Series 66 Missed Questions

Under the Investment Advisers Act of 1940, it is legal for an investment adviser to do which of these? I.) Rebate the commission on a mutual fund sale to a client who has already paid a fee for investment advice. II.) Keep the commission on a mutual fund sale when the client who purchased the shares has already paid for investment advice. III.) Reduce a client's advisory fee by any commissions earned on mutual fund sales to that client. A) I, II, and III B) II and III C) I and III D) I and II

B) II and III

In general, a broker-dealer will disclose its fee schedule A) to its agents, who are then responsible for sharing it with the client. B) at the time of the account opening. C) within 30 days following any changes in fees or charges. D) when requested by the client.

B) at the time of the account opening. Although there are no specific industry requirements, a broker-dealer's fee schedule typically is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made. LO 13.b

All of the following industry violations would probably constitute fraud except A) inaccurate market quotations B) charging unreasonable commissions C) misrepresentation of the status of a client's account D) omitting material facts in the offer/sale of securities

B) charging unreasonable commissions Charging an unreasonable commission (or markup or markdown) is a prohibited practice, but it is not considered fraud. It would be fraudulent to make inaccurate statements regarding the amount of commission being charged, such as, when acting as a principal, telling the customer that there was no commission being charged when, in fact, there is a markup or markdown built into the price. LO 14.k

Which of the following would not be an issuer? A) A partnership selling partnership interests B) A governmental agency borrowing money for short-term needs C) A corporation selling certificates of interest in a mining lease D) An investment company

C) A corporation selling certificates of interest in a mining lease Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note. LO 8.b

Under the Investment Advisers Act of 1940, if an investment adviser's advertising describes an investment system, the description must include which of these? 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) II and III C) II only D) I, II, and III

C) II only Explanation References to charts, tables, formulas, or other devices used to forecast securities prices without setting forth difficulties or limitations in their use is prohibited. It is not necessary to indicate how long the system has been used or its performance history. However, nothing prevents this information from being included. The question asks only what must be included. LO 13.i

A transactional exemption would be offered when a sale is made by A) an attorney as an incidental part of her legal practice. B) an investment adviser. C) a broker-dealer. D) a sheriff.

D) a sheriff. Among the list of exempt transactions are sales made by a sheriff or marshal. It is possible that the attorney could be acting in the role of a fiduciary, and if so, the transaction would be exempt. From a test-taking standpoint, if you have to read something into an answer to make it correct, as we just did with the attorney, don't do it; go for the straightforward choice. LO 8.d

If a person offers to buy a security after reading a tombstone ad, the offer to buy would be considered A) null and void. B) solicited. C) illegal. D) unsolicited.

D) unsolicited. A client calling to buy based on reading a tombstone ad is considered an unsolicited order because, under the law, the tombstone ad is neither a solicitation to buy nor an offer to sell. If the question had stated that the agent had sent a prospectus out and the client was responding to that, it would have been a solicited order. LO 8.d

All of the following must be disclosed by an investment adviser except A) the president of the investment adviser was found liable in a civil action involving unsuitable advice in a state where the adviser does not have an office. B) an investment adviser representative in the firm was fined $1,000 by FINRA for making unsuitable recommendations. C) a senior officer of the firm was convicted of a felony six years ago. D) a senior officer's suspension from the securities industry.

B) an investment adviser representative in the firm was fined $1,000 by FINRA for making unsuitable recommendations. Legal and disciplinary action successfully brought against an investment adviser must be disclosed to customers, as well as disciplinary actions that resulted in a fine in excess of $2,500. Convictions for a misdemeanor or felony involving securities or money within the past 10 years must also be disclosed. LO 13.b

An investment adviser (IA) has recommended funds sponsored by the GEMCO Fund group for many years. One of his clients who has been in several GEMCO Funds for over 10 years sends the IA a referral suggesting that the IA put his friend into the same GEMCO Funds as he owns. Under what circumstances would this be the appropriate action to take? A) GEMCO Funds have had outstanding performance for the past 10 years. B) The IA discloses that GEMCO Funds provide the firm with soft-dollar compensation. C) The referred client says that he wants just what your existing client owns. D) GEMCO Funds are suitable for the referred client.

D) GEMCO Funds are suitable for the referred client. When determining what securities to recommend to any client, new or existing, the most important thing is suitability. LO 14.g

NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? I.) Transaction-based compensation, such as commissions on recommended securities II.) 12b-1 trails on no-load mutual funds in the client's portfolio III.) Expenses reimbursed by third-party sources IV.) Compensation-sharing arrangements between the investment adviser and its representatives A) I, II, and III B) III and IV C) I and III D) I, II, III, and IV

A) I ,II, and III All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure. LO 14.c

Examples of identity theft would include which of these? Taking over an individual's credit card account Applying for new credit cards in the compromised individual's name Lending money in the name of the compromised individual Purchasing lottery tickets in the name of another individual A) I and II B) I and IV C) II and III D) III and IV

A) I and II When an individual's identity is stolen, it is common to find that the thief takes over the current credit card accounts and also applies for new ones. Identity thieves borrow money in the name of the compromised individual (they don't lend it), and although buying a lottery ticket in the name of someone else could help evade taxation on a big prize, the publicity attached to the winning ticket would certainly not be something the thief would relish. LO 14.l

The Uniform Securities Act contains a number of exemptions from registration of securities. Which of the following do not qualify for any of those exemptions? I.) A bond issued by a corporation II.) A bond issued by the City of Athens, Greece III.) A bond issued by the Province of Manitoba IV.) A security issued by a credit union authorized to do business in the state A) I and II B) I and IV C) II and III D) III and IV

A) I and II Securities issued by political subdivisions of countries other than the United States and Canada are not exempt unless guaranteed by their federal government (and that government has diplomatic relations with the United States). The only way the corporate bond would be exempt is if it was issued by a company whose common stock was federal covered. Because the question does not tell us that, we must assume it is not. LO 8.

Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose to clients the amount of compensation he will receive? I.) Commissions on recommended securities transactions II.) Commissions on insurance sales III.) Incentives from the issuer of a recommended security A) I, II, and III B) I and III C) I and II D) II and III

A) I, II, and III Advisers must disclose compensation received on sales of securities and non-securities products and also compensation received from the issuer of a recommended security. LO 14.c

ABCO Materials, Inc., is in the process of raising money from the public for the first time. Which of the following must be disclosed in ABCO's registration statement filed with the Administrator? I.) Biographical sketches of each of the members of the board of directors, as well as ABCO's principal officers II.) Expected use of the proceeds of the offering III.) Performance of the company's stock over the last five years or since the founding of the company, whichever is the shorter period IV.) Expected range of the public offering price A) I, II, and IV B) II and III C) I and IV D) III and IV

A) I, II, and IV A registration statement will always include the expected use of the proceeds of the offering, as well as short biographies of the members of the board of directors (and key officers as well). This question stated that it was the company's IPO, so there could not be any previous stock performance; although the public offering price is not determined until the effective date, the expected range is indicated to the state(s). LO 8.e

Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are true? The brochure must be updated each time Part 1A of Form ADV is updated. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. A) II and III B) I and II C) I, II, and III D) I and III

A) II and III Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year. LO 13.g

With regard to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, proscribed actions would include which of these? I.) Accepting an order from a third party after written trading authorization has been received II.) Forwarding a written complaint from a customer to the appropriate supervisory person III.) Offering to repurchase a security at its original cost if it does not increase in value IV.) Borrowing money from a client who was the agent's college roommate A) III and IV B) I, II, and IV C) II and IV D) I and II

A) III and IV Prohibited actions under the policy include guaranteeing a client against loss by agreeing to repurchase a security at its cost and borrowing money from a client who is not in the money-lending business. LO 14.g

Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees B) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody C) An owner of a majority of the stock in the investment adviser pledging that stock as collateral to a bank for a personal loan D) Signing an investment advisory contract that did not outline the compensation arrangements

A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The USA also requires investment advisers (IAs) to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is an assignment of the IA's contracts. LO 13.e

Under the Investment Advisers Act of 1940, which of the following statements is not true regarding custody of a client's funds or securities? A) The adviser must report the location of funds or securities at six-month intervals. B) Client securities must be segregated and kept safe. C) The adviser must arrange for an audit of the client's accounts at least once annually and arrange for the results to be forwarded to the SEC. D) The adviser must be named as agent or trustee for a client's account or else use a qualified custodian.

A) The adviser must report the location of funds or securities at six-month intervals. Advisers who have custody must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client's funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account. Annually, the adviser must arrange (hire the accounting firm) for an independent surprise audit of all custodied client accounts and the results must be forwarded to the SEC. Thus, the adviser reports to clients every three months, not every six months. LO 14.e

As a general matter, the regulators do not treat posts by customers or other third parties as the firm's communication with the public. Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content. Where the firm endorses or approves of the material but has no part in its creation, it is known as A) adoption. B) entanglement. C) retail communication. D) usage.

A) adoption. Adoption is the term used to describe material posted to a securities professional's social media site by a third party, where the securities professional explicitly or implicitly endorses or approves of the content but plays no role in its development. Where the firm is involved in the preparation of the content, it is known as entanglement.

NASAA has a Model Rule dealing with sales of securities at financial institutions. The rule applies exclusively to broker-dealer services conducted by broker-dealers on the premises of a financial institution where retail deposits are taken. Under the rule, financial institution means federal and state-chartered banks, savings and loan associations, savings banks, and credit unions. No broker-dealer shall conduct broker-dealer services on the premises of a financial institution where retail deposits are taken unless the broker-dealer complies initially and continuously with all of the following requirements except A) being under common control with the financial institution. B) making a reasonable attempt to be in a location physically distinct from that where retail deposits are taken. C) disclosing both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution. D) attempting to obtain written acknowledgement from customers that they have received and read the disclaimers.

A) being under common control with the financial institution. It is a NASAA Model Rule that broker-dealers operating on the premises of a financial institution make certain disclosures. Every attempt should be made to locate separately from the banking operation and to obtain something in writing from the clients indicating that they have received the disclosures. It is not necessary that there be any relationship between the BD and the institution other than a business one. LO 14.j

A client of an investment adviser (IA) needs a bridge loan and approaches the IA to see if the firm is interested. Because the IA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the loan A) could only be made after the advisory contract was terminated. B) would not be permitted under any circumstances. C) could be made if the IA was affiliated with a bank. D) could be made if the client was an institutional investor.

A) could only be made after the advisory contract was terminated. First of all, a bridge loan has nothing to do with a bridge. The client is not trying to cross over anything. The term is used to refer to a short-term loan to provide funds until permanent financing may be arranged. Now that we've gotten that out of the way, we can answer the question. Loans may never be made to clients unless the firm is in the business of lending money. Because this IA states that it is not their business model, the only way this loan could be made is if there was no adviser/client relationship. LO 14.g

Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) did not send an annual brochure to its clients if there was no material change from the previous year. B) sent a brochure within 150 days of the end of AT's fiscal 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.

A) did not send an annual brochure to its clients if there was no material change from the previous year. 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 Parts 2A and 2B. LO 13.g

An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when A) receiving a check made payable to that broker-dealer. B) receiving performance-based compensation. C) charging fees on an hourly basis. D) having the power to make buy-and-sell decisions in an account.

A) receiving a check made payable to that broker-dealer. Under the NASAA Model Rule on Custody Requirements for Investment Advisers, when an investment adviser (IA) uses an affiliated broker-dealer as its qualified custodian, the IA is considered to be maintaining custody. Therefore, receipt of a check made payable to the broker-dealer is acceptable (it does not have to be forwarded).​ Discretion is not custody, and the method of compensation has nothing to do with custody. Don't confuse that with the case where the IA can debit the client's account for fees—that would be custody; whether the fees are hourly, performance based, or any other method is not related to custody. LO 14.e

XYZ is an investment adviser registered in States B, C, and D. Part of its service is offering a comprehensive financial plan, for which there is an initial fee of $2,500. During a discussion with a prospect, one of its investment adviser representatives seeks to allay the individual's concerns by informing her that once the firm delivers its brochure and receives the client's payment, there is a three-day period during which the client may cancel the contract and receive a refund of that fee. In this case, A) the investment adviser representative is in violation because the time period is 5 days. B) the investment adviser representative is in violation because the brochure must be delivered at least 48 hours before signing the contract. C) there is no violation because the 5-day penalty-free withdrawal feature is only found in state law and does not apply to SEC-registered advisers. D) there is no violation because firms and their representatives can always make their rules more stringent than the regulators' rules.

A) the investment adviser representative is in violation because the time period is 5 days. The agent has committed an unethical business practice because the NASAA Model Rule dealing with advisers' brochures requires a five-day penalty-free period when the brochure is not delivered at least 48 hours prior to entering into the contract. The firm and its agents cannot impose house rules that take away the client's rights. LO 13.g

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an adviser who has custody of client securities or funds must do which of these? I.) Submit to a surprise audit of client accounts by an independent accountant each year. II.) Provide an audited balance sheet to the Administrator each year and include a balance sheet with his disclosure statement (brochure) to all prospective clients. III.) Send monthly statements to clients on the status of their accounts. A) II and III B) I and II C) I and III D) I, II, and III

B) I and II An adviser who has custody must submit to an annual surprise audit by an independent accountant and include an audited balance sheet with Part 2A of Form ADV, which must be filed with the Administrator and also forms the basis of the information that must be contained in the disclosure brochure. Other requirements include segregation of client securities, deposit of client funds into separate bank accounts, written notification to clients of the location of their property, and quarterly (not monthly) reports to clients on their accounts. LO 14.e

Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? I.) An adviser that requires prepayment of $1,000 in fees, nine months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. II.) An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. III.) An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients. A) I and III B) II and III C) I, II, and III D) I and II

B) II and III An adviser's financial impairment must be disclosed to clients if the adviser has discretion, has custody, or requires prepayment of more than $1,200 in fees, six or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, six or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure. LO 13.b

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) Proceed with the account; the signature is not required. D) Only unsolicited orders may be accepted until the signed receipt is received.

B) Proceed with the account but make a supervisory person aware of this. Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person.

Which of the following statements is correct? A) A state-registered investment adviser collecting fees of $500 for six months or more in advance is considered to be receiving a substantial prepayment. B) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. C) Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. D) Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.

B) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require it they be more than $500 for six or more months in advance. LO 13.f

Under the SEC's Marketing Rule for Investment Advisers, which of the following is true with regard to advertising? A) The advertisement may refer to specific past recommendations if they reflect the actual performance of a client's portfolio. B) The advertisement may use testimonials from clients with proper disclosures. C) The advertisement may refer to any formula, charting device, or graphing method, provided a disclaimer is included stating there is no assurance that the same results will be obtained in the future. D) The advertisement may offer free services for a nominal charge.

B) The advertisement may use testimonials from clients with proper disclosures. One of the key changes brought about by the Marketing Rule was the removal of prohibitions against testimonials. As long as it is from a client and discloses whether or not compensation was involved, the testimonial is generally permitted. Offers of free services are permitted but must be totally free with no strings attached. If past performance is included in the ad, it cannot cherry-pick and use only selected recommendations; everything must be shown. Charts, formulas, or other devices may be referred to in an ad, but the ad must disclose the difficulties or limitations in their use. LO 13.i

If an unaffiliated person acts on behalf of an investment adviser in an attempt to solicit or refer new investment advisory clients, which of the following conditions is not required by the Investment Advisers Act of 1940 for the investment adviser to pay the solicitor a fee of $100 per month for this service? A) If the compensation exceeds $1,000 over the previous 12 months, here must be a written agreement between the solicitor and the investment adviser. B) The solicitor must be registered as an investment adviser. C) The investment adviser must be registered as an investment adviser. D) There can be no outstanding SEC order barring the solicitor's activities.

B) The solicitor must be registered as an investment adviser. An unaffiliated (nonemployee or third party) solicitor is usually not required to register as an investment adviser or investment adviser representative under the Investment Advisers Act of 1940 as long as certain stipulations are met. The solicitor is not under the control of the SEC. There must be a written agreement between the solicitor and the investment adviser for whom she solicits clients when the compensation agreement calls for payment in excess of $1,000 over a 12-month period. The solicitor cannot have a disciplinary item in her background that would prohibit that solicitor from registering as an adviser or adviser representative. LO 13.i

In an effort to benefit from the economies of scale, Liquid Assets Management, Inc., (LAMI) and Strategic Assets Management Company (SAMCO)—both registered with the Administrator as investment advisers—have merged into a new firm with the name of Strategic and Liquid Assets Management Company (SLAMCO). This would A) require notification of the clients within a reasonable period of time. B) be considered an assignment of the advisory contracts and would require consent of the clients. C) be an unethical business practice. D) require the filing of a new Form ADV along with the proper registration fee.

B) be considered an assignment of the advisory contracts and would require consent of the clients. A change of management control is considered an assignment of the advisory contracts held by LAMI and SAMCO. In order for those contracts to be continued by SLAMCO, consent of the clients is required. It is only when a change is to a minority interest in an advisory firm organized as a partnership that notification within a reasonable period of time is required. Although SLAMCO would have to register with a new Form ADV, as a successor company, no registration fees would be due until renewal on December 31. LO 13.e

Plenitude Premier Solutions (PPS) is registered in State C. If PPS wished to maintain custody of client funds or securities, A) prompt notice would have to be given to the State C Administrator in a private letter. B) prompt notice would have to be given to the State C Administrator on Form ADV. C) permission would have to be obtained from the State C Administrator. D) notice is given to the State C Administrator as part of the annual updating amendment.

B) prompt notice would have to be given to the State C Administrator on Form ADV. It is unlawful for an investment adviser, registered or required to be registered in a state, to have custody of client funds or securities unless the investment adviser notifies the Administrator promptly in writing on Form ADV that the investment adviser has or may have custody. LO 14.e

Under provisions of the Investment Advisers Act of 1940, investment advisers that maintain custody of client securities are required to do all of the following except A) keep copies of all confirmations sent to clients. B) send an itemized statement to clients at least monthly. C) maintain a separate ledger for each client, showing all purchases and sales. D) arrange for a surprise audit by an independent public accounting firm at least annually and subsequently file a report of the examination with the SEC.

B) send an itemized statement to clients at least monthly. Investment advisers that maintain custody of customer securities and/or cash are required to send statements to customers on a quarterly basis, not monthly. All the other choices are correct statements and therefore not exceptions to the requirements. LO 14.e

One of the differences between broker-dealers and investment advisers (IAs) is the disclosures that must be made when the IA is acting as a principal or agent in a transaction with an advisory client. In the case of a firm registered in both capacities, those disclosures would not be required when A) approval is granted by an officer of the firm. B) there is a transaction with a client of both entities but the trade is not based upon advisory services rendered. C) cleared with the Administrator. D) the transaction is in an exempt security.

B) there is a transaction with a client of both entities but the trade is not based upon advisory services rendered Under those conditions—where a firm is registered as both a broker-dealer and an IA—the disclosure requirements incumbent upon IAs do not apply when the transaction is solely related to the firm's capacity as a broker-dealer. LO 13.a

Wealth Creation Advisers (WCA) is a federal covered investment adviser specializing in consulting to pension plans. WCA's principal office is located in State L. The governor of State L is running for re-election. If WCA were to make a $350 contribution to the campaign, under the SEC's pay-to-play rule, WCA A) could be subject to disciplinary action. B) would be prohibited from receiving compensation for advisory services rendered to any agency of State L for two years. C) could continue with business as usual, as the contribution is within the de minimis limitation because their principal office is located in State L. D) would be prohibited from rendering any advisory services to any agency of State L for two years.

B) would be prohibited from receiving compensation for advisory services rendered to any agency of State L for two years. The SEC's pay-to-play rule prohibits investment advisers from receiving compensation for advisory services to a government entity (any agency, authority, or instrumentality of a state or political subdivision) for two years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. Please note that the advisory relationship can continue, just without any compensation. The de minimis exemption of $350 applies to an individual, as long as that person is eligible to vote for the candidate ($150 if he is not), but it never applies to the firm. LO 14.h

Which of the following actions by an investment adviser registered in three states is permitted? A) Delivering the brochure within 48 hours after signing of the contract, as long as there is a 5-day, penalty-free withdrawal provision B) Guaranteeing a rate of return equivalent to a 5-year insured bank CD or waiving their yearly fees C) As long as the firm's brochure indicates that fees are negotiable, announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year D) Stating in the advisory contract that fees will be reimbursed if account performance is less than agreed upon

C) As long as the firm's brochure indicates that fees are negotiable, announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year This is not considered discrimination, because the discount applies equally to all (if they are among the first 50). The regulators consider this to be a negotiated fee. Fee reimbursement or waivers are not permitted. The five-day withdrawal provision applies to state-registered investment advisers when the brochure is not delivered at least 48 hours prior to (not after) the signing of the contract. LO 13.a

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? They must be renewed on an annual basis. They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. They must prohibit assignment of the contract without the client's consent. A) I and II B) I and III C) II and III D) I, II, and III

C) II and III There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent. LO 13.e

Under the NASAA Model Custody Rule, an investment adviser is considered to have custody of client assets if which of these are true? I.) The adviser inadvertently receives a check from a client for a purchase that is made payable to the investment adviser and does not return the check within 24 hours. II.) The adviser inadvertently receives a check from a client for a purchase that is made payable to a third party and does not forward the check within 3 business days. III.) The adviser inadvertently receives stock certificates from a client and does not forward them within 3 business days. IV.) The adviser inadvertently receives stock certificates from a client and does not return them within 3 business days. A) II and III B) I and IV C) II and IV D) I, II, and IV

C) II and IV Checks made payable to a third party must be forwarded to that party within three business days of receipt or the IA will be considered to be maintaining custody. In the case of certificates or checks made out to the IA for a securities purchase, return must be made within three business days of receipt in order to avoid custody issues; they are never forwarded. LO 14.e

An agent has a new client who is prone to tergiversation. As such, it would probably make sense to A) obtain permission from both the client and the broker-dealer before sharing in the profits and losses in the account. B) open a discretionary account. C) accept unsolicited orders only. D) make recommendations on a frequent basis.

C) accept unsolicited orders only. Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders. LO 14.g

In general, the Administrator would require that a broker-dealer's social media policies be A) left up to the manager of each branch office. B) updated at least once every three years. C) committed to writing and communicated firmwide. D) limited to defining the responsibilities of supervisory personnel.

C) committed to writing and communicated firmwide. Although NASAA does not yet have a Model Rule dealing with social media, individual states have developed policies, and most of them mirror FINRA's, which requires that a firm's social media policies be in writing and made known to all in the company. It is not just supervisory personnel who must know the policy; any employee is subject to it. Updating every three years is not nearly frequent enough in this dynamically changing industry. LO 13.h

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan; after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A) only Mary would have to make disclosure to Amanda. B) both Susan and Mary would have to disclose the cash payment to Amanda. C) it would be permitted if Susan made the proper disclosures. D) Susan would have to obtain Mary's permission first.

C) it would be permitted if Susan made the proper disclosures. Referrals from unaffiliated third parties are considered endorsements under the SEC's investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect. LO 13.i

Holly is an IAR with Remington, Fairchild, and Hume, a federal covered investment adviser. Holly's manager tells her that he will be busy for a couple of hours working on completing Form ADV-E. This tells Holly that her firm A) will be changing to state registration. B) is undergoing a special evaluation by its clients. C) maintains custody of customer funds and securities. D) is reporting certain errors discovered by management.

C) maintains custody of customer funds and securities. Form ADV-E (E for Examination) must be completed by investment advisers (IAs) that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant, who examines client funds and securities in the custody of the investment adviser, in compliance with the Investment Advisers Act of 1940 or applicable state law. LO 14.e

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for two to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent A) should pack her bags and leave the firm before the compliance department learns of her actions. B) will probably be disciplined for failure to disclose the potential conflict of interest. C) should pack her bags for the trip; she earned it. D) should only sell what is suitable for the client based on all available information.

C) should pack her bags for the trip; she earned it. The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client, and if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable. LO 13.b

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions except A) compensation is based on gains, less losses, for a period of no less than one year. B) the formula used to calculate compensation includes realized capital losses and unrealized depreciation. C) the client must meet certain minimum financial standards. D) disclosure that the performance compensation may create an incentive for the adviser to take greater risks.

D) disclosure that the performance compensation may create an incentive for the adviser to take greater risks. Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is over $2.2 million, or a client is qualified if he has at least $1.1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than one year. Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception. LO 14.c

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) consent of the client. B) disclosure to the client. C) consent of and disclosure to the client prior to execution of the transaction. D) disclosure to the client and consent prior to completion of the transaction.

D) disclosure to the client and consent prior to completion of the transaction. 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 the settlement date. LO 13.a

The Administrator may, by rule, A) suspend federal law if the Administrator believes it to be in the public interest. B) allow an agent to waive provisions of the USA. C) suspend the registration of a federal covered adviser because the contract did not meet the requirements for a state-sanctioned investment advisory contract. D) forbid investment advisers registered in that state from taking custody of client funds.

D) forbid investment advisers registered in that state from taking custody of client funds. The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes. LO 14.e

Regarding performance-based fees charged by ​covered ​investment advisers, all of the following statements are correct except A) performance-based fees are generally prohibited. B) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE. C) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark. D) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods.

D) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods.​ Covered advisers are those under federal jurisdiction rather than state. The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. ​ Please note that the NASAA Model Rule on Performance-Based Compensation would require the risk disclosure.​ LO 14.c

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation. B) WSWM would be engaging in a prohibited practice. C) it would be permissible only if consent was obtained and written disclosure of the firm's capacity was disclosed prior to execution. D) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction.

D) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction. In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer. LO 13.a

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees except A) safekeeping of customer funds and securities. B) the cost of overnight delivery services. C) interest on debit balances in margin accounts. D) markups and markdowns on trades done as a principal.

D) markups and markdowns on trades done as a principal. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers. LO 13.b

Great Western Securities, Inc. (GWSI), a registered broker-dealer, is also the distributor for the Westcore Value Fund. When an agent registered with GWSI recommends the purchase of the Westcore Value Fund, the agent A) shall ensure that the fund's sales charge is fair and reasonable. B) is committing an unethical business practice by recommending an affiliated entity. C) shall obtain the approval of a designated supervisor before making the recommendation. D) shall disclose the potential conflict of interest to the client.

D) shall disclose the potential conflict of interest to the client. Anytime a broker-dealer is also the distributor of a mutual fund, disclosure of the potential conflict of interest shall be made whenever that fund is recommended to the firm's clients. Agents have nothing to do with the sales charge levied by a mutual fund—that is stated in the fund's prospectus. LO 13.b

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers. B) fee schedules should only be delivered by hand or postal mail, to reduce cybersecurity threats. C) the schedule should be made available on the broker-dealer's public website and should be password protected. D) the schedule should be made available on the broker-dealer's public website without requiring any login or password.

D) the schedule should be made available on the broker-dealer's public website without requiring any login or password. Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available, and cybersecurity is not a threat because there is no confidential information included. LO 13.b

Under the USA, all of the following statements are true regarding investment advisory contracts except A) they must be in writing. B) they cannot be assigned without customer approval. C) they can only allow fees to be performance related under certain limited circumstances. D) they cannot allow for prepaid advisory fees.

D) they cannot allow for prepaid advisory fees. Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2.2 million, where performance-based fees are permitted. LO 13.e