1.10 Investment Company Act of 1940, 1.11 Money Laundering

Under the Investment Advisers Act of 1940, which of the following would meet the criteria of persons associated with an investment adviser? A manager in an investment advisory firm who supervises 5 investment adviser representatives. The individuals responsible for bringing new clients to an advisory firm. A secretary in the advisory firm. A) I and II. B) I only. C) I and III. D) II only.

A) I and II.

As defined in the Investment Company Act of 1940, the term "investment company" would NOT include a: A) unit investment trust. B) holding company. C) face amount certificate company. D) management company.

B) holding company.

A" fiduciary" is a: A) broker who solely conducts agency trades. B) person entrusted with the duty of acting for the benefit of another party. C) person who sells securities to the public on a nondiscretionary basis. D) principal in a broker/dealer who specializes in proprietary trading.

B) person entrusted with the duty of acting for the benefit of another party.

If general interest rates increase, the interest income of a bond unit investment trust will probably: A) increase. B) remain the same. C) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace. D) decrease.

B) remain the same. Since the portfolio of a UIT is fixed, the income generated by that portfolio will not change. However, one would expect the value of the unit to decrease. Remember, a UIT does not have a portfolio manager.

**The purpose of the Investment Advisers Act of 1940 is to provide: A) a level playing field between investment advisers and broker/dealers. B) standards at the federal level for the regulation of investment advisers. C) standards among the various states for the regulation of investment advisers. D) regulation for investment companies and their operations.

B) standards at the federal level for the regulation of investment advisers. The purpose of the Investment Advisers Act of 1940 is to provide federal standards for the regulation of investment advisers. Providing standards among the various states for the regulation of investment advisers is the purpose of the Uniform Securities Act. Providing regulation for investment companies and their operations is the purpose of the Investment Company Act of 1940. ** BE CAREFUL HERE** The question is about IA Act of 1940, NOT the Investment COMPANY Act of '40

If you were describing an investment that trades on an exchange with a price set by supply and demand, rather than its underlying value, it would be a (an): A) open-end fund. B) forward contract. C) closed-end fund. D) hedge fund.

C) closed-end fund. The stock of closed-end investment management companies trades on exchanges and, like any other exchange security, is priced based upon supply and demand. Although closed-end funds compute their NAV, it is market forces that determine price.

***When shares of a closed-end investment company are purchased by an investor, the price paid is based upon the: A) net asset value plus commission. B) current bid price. C) current asking price. D) net asset value.

C) current asking price. Closed-end investment company shares are priced based on supply and demand. The ask is the price that investors will pay for purchasing shares and the bid is what investors receive when selling. Investors will also pay a commission as this is what the broker charges for executing the transaction. Shares of open-end investment companies are bought and redeemed based on NAV, but that is not so of closed-end companies.

Currency transaction reports must be filed for cash transactions that exceed: A) $25,000. B) $50,000. C) $100,000. D) $10,000

D) $10,000 The Bank Secrecy Act requires every financial institution to file a Currency Transaction Report (CTR) on FinCEN Form 104 for each cash transaction that exceeds $10,000. This report would include cash transactions used to pay off loans, electronic transfer of funds, and purchases of certificates of deposit, stocks, bonds, mutual funds, or other investments with cash.

Under the Investment Company Act of 1940, the reporting requirements investment companies must comply with include: filing an audited report with the SEC annually. sending semiannual reports to shareholders. notifying shareholders of changes in the portfolio as those changes occur. A) I and II. B) I and III. C) II and III. D) I, II and III.

A) I and II Investment companies must file audited reports with the SEC annually and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur.

The Investment Advisers Act of 1940 addresses all of the following EXCEPT the: A) registration of new issues of securities sold by investment advisers. B) registration of individuals who are in the business of giving investment advice. C) the establishment of standards of ethical conduct for investment advisers. D) establishment of procedures for registration of investment advisers.

A) registration of new issues of securities sold by investment advisers. The Investment Advisers Act of 1940 does not establish registration procedures for the sale or issuance of securities, but it does establish requirements for the registration of persons who are in the business of giving investment advice. The Securities Act of 1933 regulates the issuance of new corporate securities.

Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE? Only the board of directors needs to approve changes in the investment objective. The majority of outstanding shares must vote to approve changes in the investment objective. The SEC must approve all changes in the investment objective. The investment adviser does not set, but tries to meet, the investment objective. A) II and IV. B) I and II. C) I and III. D) III and IV.

A) II and IV. A majority of the outstanding shares must vote to approve any change in investment objective or policy. The investment adviser's job is to try to achieve the investment objective.

Which of the following activities is most likely to be considered by the SEC as meeting the business standard element in the definition of an investment adviser? A) Issuing reports on macroeconomic conditions. B) Advertising investment services to the public and providing them routinely. C) Advertising investment services but receiving no separate compensation for the services. D) Giving specific investment advice only on rare and isolated occasions.

B) Advertising investment services to the public and providing them routinely.

Under the Investment Company Act of 1940, an affiliated person is prohibited from: borrowing from the fund (money or property). buying anything from the fund, except shares of the fund. selling anything to the fund. A) II and III. B) I, II and III. C) I and II. D) I and III.

B) I, II and III. Affiliated persons may not have any dealings with the investment company (outside of contractual obligations and the purchase of shares of the company), such as buying securities, furniture, real estate, or other property from the company or selling such property to the company.

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities EXCEPT: A) shares of other mutual funds. B) stock on margin. C) call options. D) high yield bonds.

B) stock on margin. The Investment Company Act of 1940 generally prohibits mutual funds from making purchases on margin. There are exceptions to this rule, such as in the case of hedge funds. A fund is not prohibited from buying options or low-quality bonds. A mutual fund may invest in other mutual funds so long as it does not acquire more than 3% of the outstanding shares of the other fund.

Which of the following statements regarding an investment company's board of directors is NOT true? A) The board of directors contracts with an outside investment adviser or portfolio manager to invest the cash and securities held in the fund's portfolio. B) No convicted felon or person convicted of a misdemeanor involving the securities industry may serve on the board of directors of an investment company. C) An investment company's board of directors manages the portfolio on behalf of the investor shareholders. D) An investment company's board of directors concerns itself with policy and administrative matters

C) An investment company's board of directors manages the portfolio on behalf of the investor shareholders. The board of directors sets policy and manages the administrative affairs of the investment company, but it does not manage the portfolio. The board contracts with an outside investment manager to invest the funds.

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT: A) an investment company must have more than $100,000 capitalization to be offered to the public. B) shareholders have the right to vote on a company's change from a closed-end to an open-end investment company. C) an investment company's board of directors may be composed of up to 70% of the company's interested persons. D) open-end investment companies must redeem securities within seven days after their tender.

C) an investment company's board of directors may be composed of up to 70% of the company's interested persons. At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company.

Which of the following persons is NOT an associated person of an investment adviser? A) A third-party solicitor who refers accounts to an adviser for a fee. B) A senior officer of an investment adviser responsible for marketing as opposed to investment advisory services. C) The parent broker/dealer of an investment advisory firm. D) A graphic design consultant who prepares a broker/dealer's research publications.

D) A graphic design consultant who prepares a broker/dealer's research publications.

Under the Investment Company Act of 1940, which of the following would be considered an affiliated person? Persons who control, are controlled by, or share common control with the company. Any officer, director, or employee of the company. Persons who own or control 5% or more of the voting shares of the company. A) I and III. B) II and III. C) III only. D) I, II and III.

D) I, II and III. Affiliated persons are any investment company directors, officers, employees, or owners of 5% or more of the voting shares of stock, and/or any persons controlling or controlled by such persons.

As with most securities regulation, knowing the definitions is critical to understanding the law. Under the Investment Company Act of 1940, included in the definition of the term "investment company" would be all of the following EXCEPT: A) face-amount certificate company. B) management company. C) unit investment trust. D) public utility holding company.

D) public utility holding company. Holding companies are not investment companies.

When an agent is discussing possible discounts related to the purchase of mutual funds shares, she would be referring to: A) the CDSC. B) breakpoints. C) 12b-1 fees. D) reinvesting distributions.

B) breakpoints.

Usually, the fee received by the management company, from an investment company, depends on the: A) volume of new shares sold. B) type of securities in the fund portfolio. C) average annual net assets of the fund. D) profit of the fund.

C) average annual net assets of the fund. The adviser under contract to manage the fund receives a fee that is most commonly based on the amount of assets under management. It is true that the fee can be affected by the types of securities in the portfolio such as a lower fee for money market funds and a higher fee for small cap funds, but, in this case, the best answer is the one that applies universally.

Which of the following individuals would be considered a noninterested person in a mutual fund? A) A member of the board of directors who is also employed as the investment adviser. B) A shareholder who owns 10% of the fund's shares. C) A person who holds a position with the fund's underwriter. D) A member of the board of directors who does not hold another position within the investment company.

D) A member of the board of directors who does not hold another position within the investment company. An interested person is defined as someone in a control relationship with the fund or someone who owns 5% or more of the outstanding shares. Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.

Under the Investment Advisers Act of 1940, which of the following are considered affiliated persons of an adviser? The vice president of finance of the company. A registered agent of the company. An office secretary of the company. A) I and III. B) II and III. C) I, II and III. D) I and II.

D) I and II. Affiliated persons include investment company directors, officers, employees, or owners of 5% or more of the voting stock and/or any persons controlling or controlled by such persons. This does not include secretarial or administrative personnel. Thus, the office secretary is not considered an affiliated person.

The Investment Company Act of 1940 does which of the following? A) Regulates the secondary market. B) Governs the issuance of new issues. C) Sets rules for the registration of investment advisers. D) Prescribes procedures for the establishment of investment companies.

D) Prescribes procedures for the establishment of investment companies.

Which of the following persons may legally open an account to trade on margin? A) An open-end investment company. B) A corporation. C) A custodian of an UTMA account. D) A minor child with approval of a court-appointed guardian.

B) A corporation. A corporation may open an account to trade on margin if provided for in the charter and authorized in the bylaws. Both UTMA and UGMA specifically prohibit custodians from either engaging in speculative trading or borrowing money or securities in the name of the minor through trading on margin. Mutual funds are also prohibited from trading on margin.

FinCEN Form 104, the Currency Transaction Report, is filed with the: A) National Security Agency. B) Internal Revenue Service. C) Department of the Treasury. D) Federal Bureau of Investigation (FBI).

B) Internal Revenue Service. Currency transactions in excess of $10,000 are reported on FinCEN Form 104 to the IRS in Detroit, Michigan.

Apart from those exempt or prohibited, anyone meeting the definition of investment adviser under the Investment Advisers Act of 1940 must: A) be approved by the SEC. B) register by coordination with the SEC. C) register with the state in which the investment adviser has a business. D) register with the SEC.

D) register with the SEC. The Investment Advisers Act of 1940 states that persons defined by the act as investment advisers must register with the SEC, unless exempt or prohibited by the act from the registration process with the SEC. **IAs who register with the SEC are federal covered and do not register with the states.

**Section 15 of The Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: no contract may be terminated with more than 60 days notice in writing. the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis. unless a specific exemption applies, the fund may not engage in margin trading . the contract must be in writing. A) I and IV. B) I and III. C) II and III. D) II and IV.

A) I and IV. Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.

What are the 3 classifications used to identify investment companies? A) Face-amount certificate companies, management companies, and open-end companies. B) Face-amount certificate companies, management companies, and closed-end companies. C) Unit investment trusts, closed-end companies, and open-end companies. D) Face-amount certificate companies, unit investment trusts, and management companies.

D) Face-amount certificate companies, unit investment trusts, and management companies.

Under the Investment Company Act of 1940, which of the following statements about advisory contracts between an investment company and an outside adviser is TRUE? A) The contract must be established for a 1-year period and renewed annually thereafter. B) The initial contract is effective once approved by the board of directors. C) The contract may be in writing, or it may be oral if there are at least two witnesses to the agreement. D) The contract may not be unilaterally assigned to another adviser.

D) The contract may not be unilaterally assigned to another adviser. All contracts between an investment company and an outside adviser must be in writing and must contain certain provisions; these include that the contract may not be unilaterally assigned to another adviser. ***The initial contract may be for TWO YEARS***, but it is subject to annual reapproval by a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties.

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: no contract may be terminated with more than 60 days notice in writing. the initial contract is for a maximum of 1 year and then may be renewed on either an annual or biannual basis. unless a specific exemption applies, the fund may not engage in margin trading. the contract must be in writing. A) I and IV. B) I and III. C) II and III. D) II and IV.

A) I and IV. Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. ****Whether the fund can trade on margin is not a function of the management contract.

**Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is NOT true? A) The renewal may be executed orally, provided it is done within 2 years of the initial contract. B) The renewal must be approved by either a majority of the board or a majority of the shares. C) The renewal must state the adviser's compensation. D) The contract must be terminable upon not more than 60 days notice.

A) The renewal may be executed orally, provided it is done within 2 years of the initial contract. If an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract may be for two years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the board of directors and annually renewed by either a majority of the board of directors or a majority of the outstanding shares. The contract must be terminable at any time, with a maximum of 60 days notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned.

Under the Investment Company Act of 1940, which of the following statements is (are) TRUE about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? This is prohibited under the act. Investment companies may employ outside advisers if a written contract is executed. The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares. A) I, II and III. B) II only. C) I only. D) II and III.

B) II only. One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open or closed-end) must be in writing. ***The initial contract must be approved by a majority vote of the outstanding shares AND the "non-interested" members of the board of directors. It is renewed annually by either a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties.

Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? I. Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000. II. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase. III. Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. He buys shares of that fund. A) I and II. B) II and III. C) I, II and III. D) I and III.

D) I and III. A husband and wife and all children under 21 qualify as a single person for the purposes of obtaining a quantity discount, as do corporations formed for a purpose other than obtaining such a discount and employee benefit plans. But other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter.

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of: A) a majority of the outstanding shares. B) the fund's investment adviser. C) a majority of the board of directors. D) they do not need approval.

A) a majority of the outstanding shares. Changes in investment policy require a vote of the majority of outstanding shares for approval.

The currency reporting threshold for cash and equivalent instruments is: A) over $5,000. B) over $25,000. C) over $10,000. D) over $3,000.

C) over $10,000. The currency reporting threshold for cash and equivalent instruments is over $10,000. These transactions must be reported on a CTR (currency transaction report) (FinCEN Form 104).

How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? A) Quarterly. B) Semiannually. C) Annually. D) Monthly.

C) Annually.

*The Investment Company Act of 1940 allows a majority vote of outstanding shares of a registered investment company to authorize the fund to: borrow money from a commercial bank. invest funds in securities consistent with the fund's objectives. change the objectives of the fund. change the nature of its business and cease to be an investment company. A) II and III. B) I, II and III. C) I, III and IV. D) I only.

C) I, III and IV. Under the Investment Company Act of 1940, a vote of the majority of outstanding shares may approve borrowing money from a bank, changing the investment objectives of the fund, and deciding to cease to be an investment company. Shareholder approval is not necessary to authorize the fund to invest consistent with the fund's objectives.

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are: mutual funds are only allowed to maintain TIC accounts with other funds that are members of the same family of funds. no public offering may commence unless the fund has at least $100,000 in net assets. no registered investment company may own more than 3% of the voting shares of another registered investment company. shares of the fund will not have any margin loan value until the 30th day after purchase. A) II and III. B) I and II. C) I and IV. D) II and IV.

A) II and III. The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Since the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940.

Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply(ies)? I. The board of directors has sole approval authority. II. The majority of the outstanding shares has sole approval authority. III. Both the board and the majority of outstanding shares must approve it. IV. A distribution plan must be written. A) III and IV. B) I only. C) I and III. D) II and III.

A) III and IV. For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares as well as a majority of the board of directors, including a majority of directors classified as outside directors.

The NASAA Statement of Policy on Unethical and Dishonest Business Practices of Broker/Dealers and Agents contains an extensive list of prohibited practices, but concludes with the statement that the list is not inclusive. This means that even practices not specifically enumerated will be prohibited if they are in violation of the standards of ethical behavior. One such circumstance that may arise is an agent making an initial sale of shares of an open-end investment company in a quantity just below a breakpoint published in the fund's prospectus. In this case, the agent: A) recognized the limitations of the client's ability to invest any further sum of money. B) would violate those ethical standards by failing to disclose that adding a small amount to the purchase would save a significant amount of sales charge. C) must explain the procedure for taking advantage of rights of accumulation on future purchases. D) has violated the suitability standards by failing to explain the risks inherent in making an investment below a breakpoint.

B) would violate those ethical standards by failing to disclose that adding a small amount to the purchase would save a significant amount of sales charge. A breakpoint is that purchase level where there is a reduction in the fund's sales charge. Allowing a client to purchase a quantity just below that level without describing the benefits of investing a small amount of additional capital, or perhaps signing a letter of intent, would be a violation of the standards of ethical behavior.

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of: A) the majority vote of the board of directors. B) the chief executive officer of the investment company. C) the majority vote of the outstanding shares and the board of directors. D) the majority vote of the outstanding shares.

C) the majority vote of the outstanding shares and the board of directors. The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares.

**The antifraud provisions of the Investment Advisers Act of 1940: A) prohibit any deceitful practice or course of business with respect to the purchase and sale of securities. B) do not apply to conduct directly related to actual transactions involving the purchase or sale of securities. C) apply to all conduct related to the purchase and sale of securities. D) do not apply to activity related to prospective or actual advisory clients.

B) do not apply to conduct directly related to actual transactions involving the purchase or sale of securities. The antifraud provisions of the Investment Advisers Act of 1940 apply to all conduct that concerns the integrity of the client relationship from an advisory standpoint. As far as actual securities transactions, those are covered under the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Advisers Act differed in that the activity did not have to be directly related to actual conduct in the offer or sale of securities, but extended to any deceitful conduct in the rendering of investment advice, the results of which constitute a fraud upon the client.

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. 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. file Form ADV with his current brokerage firm. notify his current brokerage firm and receive permission to operate independently from the firm as a registered investment adviser. do nothing and begin performing investment advisory services without regard to his current brokerage firm. A) I and IV. B) II and III. C) II and IV. D) I and III.

D) I and III. 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).