Federal Securities Act Missed Questions

Under the Investment Advisers Act of 1940, to determine if a person is "in the business" of giving investment advice, which of the following statements are TRUE? I The individual regularly gives advice on securities II The advice is rendered about securities III The individual receives compensation for giving advice on securities

1,2,3 To be "in the business" of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice.

Under the Investment Advisers Act of 1940, which statements is (are) TRUE regarding the use of advertising? I Past performance may be shown in advertising II Prior recommendations may be shown in advertising III Testimonials may be shown in advertising

1 Under the Investment Advisers Act of 1940, testimonials are prohibited in advertising; and the showing of prior recommendations is prohibited in advertising. However, past performance can be shown in advertising as long as there is an accompanying statement about general market conditions during this period; and a disclaimer is included that "past performance does not predict future results."

Which statements are TRUE regarding mutual funds? I That day's closing price is the basis for fund purchase price computations II That day's closing price is the basis for fund redemption price computations III The next day's closing price is the basis for fund purchase price computations IV The preceding day's closing price is the basis for redemption price computations

1+2 An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees. Review

Which statements are TRUE regarding advisory contracts under the Investment Company Act of 1940? I Advisory contracts must be in writing II Advisory contracts must be approved by a majority vote of the outstanding shares III Advisory contracts can be terminated by a majority vote of the Board of Directors IV Advisory contracts can be terminated by a majority vote of the outstanding shares

1,2,3,4 Under the Investment Company Act of 1940, investment advisory contracts between the fund and the adviser must be in writing and must be approved by a majority vote of the outstanding shares. Termination of the contract is permitted with either a majority vote of the Board of Directors; or a majority vote of the outstanding shares.

Under the Investment Advisers Act of 1940, which of the following persons managing assets of at least $100,000,000 MUST be registered with the SEC? I A person who gives advice solely about listed securities II A person who gives advice solely about municipal securities III A person who gives advice solely about U.S. Government securities

1+2 Excluded from the definition of an investment adviser is any person who renders advice solely about securities guaranteed by the U.S. Government - thus, no registration is required. Note, however, that this exclusion does not apply to persons who render advice about municipal securities; nor does it apply to persons who render advice about listed stocks. Finally, remember that only advisers with $100,000,000 of assets or more under management are required to register with the SEC; those advisers with less than $100,000,000 of assets under management only register with the State; and not with the SEC.

Which of the following statements are TRUE regarding market makers? I A market maker is a firm that buys securities into its own account on a principal basis from customers II A market maker is a firm that buys securities on an agency basis for customers III A market maker is a firm that sells securities from its own account on a principal basis to customers IV A market maker is a firm that sells securities on an agency basis for customers

1+3 A market maker or dealer is a firm that sells securities out of its own account or buys securities into its own account on a principal basis. Brokers effect trades for the account of customers on an agency basis.

A broker-dealer participates in the distribution of a new issue on a best efforts basis, receiving an underwriting fee from the issuer. The broker-dealer is: I acting as agent for the issuer II acting as a principal III the underwriter of the securities IV the investment adviser to the issuer

1+3 Firms that handle new issue distributions for issuers are underwriters. The underwriter can either act as a principal or agent in the underwriting. A firm commitment underwriting obligates the underwriter to buy the issue from the issuer - the underwriter takes full financial liability. A best efforts underwriting means that the underwriter acts as agent, using its best efforts to sell the issue to the public, taking no liability. For this, it earns an underwriting fee on each share or bond sold.

Which of the following can be purchased on margin? I NASDAQ issues II Options III Futures IV OTCBB issues

1+3 NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. In contrast, the futures markets are not subject to Regulation T and have their own margin requirements, which are quite low. Futures contracts can be purchased on margin. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

Under the Investment Advisers Act of 1940, which of the following statements are TRUE about the acceptance of prepaid advisory fees by an investment adviser? I The fees must be detailed in writing in the advisory contract II The fees cannot amount to more than 6 months' payment in advance III Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" IV Acceptance of a prepaid fee constitutes taking "custody" of customer funds

1+3 Prepaid advisory fees are permitted, as long as they are detailed in the advisory contract; and there is a refund of such fees if the contract is canceled prematurely. There is no restriction on the amount of prepaid fees that can be accepted - but remember that under the Statement of Policy on unethical practices, adviser fees must be similar to those charged by other advisers for comparable services. If an adviser accepts $1,200 or more of prepaid fees, for 6 months or more of service in advance, then a balance sheet must be included in the "Brochure" given to customers (the "Brochure" is Part 2A of Form ADV). Acceptance of prepaid fees is not the same as taking custody of customer funds or securities.

Under the provisions of the Sarbanes-Oxley Act of 2002, the annual audited 10K report filed with the SEC MUST be certified by the: I chief financial officer of the issuer II chief legal officer of the issuer III chief compliance officer of the issuer IV chief executive officer of the issuer

1+4 Sarbanes-Oxley was passed after the Enron fraud was uncovered in 2001. Enron basically produced fictitious financial statements that gave "market support" to the stock's price. When the fraud was uncovered, the stock price collapsed, taking a lot of innocent investors with it. As a result, "SarbOx" made auditors take personal liability for certifying a company's financial statements; and also made the CEO and CFO take personal liability for any misrepresentations or misstatements in the company's financial statements.

Which of the following statements are TRUE? I Investment advisers with assets of less than $100,000,000 are required to register in each State II Investment advisers with assets of $100,000,000 are required to be registered with the SEC III Investment adviser representatives associated with advisers with assets of less than $100,000,000 can be required to be registered in each State IV Investment adviser representatives associated with advisers with assets of more than $100,000,000 are required to be registered with the SEC

1,2,3 Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. Note that the SEC registers the investment adviser only - it does not register investment adviser representatives. The smaller advisers are only required to be registered at the State level. However, the State can require registration of investment adviser representatives for any investment adviser firm.

Which of the following records of an investment adviser that takes custody of customer funds are required to be retained under the provisions of the Investment Advisers Act of 1940? I Cash receipts and disbursements journal II Statement of financial position III Customer account statements IV Beneficiary designations for each customer account

1,2,3 The records required to be retained by an investment adviser that takes custody include: Cash receipts and disbursements ledger and general ledger Securities received and delivered ledger Purchase and sales ledger (trade ledger) Securities record (a record of each aggregate security position held, broken down by each customer owning part of the position and the physical location of that position) Confirmation copies of all customer trades Customer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account Note that there is no requirement for beneficiary designations to be retained for customer accounts - in most cases, the beneficiary is named in the will when a customer dies.

If the Securities and Exchange Commission sets the effective date for a new issue in registration, which of the following statements are TRUE? I All proper documents have been filed with the SEC II Additional documents must be filed with the SEC III The SEC approves of the new issue IV The issue may be offered to the public

1,4 If the SEC sets the "effective date" for an issue in registration, this means that all proper documents have been filed with the SEC. The SEC does not approve (nor does it disapprove) of any new issue in registration. Once the proper documents relating to a new issue offering are filed, the issue may be offered to the public.

Which of the following are provided to shareholders in the annual reports of registered corporations? I Income Statement II Balance Sheet III Statement of Changes in Stockholders' Equity IV Sources and Uses of Cash Statement

1234 Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings (this shows earnings added for the year and dividends paid from retained earnings for that year); and Statement of Sources and Uses of Cash (this shows cash received that year from income earned; stock and bond offerings; and disposals of equipment; and cash paid that year for equipment purchases, pay-down of debt; dividends, etc.)

Which of the following are national securities exchanges that MUST register with the SEC? I NYSE II AMEX (NYSE American) III PHLX IV CBOE

1234 The Securities Exchange Act of 1934 requires that each national securities exchange register with the SEC. Such exchanges include the NYSE, AMEX (NYSE American), CBOE, PHLX, etc. These exchanges become "self-regulatory organizations" under SEC oversight. They must have their rules approved by the SEC; and they enforce their own rules under SEC oversight.

Under the Securities Exchange Act of 1934, an investment manager that has discretion over $100,000,000 or more of customer assets must file Form:

13F a report filed with the SEC by investment managers who exercise discretion over the accounts of customers who collectively hold $100,000,000 or more of equity securities. The 13F must be filed within 45 days of the quarter ending where the $100,000,000 dollar limit was reached.

Mutual funds must send their financial statements to shareholders:

2 times per year Mutual funds must send their financial statements to shareholders semi-annually (twice a year).

Under the Investment Company Act of 1940, an investment adviser's contract is initially set for:

2 years; and is subject to renewal every year thereafter

The sale of a new issue of bonds by an insurance company is: I exempt from registration with the SEC II subject to registration with the SEC III exempt from registration in the State IV subject to registration with the State

2+3 The Securities Act of 1933 exempts insurance company "products" from registration with the SEC - meaning insurance policies and fixed annuities. However, if an insurance company sells its own securities to the public (e.g., common stock, preferred stock or bonds), these are non-exempt securities that must be registered with the SEC and sold with a prospectus. However, insurance company securities are exempt from State registration requirements, because insurance companies are already regulated at the State level by each State Insurance Commission.

An investment adviser will NOT be required to be registered with the SEC if the: I adviser's only clients are investment companies II adviser's only clients are insurance companies III adviser is located in only 1 State and all of the adviser's clients reside in that State

2+3 The main intent of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation. SEC registration is not required for advisers to insurance companies because there is no worry that an insurance company (which is a sophisticated purchaser) will be overcharged. Because the Investment Advisers Act of 1940 is federal legislation, which only applies to transactions that "cross State lines," if a transaction occurs wholly within 1 State, then Federal law does not apply and only that State's law applies. This is an "intrastate" exemption.

Net capital rules for broker-dealers under the Securities Exchange Act of 1934 set: I Minimum Net Worth amounts II Minimum Liquid Net Worth amounts III Maximum leverage ratios of Debt to Net Worth IV Maximum leverage ratios of Debt to Liquid Net Worth

2+4 Broker-dealer net capital is the firm's liquid net worth (liquid assets minus all liabilities). It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. Minimum net capital amounts for broker-dealers are set under the Securities Exchange Act of 1934. The ratio of debt to net capital is a leverage measure for a broker-dealer, with maximum limits set under the 1934 Act.

Under the Investment Company Act of 1940, violations are punishable for up to how many years in jail?

5 All of the Federal securities laws stipulate that violations are punishable by up to 5 years in jail and a $10,000 fine. This differs from Uniform State law, which imposes a maximum $5,000 fine and 3 years in jail for violation

To be defined as a diversified management company, the maximum percentage of the portfolio's assets that can be invested in a single issuer is

5% To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.

The maximum permitted dollar amount that can be raised in a Private Placement under Rule 504 of Regulation D is:

5,000,000 The Regulation D Private Placement exemption consists of Rules 501-506. Rules 501-503 are definitional rules, basically explaining who is an accredited investor and who is a "sophisticated" investor. The actual permitted offerings are detailed under Rules 504-506. Rule 504 is for small offerings, and is pretty much obsolete (but still tested!). Rule 505 has been rescinded. Rule 506 is the one everyone uses and can be used to raise any dollar amount. Rule 504: Covers offerings of up to $5,000,000. For such very small offerings, the rule does not specify required investor disclosures, and does not place any limit on the number of investors. Also, there is no audit requirement for the issuer's financial statements. While there is no Federal registration required, the State(s) where the issue is offered can still require State registration. Rule 505: Rescinded. Rule 506: Covers offerings of more than $5,000,000: This is the private placement rule used by pretty much everyone. The rule requires detailed disclosure to investors, similar to that required in a prospectus. The offer can only be made to a maximum of 35 non-accredited investors; and to an unlimited number of accredited investors. However, the States cannot require registration at the State level - a big financial benefit.

To be defined as a diversified management company, a fund must have at least what percentage of its assets invested in securities?

75% To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.

Which of the following would be defined as "being in the business" of giving investment advice?

A market timing service that does not recommend securities but which gives customers "buy" and "sell" signals on heavily traded ETFs based on technical factors There are advisers that specialize in offering market timing services (of about 8,000 SEC registered advisers, there are 200 or so of these firms). They are considered to be "in the business" of giving investment advice for a fee and must register. A newsletter that discusses investing in securities in general terms as part of a broad discussion of the U.S. economy is not giving advice about investing in securities. The giving of isolated advice means that one is NOT "in the business" of giving advice (Choices C and D).

Which of the following individuals will be denied federal registration as an investment adviser?

A person who, 11 years ago, was imprisoned for 18 months for counterfeiting The National Securities Markets Improvement Act of 1996 specifically requires the denial of SEC registration as an investment adviser to any person who has a criminal record and who has been imprisoned for 1 year or more.

An exempt reporting adviser must file:

ADV with SEC Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. To do so, it must file both Form PF (Private Fund adviser) and Form ADV. If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing. Broker-dealers file Form BD to register with the SEC. There is no such thing as Form RIA.

Under the Investment Company Act of 1940, the investment adviser's contract must be renewed by a majority vote of the fund's:

Board of Directors or the outstanding shares

What is the difference between Class A and Class B stock in a pooled investment vehicle?

Class B stock charges higher 12(b)-1 fees than Class A stock A pooled investment vehicle is an investment fund. Mutual funds offer share classes to investors, with different ways of imposing sales charges: Class A: An up-front sales charge reduced by breakpoints for larger purchases and no, or very low, annual 12b-1 fees. Class B: No up-front sales charge, instead a CDSC - Contingent Deferred Sales Charge is imposed that declines towards "0" over 6-7 years, however there are annual 12b-1 fees averaging .50%. Class C: No up front sales charge, usually no CDSC, but the fund charges the highest permitted annual 12b-1 fee of .75% annually. All share classes buy into the same exact mutual fund and receive the same distributions from the fund. Long-term investors, and investors with large dollar amounts, are usually better off with the "A" shares. Intermediate-term investors (6-7 years) with moderate amounts to invest are usually better off with the "B" shares. Short-term investors are better off with the "C" shares.

All of the following are defined as "affiliated persons" under the Investment Company Act of 1940 EXCEPT a(n): Incorrect answer A. You did not choose this answer. A officer of themanagement company B employee of the management company C 5% holder of the management company's shares D outside counsel for the management company

D An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company. The Board of Directors of a management company cannot consist of more than 60% of these affiliated persons. Other persons that the fund compensates, such as accountants and lawyers for the fund, are termed "interested" persons.

Under IA-1092, a person is "in the business" of rendering investment advice if that person: A advertises that it gives advice B is compensated for giving advice about securities C regularly gives advice about securities D all of the above

D SEC Release IA-1092 states that if a person is "in the business" of giving advice about securities, then he or she must register with the SEC as an investment adviser. If one holds oneself out as an investment adviser (that is, advertises); this constitutes being "in the business." If one is compensated for giving advice about securities (unless this is an isolated event), this person is "in the business." If one gives advice about securities on a regular basis, one is "in the business" as well.

Which of the following can be purchased on margin?

Futures NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. In contrast, the futures markets are not subject to Regulation T and have their own margin requirements, which are quite low. Futures contracts can be purchased on margin. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

13G report

an annual report filed with the SEC by anyone who acquires a 5% or greater holding in a publicly traded company and intends to remain a passive investor. The report is due within 45 days of year end.

Which of the following statements is TRUE regarding an investment adviser who renders advice solely to investment companies? The investment adviser:

Must register with SEC only

Which of the following persons can use the term "investment counsel"? A

Investment advisers whose primary business is the rendering of investment advice Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm.

What is the sales charge on a mutual fund called?

Load

If a firm maintains both a bid and ask quote in the secondary market, it is acting as a:

Market Maker A market maker maintains a bid-ask quote in a security, with the profit to the firm being the spread between the bid and ask quotes. A market maker is a dealer in securities. A specialist (now called the DMM - Designated Market Maker) on an exchange has a dual function - the specialist can act either as a dealer or as a broker, matching customer orders for a commission. A broker-dealer has a similar dual function. A floor broker acts as agent only, executing trades for customers as a broker on an exchange floor.

Which of the following actions by an investment adviser are prohibited under the Investment Advisers Act of 1940? I Making a cash payment to a solicitor that is undisclosed to the customer for signing that customer as an advisory client II Using an advertisement that includes a testimonial from a famous personality III Entering into an oral advisory contract with the customer IV Accepting a prepaid advisory fee from a client

Prepaid advisory fees are permitted, though the contract must explain how much of the fee will be refunded if the contract is canceled prematurely. Making a cash payment to a solicitor for signing a customer to a contract is permitted only if the payment is disclosed to the customer; and if the customer receives a solicitor's "Brochure" as well as the adviser's "Brochure;" and the customer must sign an acknowledgment that both were received. Oral advisory contracts are not permitted under the Investment Advisers Act of 1940 - they must be in writing (Note, however that the "Brochure Rule," under the Investment Advisers Act of 1940, requires delivery of the "Brochure" at, or prior to, entering into either a verbal or written contract, which is contradictory - but this is the rule!). Testimonials are prohibited in investment adviser advertising.

An investment adviser is a private fund adviser that is not required to register with the SEC. In order to maintain its exempt adviser status, it can only solicit investors who are:

Qualified Under the Investment Advisers Act of 1940, "private fund advisers" with less than $150 million of assets under management are exempt from registering with the SEC. A "private fund" is defined as one that would require registration with the SEC as an investment company, but it is not required to do so because either: it does not publicly offer its securities and has 100 or fewer beneficial owners of its securities (this is the typical structure for a hedge fund); or it does not publicly offer its securities and only limits its owners to qualified purchasers. To be a "qualified purchaser" is tougher than being an accredited investor under Regulation D. A qualified purchaser is an individual or trust with at least $5 million of assets available for investment; or an investment manager or company with at least $25 million of assets available for investment. In contrast, an accredited investor under the Regulation D Private Placement rule is an individual with $200,000 of annual income; a married couple with $300,000 of annual income; and individual with a net worth of $1,000,000; or an investment manager with at least $5,000,000 of assets available for investment.

An offering of securities in an amount that does not exceed $50,000,000, is given an exemption from registration under the Securities Act of 1933's:

Regulation A Regulation A under the Securities Act of 1933 gives an exemption from registration to issues of no more than $50,000,000. Rule 147 is the SEC's "intrastate" exemption; while Regulation D is the SEC's "private placement" exemption.

Which of the following is disclosed in Form ADV Part 1?

States in which the adviser is registered The ADV Part 1 is the basic registration information filed with the SEC - such as name of firm, address, phone number, officers, shareholders, States where the adviser is registered, etc. The ADV Part 2 is broken down into 2 parts. Part 2A is the "Brochure" that must be delivered to customers. It describes the investment adviser's policies, fees, education, types of investments, types of clients, method of analysis used, conflicts of interest, etc. Part 2B is the "Brochure Supplement" which details the educational and work background of the key personnel who make investment decisions or manage accounts

An investment adviser representative's friend provides him with a list of 10 prospective clients. The representative agrees to pay his friend a referral fee for each person on the list that opens an account with the adviser. Which statement is TRUE?

The arrangement is permitted only if it is in writing between the investment adviser and the friend and the arrangement is disclosed in writing to any customer opening an account . An investment adviser that pays a referral fee to another individual for finding new clients comes under SEC Rule 206(4)-3 covering solicitors. An investment adviser can only pay a solicitor if there is a written agreement between the adviser and the solicitor. The investment adviser must give the customer its brochure and the solicitor's brochure, in which the referral fee arrangement must be disclosed.

An investment adviser includes a list of its "Top Ten" recommendations made over the last year in its advertising. Under the Investment Advisers Act of 1940, which statement is TRUE?

This is a violation of the Act and is fraudulent Prior recommendations cannot be shown in investment adviser advertising - doing so is a violation of the Investment Advisers Act of 1940 (but the advertisement can offer to provide a list of prior recommendations upon request, as long as such list shows ALL recommendations made over the last 12 months; the date of the recommendation; the price at that time; the current market price; accompanied by a statement to the effect that "the performance of prior recommendations is not a predictor of future performance").

13D report

a report filed with the SEC by anyone who accumulates a 5% or greater holding in a publicly traded company, this is a public announcement that this person may intend to exercise "control" over the corporation, or may attempt to take over the company.

13F report

a report filed with the SEC by investment managers who exercise discretion over the accounts of customers who collectively hold $100,000,000 or more of equity securities. The 13F must be filed within 45 days of the quarter ending where the $100,000,000 dollar limit was reached.

Under the Investment Advisers Act of 1940 to satisfy the requirements of the "Brochure Rule," customers who wish to buy advisory services must receive a copy of the brochure:

at, or prior to, entering into an advisory contract The "Brochure Rule" obligates an investment adviser to give a potential customer the disclosure document (Part 2A of Form ADV) and the Brochure Supplement (Part 2B of Form ADV) at or prior to entering into a contract to provide advisory services.

The "Brochure Rule" applies to:

both oral and written advisory contracts D. The SEC states that the Brochure Rule applies to both oral and written advisory contracts. Note that this does conflict with the Investment Adviser Act of 1940's requirement that advisory contracts be in writing; but this is a later rule, written by someone who wanted the broadest interpretation possible.

All of the following are defined as "giving advice about securities" under IA-1092 EXCEPT a person who:

charts the price movements of stocks and distributes them to subscribers Charting of the price movements of stock is not "investment advice." An investment adviser, under the Investment Advisers Act of 1940, is "a person who receives compensation for advising others about securities, or about the advisability of investing in securities." Under the SEC's interpretations, a person who prepares a "list" of securities is making an implicit recommendation of these securities and is giving advice; a person who prepares asset allocation plans is also giving advice (if one of the assets included is securities). Furthermore, a person who recommends investment advisers is also one who gives advice! A person who prepares and distributes charts of stock price movements is not giving advice. Note, however, that if this information is used by the preparer to determine which securities to buy or sell, it would be considered to be "investment advice."

All of the following are included in the Form ADV filed with the SEC under the Investment Advisers Act of 1940 EXCEPT a list of the:

customers of the advisory firm The Form ADV Part 1 filed with the SEC includes the officers of the firm, the States in which the firm is registered, and if the firm is a partnership, a schedule of the partners' names is included; while if the firm is a stock company (privately held) a schedule of the shareholders is included. There is no listing of the customers of the adviser in the Form ADV. Note, however, the Part 2A, which constitutes the "Brochure" does include the type and approximate number of customers and the approximate value of assets under management.

Under the provisions of Rule 147 of the Securities Act of 1933, all of the following would be prohibited when making an intrastate sale of securities EXCEPT:

directly negotiating with the client in the State where the offering is being made The Act of 1933 prohibits the "use of the mails or other means of interstate commerce" to offer or sell securities unless the securities are either registered with the SEC or are exempt from registration. Thus, the Feds have no jurisdiction if a transaction stays wholly within 1 State - then only that State has jurisdiction under its Blue Sky law. Rule 147 spells out the requirements to obtain an Intrastate Exemption from Federal registration from the SEC. As part of the offering procedure, the "mails or other means of interstate commerce" cannot be used to make the offering. This includes the telephone and the Internet. Thus, the sale must be negotiated face-to-face with each potential purchaser in that State. It cannot be offered or sold to 1 person outside that State. Needless to say, this is an exemption that is almost never used!

Investment Company Act of 1940

federal regulation administered by the SEC that defines the structure for investment companies (face amount certificate company; unit investment trust; or management company) and which sets the regulations under which the companies must operate. The Investment Company Act of 1940 requires the registration of investment companies that have 100 or more shareholders; and which have $100,000 or more initial capital.

Under the Investment Advisers Act of 1940, if a registered investment adviser, for the first time, decides to require prepayment of $1,200 or more of advisory fees, 6 months or more in advance of rendering services, the adviser must:

file an audited balance sheet promptly with the Securities and Exchange Commission If an investment adviser, for the first time, will take custody of client funds or securities; or if the adviser takes $1,200 or more of prepaid advisory fees, 6 months or more in advance of rendering services; then the adviser must file a balance sheet with the Form ADV Part 2A filed with the SEC. This filing is required "promptly."

All of the following are defined as impersonal advisory services under the Investment Advisers Act of 1940 EXCEPT:

financial plan prepared using a computer program based upon statistical information provided by the customer The "Brochure Rule" is not required for providers of so-called "impersonal advisory services" that require payment of $500 or less. Such services do not render advice based upon a specific client situation. If the advice is tailored to a customer's specific financial situation and needs (as is the case in Choice D), then such advice is not defined as "impersonal advisory services" and the "Brochure" must be delivered to the customer.

All of the following are required to be disclosed by investment advisers to their clients under the NASAA Statement of Policy EXCEPT that the:

investment adviser will buy back any recommended securities at the original purchase price upon request Guarantees of customer accounts are prohibited under the NASAA Statement of Policy. IA-1092 requires that disclosure be given to customers if anyone other than the customer will compensate the investment adviser for transactions that result from the investment adviser giving advice to that client - so if the investment adviser will get commissions on recommended trades, this must be disclosed; and if the investment adviser is paid management fees by an investment company whose shares are recommended, this must be disclosed as well. If an investment adviser takes the same securities position personally as that recommended to customers, this must be disclosed; and if the investment adviser is selling a security position that he is recommending that a customer buy; this must be disclosed as well.

ADAP Advisors is a State-registered adviser with 7 IARs. One of the IARs, Mark, leaves the employ of ADAP to join another advisory firm. His accounts are assigned by ADAP to the remaining 6 IARs at ADAP. By taking this action, ADAP:

is not required to take any further action . The transfer of an investment adviser account to another investment adviser must be approved by the customer. However, this situation is different. The advisory client's account is being transferred to another IAR at the same firm. This is not an assignment of the account to another adviser. The customer's contract is with the advisory firm; not the IAR. The firm can reassign customer accounts to any IAR at the same firm without notifying the customer.

The Securities Act of 1933 requires that new issues of securities be registered with the SEC if the:

mails, or other means of interstate commerce, are used to sell the securities

Past performance:

may only be shown in an investment adviser advertisement if it reflects the deduction of advisory fees, brokerage commissions and any other expenses that a client would pay Past performance may be shown in investment adviser advertising (it is testimonials that are prohibited). Results shown must deduct all expenses that a customer would incur. There is no requirement for a comparison to be made of results to a relevant market index; nor is there a requirement for the advertisement to be filed with the SEC.

A Registered Investment Adviser has been in business for 15 years. The adviser, who trades options, uses graphs and charts during a presentation to a client that show that the adviser made a 30% return over the past 5 years. The adviser tells the client that because of this, it is probable that he will make at least a 15% return for any new accounts. The statement by the adviser is:

not permitted because it is misrepresenting that there is no risk in trading options The Investment Advisers Act of 1940 permits past performance to be shown in advertising, as long as the entire universe of recommendations is shown and the disclaimer that "past performance does not predict future results" is made. This is not a prohibited "performance guarantee" (Choice D) because the adviser only said that "it is probable" that a 15% return will be achieved for new clients - he or she did not guarantee it.

Investment advisers, without exception, are prohibited from:

placing the interests of the advisory firm ahead of those of the customer when making recommendations nvestment advisers are fiduciaries, who must always act in the best interests of the customer - without exception. They cannot place their interests first. An investment adviser cannot disclose customer account information to a third party, unless the customer approves. An investment adviser cannot charge advisory fees based on account performance, unless the client has a net worth of a least $2,100,000 or has at least $1,000,000 under management with the investment adviser. Finally, the investment adviser cannot have a conflict of interest when dealing with customers, unless this is disclosed in advance of opening the customer account. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.)

An investment adviser makes presentations to existing and prospective clients using a chart that determines when to buy or sell securities. In order to do this, the adviser must:

prominently disclose the limitations of using the chart and the difficulties regarding its use The Investment Advisers Act of 1940, under Rule 206(4)-1 prohibits an investment from publishing or circulating an advertisement that "makes any direct or indirect representation that a graph, chart, formula, or other device can, in and of itself, determine which securities to buy or sell or when to buy or sell securities, or can assist an individual in making such determinations, without prominently disclosing the limitations thereof and difficulties regarding its use."

Securities Information Processors

registered with the SEC, these entities collect, process, and distribute quotes or trade reports for non-exempt securities. (e.g., Pink Sheets, OTCBB, each exchange's TRF -Trade Reporting Facility) Securities information processors provide quotes or transaction information for trades of non-exempt securities. If the processor only gives this information for exempt securities, such as U.S. Governments, then no registration with the SEC is required. If the processor gives information about listed securities (for example, the Consolidated Quotations Service - CQS - gives quotes for listed stocks), registration is required because these are non-exempt under Federal law. General circulation newspapers are excluded from the definition of a securities information processor. Examples of "securities information processors" include each exchange's TRF (Trade Reporting Facility), Bloomberg, and Reuters.

Brochure rule

requires investment advisers, under the Investment Advisers Act of 1940, to provide to clients a disclosure document detailing the investment adviser's business, fees, and conflicts of interest (a "brochure"), which is either Form ADV Part 2A or a separate printed brochure with the same information. Furthermore, Form ADV Part 2B (the "Brochure Supplement") must also be included - this gives the educational and work history of the key personnel who make investment decisions or manage accounts. The brochure must be delivered to clients at, or prior to, entering into an advisory contract. Note that electronic delivery of these documents is permitted

SEC Rule 12b-1 allows open-end investment companies to charge an annual fee for soliciting new investment into the fund against:

total net assets of the fund

A registered investment adviser has hired several investment adviser representatives and wishes to print up business cards for these individuals. Each business card will have the IAR's name, followed by "Registered Investment Adviser." Under the provisions of the Investment Advisers Act of 1940, the investment adviser has:

violated the Act because the business card implies that the representative is registered with the SEC Only investment advisers register with the SEC; their representatives do not register with the SEC. The wording on the business card implies that the representatives are registered, which is not the case. Only the advisory firm would be registered with the SEC

All of the following are "federal covered" advisers EXCEPT an adviser:

with $40,000,000 of assets under management