed a drop in AUM from $141 million to $99 million D) An IA who is under contract to manage a registered investment company

B No IA can remain registered with the SEC with assets under management (AUM) of less than $90 million (except those who manage registered investment companies). It takes $100 million in AUM to be able to initially register with the SEC; thereafter, the IA must maintain at least $90 million to remain SEC-registered.

Under the Investment Advisers Act of 1940, for how many years must records be kept after the end of the fiscal year in which an entry was made? A) 10 years B) 5 years C) 2 years D) 1 year

B Records must be kept for a full five years—the first two years in the firm's principal office—and are subject to SEC examination at any time. The five-year requirement governs records of business activities. Additional rules require the articles of incorporation or partnership documents of the advisory firm and other business organizational documents to be kept for three years after termination of the enterprise.

Which of the following would meet the USA's definition of person? An individual An unincorporated association A political subdivision A) II and III B) I, II, and III C) I and II D) I and III

B The USA's definition of person is extremely broad. Just remember the three nonpersons: minors, those who are deceased, and those declared mentally incompetent.

Under the Uniform Securities Act, a person whose business model is selling reports on a subscription basis concerning specific securities to investors based on their individual objectives will be defined as A) a journalist. B) an investment adviser. C) an agent. D) a broker-dealer.

B The definition of investment adviser includes any person who (1) for compensation, engages in the business of advising others as to the value of securities or the advisability of buying, selling, or investing in securities or (2) as a part of a regular business, publishes securities analyses or securities reports for individual investors on a paid-subscription basis.

Which of the following persons does not meet the definition of providing investment advice as a business outlined in SEC Release IA-1092? A) An accountant who charges clients an additional fee for providing investment advice B) A management consultant whose only investment advice is suggesting to a couple of small-business clients who had invested their surpluses in speculative securities that they should find something less risky C) A financial planner who provides specific investment advice as part of his fee-based services and also makes specific securities recommendations to his clients in his capacity as an agent for a broker-dealer D) An attorney who advertises the availability of investment advice

B The management consultant's advice to clients is more like personal opinion than investment advice as a business. In the other choices, investment advice is offered as part of the individual's regular business. Lawyers, accountants, teachers, and engineers (LATE) are not generally considered investment advisers, provided the advice is incidental to their regular profession.

There are waivers from the Series 65 exam requirement for certain professional designations. Among those qualifying for the waiver are individuals who are A) CLU®s. B) CFP®s. C) CPAs. D) MBAs.

B This is tricky. CFP®s do qualify for the waiver. ChFC®s (not CLU®s) also qualify, and those with the PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants)—but not solely a CPA qualify. MBA is not a professional designation. In general, the following designations allow for a waiver of the exam requirement: CFP®—CERTIFIED FINANCIAL PLANNER™ (granted by the CFP Board of Standards) CIC—Chartered Investment Counselor (granted by the Investment Adviser Association) ChFC®—Chartered Financial Consultant® (granted by the American College of Financial Services) PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants) CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Institute)

Under both state and federal law, the definition of investment adviser excludes certain publishers. To qualify for that exclusion, the publication must meet which of the following criteria? I. It must be bona fide, containing disinterested commentary without promotional material. II. It must be published on a schedule to coincide with market events. III. It must be of a general and impersonal nature. IV. It must contain enough specific advice to enable the targeted recipient to construct an appropriate portfolio. A) II and III B) I and III C) II and IV D) I and II

B Under a decision of the U.S. Supreme Court, for a publisher to qualify for the exclusion, the publication must satisfy the following three elements: "(1) the publication must offer only impersonal advice, i.e., advice not tailored to the individual needs of a specific client, group of clients, or portfolio; (2) the publication must be 'bona fide,' containing disinterested commentary and analysis rather than promotional material disseminated by someone touting particular securities, advertised lists of stocks 'sure to go up,' or information distributed as an incident to personalized investment services; and (3) the publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry."

The term investment counsel can be used by investment advisers A) who are registered with the SEC under the Investment Advisers Act of 1940. B) with a primary business of rendering investment advice. C) who are also registered as broker-dealers. D) who are also attorneys.

B While this choice is only half correct, under the Investment Advisers Act of 1940, the term investment counsel may be used by any adviser that meets two standards: the adviser performs investment supervisory services, and the adviser provides advice as the primary business of the firm. No other special qualifications or registrations are needed.

Under SEC Release IA-1092, a financial planner would not be considered an investment adviser when A) there is an up-front fee charged for creating a comprehensive financial plan, even when the plan is not put into place B) the extent of her planning is limited to wills, estates, and trust creation. C) she is a licensed insurance agent and credits the commission earned on the sale of insurance policies included in a comprehensive financial plan against the fee charged for the plan. D) she does financial planning as part of offering a wrap fee program as a licensed agent of a broker-dealer.

B Wills, estates, and trusts are not securities, so any advice given on them does not make one an investment adviser (IA). Look for the term comprehensive financial plan because that always includes securities advice, and as long as a fee is charged, even when the advice is not followed, registration as an IA (or perhaps IAR) is required. Wrap fee programs may only be offered by IAs or IARs.

Under the Uniform Securities Act, most books and records of investment advisers must be maintained for A) two years. B) five years, the first two in the firm's principal office. C) three years, the first two in the firm's principal office. D) one year.

B With few exceptions, the accounting records, correspondence, and advertising of investment advisers must be kept for a minimum of five years after the end of the year in which they were created, the first two years in the firm's principal office (on premises).

A consent to service of process required by an Administrator is A) an agreement to perform all services and duties that the USA requires of those individuals covered by the USA. B) a legal procedure that authorizes the Administrator to issue injunctions. C) an agreement whereby a registrant will be bound by any legal action or subpoena served on the Administrator as if it had been served on the registrant. D) a formal statement declaring that an investment adviser will comply with all advertising requirements of the USA.

C A consent to service is a formal legal agreement whereby a registrant will be bound by a legal action or subpoena served on the Administrator as if it had been served on the registrant. A consent to service is not an authorization to issue an injunction.

A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to A) securities listed on a national stock exchange. B) foreign securities. C) U.S. government securities. D) bank and insurance company securities.

C Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government.

Under the Uniform Securities Act, which of the following investment advisers with no place of business in the state must register with the state as an investment adviser? A) An adviser rendering advice solely to broker-dealers B) An adviser rendering advice to employee benefit plans with at least $1 million in assets C) An adviser rendering advice to no more than 10 individual clients within a 12-month period D) An adviser managing more than $110 million in assets

C An investment adviser with no office in the state is exempt from registration in the state if the adviser renders advice to no more than 5 noninstitutional clients (not 10) in a 12-month period. If an investment adviser has no office in the state and renders advice solely to broker-dealers, insurance companies, banks, investment companies, governmental agencies, or employee benefit plans with assets of $1 million or more, the adviser is exempt from registration with the state. If the adviser manages assets of $110 million or more, the adviser is required to register with the SEC, not the state.

Which of the following statements best describes an investment supervisory service as described by the Investment Advisers Act of 1940? A) An investment adviser sends monthly newsletters to 200 clients offering nonspecific advice. B) No actions are taken in client accounts without first being approved by a senior supervisory person. C) An investment adviser provides continuous advice based on the client's individual needs. D) An investment advisory firm offers nondiscretionary services on a non-client-specific basis.

C An investment supervisory service is an individualized service delivered to a specific client on a continual basis. General nonspecific advice given across the board is deemed impersonal advisory services. Only when an investment adviser provides investment supervisory service, and the adviser's principal business activity is the giving of advice, may the term investment counsel be used.

An investment adviser is eligible to register with the SEC if it A) has rendered advice to more than 5 retail clients during the most recent 12-month period. B) has more than 100 investment adviser representatives. C) anticipates acquiring at least $100 million in assets under management within the next 120 days. D) would be required to register in at least 10 different states.

C IAs must have at least $100 million in AUM in order to register with the SEC. If it is reasonable to expect reaching that level within the next 120 days, SEC registration is allowable now. One of the exceptions that would permit small and mid-size advisers to register with the SEC is if they would have to register in at least 15 states, not 10.

Which of the following investment advisers would be permitted to use the term investment counsel? A) An investment adviser who has been admitted to the bar in the state in which the firm's principal office is located B) A financial planner offering a wide range of services to his clients, including tax planning, estate planning, insurance planning, and investment advice C) A firm whose exclusive business is placing clients' assets into model portfolios D) A professional providing a market timing service with an annual subscription fee of $995, with this service attempting to maximize profits by suggesting entry and exit points for over 100 listed stocks

C In order for the term investment counsel to be used, two criteria must be met. First, the principal business of the adviser must be the rendering of investment advice. Second, the nature of the advice must meet the definition of investment supervisory service. That means giving continuous investment advice to clients based on their individual needs. That is frequently accomplished by selecting model portfolios most appropriate to the client's needs. The financial planner clearly is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only a part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the publisher's principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored.

Which of the following statements is not true of investment advisers under the Uniform Securities Act? A) A natural person may register as an investment adviser. B) Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell. C) Only written advice concerning investments is covered by the act. D) Compensation is a key factor in determining whether a person is required to register as an investment adviser.

C One of the three prongs defining an investment adviser under both state and federal law is the giving of investment advice. That advice can be in written or oral form. Any person, as defined in the USA, may register as an investment adviser. Even though we tend to think of the investment adviser as the company you will be working for, a significant percentage of state-registered investment advisory firms are sole proprietorships (one-person shops). Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is another one of the three prongs in determining whether a person is defined as an investment adviser.

Registration as an investment adviser is required for any firm in the business of giving advice on the purchase of A) rare convertible automobiles. B) gold coins. C) convertible bonds. D) apartments undergoing a conversion to condominiums.

C Only those individuals in the business of giving advice on securities are required to register as investment advisers; only the convertible bonds are securities.

Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of A) $5,000. B) $10,000. C) $35,000. D) $50,000.

C The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond​ because it doesn't meet the net worth requirement​, ​it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.

Which of the following statements regarding registration of investment advisers is true under the Investment Advisers Act of 1940? I. If any material information filed in the registration becomes inaccurate, an amendment must be filed promptly. II. If any nonmaterial information filed on Form ADV changes, an amendment must be filed within 90 days of the end of the fiscal year. III. Material information requires a prompt amendment, but nonmaterial changes do not require amendment. A) III only B) II only C) I and II D) I only

C The SEC requires prompt amendment of any material information changes on Form ADV (e.g., names, location, control, custody, organization) and also requires nonmaterial amendments within 90 days of the end of the adviser's fiscal year.

The document that provides the Administrator with limited power of attorney to accept documents issued in investigation of registrants in the Administrator's state is: A) the hypothecation agreement. B) Form ADV Part 1B. C) the consent to service of process. D) the agent's licensing agreement.

C The consent to service of process conveys to the state Administrator the authority to accept a subpoena that has been filed against an agent.

Under the Securities Act of 1933, the term person would not refer to which of the following? A) A subdivision of a government B) An unincorporated amateur athletic club C) A deceased individual D) A nonprofit, charitable corporation

C There are three specific nonpersons on this exam. They are (1) deceased individuals, (2) individuals declared mentally incompetent, and (3) minors. A person can be almost any entity, including a corporation, partnership, unincorporated association, subdivision of a government, trust that issues shares of ownership (such as a unit investment trust), or a natural person (an individual).

In defining an investment adviser under SEC Release IA-1092, which of the following would meet the business standard? I. A person who advertises himself as an investment adviser II. A person who provides securities-related advice on a frequent or regular basis III. A person who receives separate or additional compensation for securities-related advice A) I and II B) III only C) I, II, and III D) II and III

C To meet the business standard, persons must meet three criteria. First, they must hold themselves out (advertise) as persons who provide investment advice. Second, they must provide such advice on a frequent or regular basis, but it need not be their principal business activity. Third, they must receive separate or additional compensation for doing so.

A federal covered investment adviser is a person A) exempt from regulation under the Securities Exchange Act of 1934. B) registered under the Uniform Securities Act. C) registered with the North American Securities Administrators Association (NASAA). D) registered, or excluded from the definition, under the Investment Advisers Act of 1940.

D A federal covered investment adviser refers to a natural person or firm registered under the Investment Advisers Act of 1940 or excluded from the definition of investment adviser under that act. A person registered under the Investment Advisers Act of 1940 is exempt from state registration or licensing requirements of state securities Administrators under the Uniform Securities Act. Federal covered investment advisers are not exempt from the antifraud provisions of the USA. Investment advisers, whether state or federal registered, do not register with NASAA.

Under the Investment Advisers Act of 1940, which of the following is true about the use of the term investment counsel by investment advisers? A) The use of the term is prohibited under any circumstances. B) Advisers may use the term only if they are attorneys. C) Advisers may use the term without restriction, as long as they are registered. D) Advisers may use the term only if their principal business is acting as an investment adviser and a substantial part of their business consists of providing continuous advice based on a client's individual needs.

D Advisers may use the term investment counsel only if two conditions are met: rendering investment advice must be their principal business, and a substantial part of that business must be providing investment supervisory services—that is, continuous advice based on the individual needs of each client.

Under the Uniform Securities Act, if sent to two or more persons, a file must be maintained containing a copy of which of the following? I. Bulletins II. Newspaper articles III. Notices IV. Websites A) I and II B) I and IV C) II, III, and IV D) I, II, III, and IV

D All of these types of communications, unless sent to persons connected with the investment adviser, require maintenance of a file containing a sample copy.

Martin holds both the CPA and the CFP® designations. Within the previous year, if he has provided portfolio advice to approximately 40 clients, is Martin required to register as an investment adviser? A) No, because he falls under the de minimis exemption having relatively few clients. B) No, because he is a CPA. C) Yes, because he could receive commission income from investment clients. D) Yes, because he provides investment advice on a more-than-incidental basis.

D Although Martin is an accountant, he provides investment advice on a more-than-incidental basis (typically regarded as more than 10 client contacts per year). Nothing indicates that Martin is executing commissionable trades; he's only providing advice.

The Investment Advisers Act of 1940 excludes from the definition of investment adviser persons whose advice does which of these? I. Relates solely to municipal issues II. Relates solely to issues issued by or guaranteed by the U.S. Treasury III. Is solely incidental to their professional practice as an aeronautical engineer IV. Is limited to fewer than 15 clients in any 12-month period, none of whom is a registered investment company A) I, II, III, and IV B) III and IV C) I, II, and IV D) II and III

D Among the exclusions from the definition of investment adviser under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions. Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government-issued or guaranteed issues. Advice to fewer than 15 clients qualifies one for an exemption from registration (not an exclusion from the definition), but only in the case of a foreign adviser with less than $25 million in AUM in the United States.

Under the Uniform Securities Act, an accountant who charges hourly fees for securities recommendations in the regular course of his accounting practice is A) not included in the definition of an investment adviser because he is an accountant. B) included in the definition of an investment adviser because accountants are not among the professionals excluded from the definition. C) not included in the definition of an investment adviser because he receives an hourly rate instead of a commission. D) included in the definition of an investment adviser because he is compensated for giving investment advice in the regular course of business.

D An accountant who gives advice in the course of business and receives compensation, hourly or not, for providing the advice in the regular course of business falls within the definition of an investment adviser under the Uniform Securities Act. To be excluded, the advice must be on an incidental basis.

The Uniform Securities Act would not provide an exemption from registration as an investment adviser to an investment adviser who A) has no place of business in the state and limits clientele to other investment advisers. B) has no place of business in the state and limits clientele to banks and insurance companies. C) has no place of business in the state and limits clientele to broker-dealers. D) is an out-of-state investment adviser and directed business communications to fewer than 12 clients in the state in the past 12-month period.

D An adviser is exempt from state registration if it has no place of business in the state and limits clientele to other investment advisers, banks and insurance companies, or broker-dealers. There is a de minimis exemption, but it is for no more than 5 (not 12) clients during a 12-month period.

ABC Advisers, a federal covered investment adviser, is moving the firm's headquarters to a new office park in the suburbs. ABC is required to file this change with the SEC A) within 30 days. B) within 90 days. C) within 60 days. D) promptly.

D Any material change that affects an investment adviser's ADV must be filed promptly with the SEC (or Administrator if state-registered), and a change of address would certainly be material.

The Investment Advisers Act of 1940 lists several specific exclusions from the definition of investment adviser. Which of the following are included in that listing? A) Publishers of investment newsletters distributed based on market events. B) Sports or entertainment representatives C) Pension consultants D) Attorneys for whom providing investment advice is incidental to the practice of their profession

D Attorneys qualify for a professional exclusion if the advice they render is solely incidental to the practice of their profession. They are part of the LATE group exclusion. To qualify for the publisher exclusion, the publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry. Sports or entertainment representatives and pension consultants were added to the definition of investment adviser through Release IA-1092 in 1987.

Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA? A) Neither the SEC nor State X B) Both the SEC and State X C) SEC only D) State X only

D Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser. Although advisers dealing solely with institutions such as insurance companies are not deemed to be investment advisers in the state, that only applies when there is no place of business in the state. Obviously, with its home office in State X, that does not apply to ABA, so it would have to register in that state.

Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2017. A copy of this must be maintained until at least A) December 31, 2019. B) January 31, 2019. C) January 31, 2022. D) December 31, 2022.

D Investment adviser records, including copies of advertisements, must be kept for at least five years from the end of the fiscal year in which the records originated—in this case, five years from the end of 2017.

In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management? A) An investment adviser that acts as an adviser solely to one or more national banks B) An investment adviser that acts as an adviser solely to private funds and has assets under management in the United States of less than $150 million C) An investment adviser with assets under management of less than $25 million D) An investment adviser that acts as an adviser solely to one or more venture capital funds

D It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM. Private fund advisers with AUM of $150 million or more must register, and "small" investment advisers—those with less than $25 million in AUM—are generally prohibited from SEC registration. If the investment adviser's only clients are insurance companies, the adviser is exempt from SEC registration even if the firm has billions in AUM, but that exemption does not apply when the only clients are banks.

The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of A) each investment adviser representative's immediate supervisor. B) the managing principal. C) the Administrator. D) the chief compliance officer.

D It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the "first-line" responsibility, but the "buck stops" with the CCO.

Which of the following is specifically excluded from the definition of investment adviser under the Investment Advisers Act of 1940, when that person's investment advice is solely incidental to the practice of their profession? A) Athlete's financial manager B) Pension consultant C) Financial planner D) Aeronautical engineer

D Lawyers, accountants, engineers, teachers, and broker-dealers who do not charge a separate fee for investment-related advice, when such advice is solely incidental to the practice of their profession, are excluded from the definition.

Bulaan Advisory Services, Inc. (BAS), an investment adviser registered in five states, was found to have been untruthful in its performance reporting. Once this news was released, most of its clients terminated their advisory contracts. As a result, BAS shuttered its doors on July 18, 2023. Minutes of shareholder meetings must be preserved until at least A) December 31, 2028. B) December 31, 2023. C) July 18, 2028. D) July 18, 2026.

D NASAA's Model Rule on recordkeeping by investment advisers requires that partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise.

An investment adviser with $20 million under management exercises investment discretion over client portfolios. If the firm's accounting manager were to discover that the firm's net worth was only $8,500, what would the USA require the firm to do? I. Cancel all discretionary powers. II. Immediately raise an additional $1,500. III. Send notice to the Administrator before the close of business on the day following discovery. IV. Send a financial report to the Administrator before the close of business on the day following the sending of notice. A) I and II B) I and IV C) II and III D) III and IV

D State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of $10,000. Any advisory firm whose net worth falls below required minimums is required to send notice to the Administrator no later than the close of business on the day following discovery. This notice must be followed up no later than the next business day with a complete financial report to the Administrator.

Transparent Investment Advisers, Inc. (TIA), is registered in three states and has $55 million in assets under management. TIA maintains custody of customer securities. TIA's chief financial officer reports that the net worth of the firm has suddenly fallen to $28,000. This requires TIA to A) borrow $7,000 from the owners. B) obtain a surety bond in the amount of $7,000. C) issue $7,000 of stock. D) obtain a surety bond in the amount of $10,000.

D State-registered investment advisers who maintain custody of customer funds or securities must have a minimum net worth of $35,000. If the net worth should fall below that amount, the firm must immediately obtain a surety bond rounded to the next $5,000 to meet that level. In this case, the firm's deficiency is $7,000, and the next $5,000 that will cover that is a bond for $10,000. Borrowing money does not increase net worth, and even though TIA is a corporation, it would probably take too long to issue additional stock.

Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of A) $500 for the next six months of advisory service. B) $500 for the next three months of advisory service. C) $1,000 for the next three months of advisory service. D) $1,000 for the next year's advisory service.

D State-registered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is more than $500, six or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $500 or more, it is more than $500 and it must be for at least six months of service to count.

The responsibility for administering the Investment Advisers Act of 1940 lies with A) the Administrator. B) FINRA. C) the Investment Advisers Association (IAA). D) the SEC.

D The Investment Advisers Act of 1940 is federal law, and that comes under the jurisdiction of the SEC.

Which of the following is not a person as defined by the Uniform Securities Act? A) Guelph, a small city outside of Toronto, Ontario, that maintains an investment account at a brokerage house to invest surplus funds B) XYZ Dry Cleaners, Inc., whose shareholders all work on the premises and also offer financial advice to customers who request it C) A small unincorporated investment club D) A child prodigy for whom his mother, as custodian, opened an account at a major securities firm

D Under the Uniform Securities Act, the term person has a specific meaning. Person refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government. A minor child is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children.

Included in the Investment Advisers Act of 1940 are a number of different recordkeeping requirements. Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for A) the lifetime of the firm. B) five years after the dissolution. C) five years from the date of organization. D) three years after the dissolution.

D ​Both ​​the Investment Company Act of 1940 ​(applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping ​require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than three years after dissolution.

Under the Investment Advisers Act of 1940, the definition of investment adviser excludes which of these? I. The publisher of a financial newsletter on a paid-subscription basis, which contains only general securities recommendations II. Persons whose investment advice relates solely to issues distributed or guaranteed by the U.S. government III. A lawyer who charges a separate fee for investment advice that is provided as a separate part of the business

I & II Under the Investment Advisers Act of 1940, publishers of bona fide publications, such as financial newsletters, on a paid-subscription basis with regular circulation are excluded as long as the publication does not contain recommendations of specific securities. One thing to look for on the exam is if the publication is market-event driven. That is, publication is not regular and is based on current events affecting the securities markets. In that case, the exclusion does not apply. Another exclusion is for persons whose advice relates solely to issues distributed or guaranteed by the U.S. government. One of the most tested exclusions is LATE, where lawyers, accountants, teachers, and engineers are excluded, but that is only the case when the advice is given as an incidental part of their professional practice. A lawyer charging a separate fee for advice cannot claim that it is incidental.

Under the Uniform Securities Act, which of the following are elements in the definition of an investment adviser? I. Advice as to investments must be in writing, not given orally. II. Advice must relate to the value of securities or recommendations to purchase or sell securities. III. There must be compensation for services rendered.

II & III An investment adviser provides advice related to securities for compensation. The advice may be given orally or in writing.