Test 1 Part 1 - Weak Parts
Under the Securities Act of 1933, a registration statement for a security generally becomes effective how many days after it is filed?
20 A registration statement for a security becomes effective 20 days after it is filed, unless the SEC orders a delay.
Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT
CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for: pension consultants once their AUM reach $200 million; small and mid-size advisers who would be required to register in 15 or more states; and those advisers with at least $100 million in AUM, but not $110 million in AUM. Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.
Strategic Capital Asset Managers (SCAM) is an investment adviser that is registered in 5 states. In lieu of preparing a fancy brochure, SCAM is permitted to provide its clients with a copy of its
Form ADV Part 2A and Part 2B The Form ADV Part 2 (both parts) is acceptable for use as the firm's brochure. Part 1 is for registration purposes, and Part 1B is only used by state-registered advisers (as this firm is). Part 2, Appendix 1 is used for investment advisers who offer wrap fee programs. As a state-registered investment adviser, SCAM does not file any forms with the SEC.
Under the Uniform Securities Act, who must register as an investment adviser?
Registered broker-dealers that provide advice only incidentally to their business are exempt from the definition if they do not receive compensation. However, a broker-dealer that receives compensation for investment advice must register. A financial planner with no place of business in a state and who advises only trust companies is exempt from registration. Out-of-state advisers (with no office in the state) are not defined as investment advisers within a state if their only clients within the state are other investment advisers or broker-dealers, financial institutions, or institutional investors. Banks are excluded from the definition of investment adviser, as are accountants who provide advice only incidentally to their business.
Which of the following statements regarding an agent's authority to place orders for a client's account under NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents is TRUE?
The client's oral approval is sufficient for a specific order. Oral approval from the client authorizing a stated amount of a specified security is sufficient to place an order. An agent must receive authority to place orders for a client whether or not there is a conflict of interest. Written approval from the client authorizing a stated amount of a specified security is not required before placing the order. However, written authority is necessary for the agent to exercise discretion in the account.
Under the NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of
$10,000.00 The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000.
Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092?
A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space. If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all 3 elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice.
Which of the following must register as an agent when representing a broker-dealer?
An employee who accepts unsolicited orders from institutional clients An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents.
Which of the following actions by an investment adviser registered in 3 states is permitted?
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). Fee reimbursement or waivers are not permitted. The 5-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.
Which of the following persons is defined as an agent by the Uniform Securities Act?
Clerk at a broker-dealer who is authorized to take orders Anyone who solicits or receives an order while representing a broker-dealer is an agent. Silent partners, administrative personnel, and certain executives of broker-dealers, such as outside directors, who have nothing to do with the sales end of the business are not agents under the terms of the USA because they do not solicit or receive orders or supervise those who do. Remember, broker-dealers are not agents; agents represent broker-dealers. If, however, any of these individuals were authorized to accept orders, or supervise those that do, registration as an agent would be required.
Which of the following would NOT be considered a nonissuer transaction as defined in the Uniform Securities Act?
Gemco, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in Gemco stock. The stock was donated to Gemco by a former officer of the firm. A nonissuer transaction is one in which the issuer does not receive the proceeds of the sale. When a stockholder sells his shares, he is the one who receives the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. When an issuer sells shares, whether in a primary or secondary transaction (as is the case with the donated shares), if it receives the proceeds, it is an issuer transaction.
Under the Investment Advisers Act of 1940, an IA that uses a website would be required to maintain a copy of the screens used on its site in the firm's advertising file place copies of new screens into the firm's advertising file each time a change is made file copies of the web design with the SEC password protect the site to limit access to existing clients only
I and II A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons. Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm's advertising file. Advertisements are never filed with the SEC.
A federal covered investment adviser employs the services of a third-party solicitor. The Investment Advisers Act of 1940 would require the solicitor to deliver a copy of the IA's brochure a copy of the solicitor's brochure a copy of the solicitor's script a copy of the IA's Form ADV Part 1
I and II Third-party solicitors must provide a copy of the investment adviser's brochure (Form ADV Part 2A), as well as a copy of the solicitor's brochure. The solicitor's script must be approved by the IA, and only the SEC receives a copy of the Form ADV Part 1.
Which of the following financial instruments are considered securities under the USA? Collateral trust certificates Investment contracts, including interests in oil and gas drilling partnerships Options listed on the Chicago Board Options Exchange Foreign currency options contracts traded on the Philadelphia Stock Exchange
I, II, III, and IV Collateral trust certificates, investment contracts, options, and option contracts, regardless of the underlying asset, are identified as securities in the Uniform Securities Act and are subject to its provisions. Currencies are not securities, but options on currencies are. The key to questions like this is to remember those things that are NOT securities.
As defined in the NSMIA, federal covered securities would include open-end investment companies registered under the Investment Company Act of 1940 closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board bonds listed on the OTC Link where the company's common stock trades on Nasdaq bonds issued by the Province of Ontario
I, II, and III Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered, and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian government and municipal securities are not federal covered (although under the Uniform Securities Act, they are exempt securities).
Kapco Advisers registers with the Administrator on April 1. Pete Patel, an IAR with Kapco, registers on the same day. Both of them file renewal papers, accompanied by the appropriate fees, on March 31 of the following year. Which of the following statements are TRUE? Kapco's renewal was timely. Kapco's renewal was late. Patel's renewal was timely. Patel's renewal was late.
II and IV Regardless of when initial registration occurs, the renewal date for all professionals is December 31.
Which of the following is NOT considered to be in the business of investment advising?
Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only Please note that this question is not asking "who is an investment adviser?" It is asking about one of the 3 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.
Under the Securities Exchange Act of 1934, which of the following would NOT be considered associated with XYZ Corp., a broker-dealer?
Robert, a client who owns 1,000 shares of XYZ's voting stock An associated person of a broker-dealer includes any partner, branch manager, officer, or director of a broker-dealer, including outside directors. It also includes employees such as account executives or sales representatives who are not clerks or ministerial personnel, and anyone who controls, is controlled by, or is under common control with the broker-dealer. Being a client of a broker-dealer or owning shares of the firm's stock does not make one an associated person, unless something in the choice indicated that this ownership put Robert into a position of control.
Transactions meeting certain conditions are exempt from the Uniform Securities Act's registration and advertising filing requirements. Which of the following transactions does NOT meet those conditions to qualify as an exempt transaction?
The sale of U.S. government securities to a retail client's IRA by a registered government securities dealer In the sale of U.S. government securities to a retail client, the security is exempt, but the transaction is not. Had the sale been to an institutional client, it would have been exempt. An offer is not a transaction.
An investment adviser wishes to advertise a proprietary charting system used to time the market. To be in compliance with the Investment Advisers Act of 1940,
a statement reflecting the limitations and difficulties of using the system must be included in the ad An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using said system.
Under the Uniform Securities Act, all of the following persons may provide investment advice incidental to their normal business without requiring registration as an investment adviser EXCEPT
an economist The Uniform Securities Act does not grant an economist exemption from registration, but it does offer an exemption to teachers, lawyers, and engineers if the investment advice is incidental to their business; thus the acronym LATE for lawyers, accountants, teachers, and engineers.
Sally is an agent with a broker-dealer. She has used her degree in computer science to develop her own stock-picking software program. Backtesting has shown that the program is likely to produce returns that beat the overall market. As a result, Sally plans to use this program for each of her clients. Sally
is violating suitability requirements The point here is not whether or not Sally's program works. It would be unlikely that all of her clients have the same objectives and financial resources. In fact, some of them might be suitable for debt securities rather than stocks. Therefore, using the same software program to pick stocks for every client would probably be violating the rules dealing with suitability. This would be the same if Sally were an IAR. Please note that while this might be considered an unethical business practice, the suitability choice is more to the point.
Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except
it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. There is no requirement that the fee schedule be filed with the Administrator. I t must be up-to-date and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees, the firm's website is one of them.
An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser
need not disclose the source of the information If an adviser provides its clients with reports or recommendations prepared by a third party without disclosure of the source, the adviser has acted unethically. There is, however, an exception to this rule, which happens to apply here. If the adviser uses third-party reports as a basis for its own recommendation or as a support to its own recommendation to its client, it does not have to disclose this information.
It would not be a prohibited practice under the Uniform Securities Act for an agent to tell a client that
registered nonexempt securities may properly be sold in the state Nonexempt securities are those that must register. The Administrator never approves of any security, passing a licensing exam does not give one the right to assert one's qualifications, and performance-based compensation is never permitted for agents.
All of the following statements regarding the role of the chief compliance officer of an investment adviser are correct EXCEPT
the chief compliance officer should have a minimum of 5 years' experience in securities compliance in matters involving public customers or accounts There is no specific experience requirement for the chief compliance officer of an investment adviser; he should be competent and knowledgeable regarding the applicable federal securities laws. Additionally, the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser.
The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of
the chief compliance officer. 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.
A broker-dealer is NOT considered an investment adviser if
the investment advisory services are incidental to the broker-dealer's business and no special compensation is received Excluded from the definition of investment adviser are financial institutions, publishers, investment adviser representatives, and certain professionals, including broker-dealers, whose advice is incidental to their profession and who are not compensated for it.
Under the Investment Advisers Act of 1940, a cash referral fee may be paid by an IA
when a written agreement providing certain disclosures has been entered into between the IA and the third party Please note that the question refers to the Investment Advises Act of 1940; this answer would not be appropriate under the Uniform Securities Act. A cash referral fee may be paid under the terms of a written agreement spelling out the terms and conditions of the arrangement and making the required disclosures.
