Federal Securities Act
Which of the following is an accredited investor under Regulation D? A. A trust with over $5 million under management B. An individual with $2 million in securities C. An investment adviser with over $40 million under management D. A limited partnership with over $5 million to invest formed of individuals where each has a net worth of $500,000
The best answer is A. This question is not immediately obvious! An individual with $2 million of securities does not mean that he or she has a net worth of $1,000,000 (the minimum requirement to be accredited). He or she may have a margin loan against the securities, with the loan amount in excess of $1,000,000! For an investment adviser to be "accredited," each of the customers whose monies are being invested in the private placement would need to be accredited, making Choice C wrong. For a limited partnership to be accredited, each of the limited partners must meet the minimum $1,000,000 net worth test. However, employee benefit plans and trusts that have over $5,000,000 under management are accredited investors under Regulation D!
Under the Investment Advisers Act of 1940, a person is "in the business" of giving investment advice if he or she is compensated for which of the following? I Recommendations of securities II Analyses of securities III Reports about specific securities A. I only B. I and III only C. II and III only D. I, II, III
The best answer is D. 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. Investment advice includes recommendations, analyses, or reports about specific securities or specific categories.
Which of the following persons is LEAST likely to be defined as an investment adviser? A. A Certified Public Accountant who makes recommendation to customers of portfolio allocations in their 401(k) accounts after preparing their tax returns B. The publisher of an investment newsletter specializing in making small cap stock recommendations that is distributed to paid subscribers monthly C. A lawyer who offers financial planning services only to its existing customers at a discounted rate as compared to the rate charge to the customers for legal services D. A financial planner that sets up a website that includes a retirement calculator that, based on customer input to a series of questions, creates a basic financial plan at no charge to the customer; the site includes advertisements placed by brokerage firms and insurance companies.
The best answer is B. Choice C is clearly an investment adviser because the lawyer is separately charging for financial planning services. Choice D is also an investment adviser, because a financial plan is being created that is unique to each customer and the adviser is being paid for the advice (by the advertisers instead of the customers, but the law doesn't care about this distinction - the fact is the planner is being compensated). Choice A is a bit vague - it doesn't say if the CPA is separately charging for the recommendation, so this choice could go either way. Choice B is more clear - this is a newsletter that is not making recommendations based on specific client situations, so it is not an "investment adviser." It is the best of the choices offered.
Under the Securities Act of 1933, commercial paper is an exempt security if: I the security represents the non-convertible debt obligation of the issuer II the security is issued with a maximum maturity of 9 months III no commissions or other compensation is taken in the transaction A. I only B. I and II C. II and III D. I, II, III
The best answer is B. Commercial paper is an exempt security under the Securities Act of 1933 if it is a straight (non-convertible) corporate debt issue with a maximum maturity of 270 days. Under the Uniform Securities Act, commercial paper is exempt if it is issued in at least $50,000 amounts; and is rated in one of the 3 highest ratings levels. The prohibition on taking commissions only applies to a private placement exemption under the Uniform Securities Act. There is no similar requirement for an exemption from registration for commercial paper under the Securities Act of 1933.
An individual who is a registered representative with a broker-dealer prepares financial plans for customers under the supervision of the broker-dealer and does not charge for the plans. The individual takes commissions on transactions that result from the implementation of the recommendations included in the plans. Under SEC Release IA-1092: A. both the individual and the broker-dealer must register with the SEC as an investment adviser representative and an investment adviser, respectively B. neither the individual nor the broker-dealer need register with the SEC as an investment adviser representative and an investment adviser, respectively C. the individual must register with the SEC as an investment adviser representative; the broker-dealer is not required to register with the SEC as an investment adviser D. the individual need not register with the SEC as an investment adviser representative; the broker-dealer is required to register with the SEC as an investment adviser
The best answer is B. If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".
Under the Investment Advisers Act of 1940, which of the following is NOT required to be disclosed to customers by an investment adviser? A. An investment adviser takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is having financial difficulties B. An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is having financial difficulties C. An investment adviser that takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is the subject of a disciplinary or legal action D. An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is the subject of a disciplinary or legal action
The best answer is B. If an investment adviser that takes custody of customer funds or securities; has discretionary accounts; or that accepts prepaid advisory fees of $1,200 or more, 6 months or more in advance of services rendered; is having financial difficulties, this must be disclosed to customers. This is not required for advisers that do not have their hands in the customers' pockets. The requirement to disclose to customers legal or disciplinary actions taken against the adviser applies to all investment advisers - it makes no difference if they take custody of client funds or not.
If an investment adviser wishes to take custody of client funds or securities: I the investment adviser must be audited, on a surprise basis, at least annually II customers must receive account statements at least quarterly III prior permission from the SEC must be obtained A. I only B. I and II only C. II and III only D. I, II, III
The best answer is B. If an investment adviser wishes to take custody of client funds or securities, all customer funds must be maintained in a bank account or securities account that is separate from the adviser's personal accounts. Customers must receive notification of the name and location where the funds and securities are being held. Customers must receive account statements at least quarterly. Finally, the adviser must be audited, on a surprise basis, at least annually - with a copy of the audit report filed with the SEC. Note, however, that there is no requirement for prior permission of the SEC for an adviser to take custody of customer funds or securities.
Under the Investment Advisers Act of 1940, if the SEC suspends or revokes the registration of an investment adviser registered, an appeal may be filed in Federal Court within how many days? A. 30 days B. 60 days C. 90 days D. 120 days
The best answer is B. If the SEC suspends or revokes an adviser's registration under the Investment Advisers Act of 1940, an appeal may be filed in Federal Court within 60 days.
An Investment Adviser wishes to refer its largest and most sophisticated customers to a third party market timer to maximize their investment returns. Which statement is TRUE? A. The use of market timers is prohibited under the NASAA Statement of Policy B. Any arrangement between the IA and the market timing firm must be disclosed in the Form ADV Part 2A C. The arrangement between the IA and the market timing firm must be documented in a written contract D. The IA must review the performance of the market timing firm at least quarterly to evaluate its benefit to the referred customers
The best answer is B. Market timing firms use technical factors to determine when to buy or sell securities (e.g., time the market). Advisers can use timing services to help manage their clients' money - the argument being that an early sell signal given by a timing service reduces losses in a bear market and an early buy signal increases gains in a bull market. However, the market timing firm often pays the adviser for client referrals - and this creates an inherent conflict of interest. (Did the adviser refer the client to the timing firm because it was in the client's best interest, or did the adviser refer the client to the timing firm for the payment?) The ADV Part 2A must detail any business relationships that the adviser has that could result in potential conflicts of interest - so the relationship between the adviser and the timing firm must be disclosed in the ADV Part 2A that is given to the customer.
Past performance: A. may not be shown in an investment adviser advertisement B. 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 C. may only be shown in an investment adviser advertisement if a comparison is made to a relevant market index D. may only be made in an investment adviser advertisement if the advertisement is filed in advance with the SEC
The best answer is B. 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.
All of the following statements are true regarding "Securities Information Processors" EXCEPT: A. registration with the SEC is required under the provisions of the Securities Exchange Act of 1934 B. no registration with the SEC is required if the processor solely disseminates quotes or transaction information relating to listed securities C. no registration with the SEC is required if the processor solely disseminates quotes or transaction information relating to exempt securities D. no registration with the SEC is required if the quotes or transactions are solely published in a general circulation newspaper
The best answer is B. 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.
With regard to closed-end investment companies, which statements are TRUE? I An initial offering must be made with a prospectus II The issuer redeems shares at NAV III Once issued, shares trade on the secondary market at prevailing market prices IV The portfolio of securities is fixed and is not managed A. I and II B. I and III C. III and IV D. I, III, IV
The best answer is B. The initial public offering of closed-end fund shares is made in the same manner as any registered company. The IPO shares are sold with a prospectus at POP. The shares are then listed and trade in the secondary market like any other stock. The shares are not redeemable, as is the case with open-end fund shares. Both open-end and closed-end fund portfolios are managed (remember, both are management companies).
The financial leverage of a broker-dealer would be measured by its: A. Net Capital amount B. Aggregate Loan amount C. Ratio of Loans to Net Capital D. Ratio of Income to Net Capital
The best answer is C. "Leverage" is the use of debt in the capital base of a business. The standard measure of leverage for a business is the Debt to Equity ratio. For a broker-dealer, equity is often measured by the firm's "liquid" equity, called net capital. 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. The ratio of debt to net capital would be a leverage measure for a broker-dealer.
If an investment adviser acquires a 5% or greater holding in a publicly held company, it MUST file a 13d report: A. only if the purchases were for its proprietary account and it intends to exercise control over that issuer B. only if the purchases were for its customer accounts and it intends to exercise control over that issuer C. if the purchases were for either its proprietary account or its customer accounts and it intends to exercise control over that issuer D. if the purchases were for either its proprietary account or its customer accounts and it intends to remain a passive investor
The best answer is C. A 13d filing is required with the SEC if any one person (or an entity controlled by that person) acquires a 5% or greater holding in a publicly held company with the intention of exercising control (e.g., kicking out that company's existing management). The filing must be made within 10 business days of crossing the 5% threshold. An adviser "controls" purchases made in both its proprietary and customer accounts, so these are aggregated when determining if the 5% threshold is reached.
Which of the following actions taken by an investment adviser would require consent of the adviser's existing customers? I The investment adviser and its accounts are acquired by a larger, more prestigious firm II The investment adviser acquires a small firm and its accounts to enhance its geographic coverage III The investment adviser wishes to retire and transfer its accounts to another investment adviser A. III only B. I and II C. I and III D. I, II, III
The best answer is C. The transfer of an investment adviser account to another investment adviser must be approved by the customer. If an investment adviser is "acquired" - its accounts are being transferred to another adviser and consent of each of the acquired adviser's clients is required (Choice I). On the other hand, if an investment adviser acquires another advisory firm (Choice II), it is the acquired firm's clients that must give consent. The acquiring firm's clients are not affected by such an action. In Choice III, the adviser is retiring and transferring his or her accounts to another firm - again, in this case, the clients must consent to the transfer.
Under the Investment Adviser's Act of 1940, an investment adviser that advertises itself as a "fee only" adviser would be permitted to collect: I a fee charged for each hour of work performed for the client II a fee based on asset performance in that client's account for wealthy investors III 12b-1 fees from mutual funds recommended to that client IV a fee based on assets held under management in that client's account A. I and III B. II and IV C. I, II, IV D. I, II, III, IV
The best answer is C. Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,000,000 as permitted under the Investment Advisers Act of 1940). An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it recommends. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.
Under the Investment Advisers Act of 1940, which of the following statements are TRUE regarding advisory contracts? I Advisory fees cannot be based upon capital gains in the account II Advisory fees for clients with at least $1,000,000 of assets under management; or $2,000,000 net worth; can have a fee that is partly based upon capital gains III Advisory contracts must be filed with the SEC if they allow for $1,200 or more of prepaid advisory fees, 6 or more months in advance of services rendered IV Advisory contracts cannot contain provisions that violate Federal law A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV
The best answer is C. Any contract cannot contain provisions that violate the law. Advisory contracts must be in writing under the Investment Advisers Act of 1940; and cannot provide for an advisory fee based on capital gains. However, for wealthy customers, a "performance" fee is permitted if the customer has at least $1,000,000 invested with the adviser; or the customer has a net worth of at least $2,000,000. Regarding Choice III, if an adviser accepts $1,200 or more of prepaid fees, 6 months or more in advance of services rendered, it must include a balance sheet in the "brochure" provided to customers.
A registered representative with a broker-dealer makes recommendations of securities to a customer, and charges a commission on each trade. Which statement is TRUE? A. This person must register with the State as an investment adviser representative B. This person must register with the State as an investment adviser C. This person is excluded from the definition of an investment adviser D. This person is defined as an investment adviser, but is exempt from registration
The best answer is C. Broker-dealers and their registered representatives are excluded from the definition of an investment adviser as long as they do not charge separately for advisory services. Thus, a broker-dealer can charge a commission on each recommended trade and not be defined as an investment adviser that must register in the State (note however, that it must still register as a broker-dealer in that State).
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: A. acting as agent for the issuer and as an investment adviser to the purchasers B. acting as principal for the issuer and as an investment adviser to the purchasers C. acting as agent for the issuer and as an underwriter of the securities D. acting as a principal for the issuer and as an underwriter of the securities
The best answer is C. 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.
If an investment adviser wishes to use a paid solicitor, under the Investment Advisers Act of 1940, which of the following statements are TRUE? I The solicitor must provide the customer with a copy of the investment adviser's brochure II The solicitor cannot be subject to statutory disqualification under the Securities Acts III The solicitor must disclose to the customer any additional costs of providing advisory services, due to the nature of the relationship between the solicitor and the investment adviser IV The solicitor must register with the SEC as an investment adviser A. I and II B. III and IV C. I, II, III D. I, II, III, IV
The best answer is C. If an investment adviser uses a paid solicitor, there must be a written agreement between the solicitor and the adviser. The solicitor must provide the customer with a copy of the adviser's "Brochure" in addition to a copy of the solicitor's "Brochure," The solicitor must disclose to the customer any additional costs that the customer will pay due to the use of a solicitor. The solicitor cannot be a person subject to statutory disqualification under the Securities Acts - e.g. convicted of a money or securities related offense within the past 10 years, expelled by FINRA, currently under suspension by FINRA, etc. There is no requirement for the solicitor to register with the SEC; only the investment adviser is registered with the SEC. However, in most States, the solicitor must be registered either as an adviser or as an adviser representative.
Which of the following can be purchased on margin? A. Mutual fund shares B. Options C. Futures D. OTCBB issues
The best answer is C. NYSE, AMEX (NYSE-MKT) 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 Securities Act of 1933, which statements are TRUE regarding a Regulation D private placement exemption? I Advertising is permitted II Advertising is not permitted III Commissions can be received in connection with the offering IV Commissions cannot be received in connection with the offering A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Regulation D permits an exemption from registration for private placements with the SEC under the Securities Act of 1933. To qualify for the exemption, the securities cannot be sold to more than 35 "non-accredited" investors; and they may be sold to an unlimited number of accredited investors. No advertising is permitted, since this would be considered to be a "public" offer of these securities, which would then require registration with the SEC. (Note that an exception to the "no advertising" prohibition is given if an offering is only made to accredited investors - however, this is not mentioned in the question and cannot be assumed.) The State law private placement exemption under the Uniform Securities Act is quite different. It permits an exemption from State registration if the securities are offered to no more than 10 investors; and no commissions or other compensation may be received in connection with the offering. There is no such limitation under Federal law for private placements.
SEC Rule 12b-1 allows open-end investment companies to charge an annual fee for soliciting new investment into the fund against: A. any shares issued as of the date of the adoption of the plan B. any shares redeemed as of the date of the adoption of the plan C. total net assets of the fund D. total income of the fund
The best answer is C. SEC Rule 12b-1 allows management companies to charge against total net assets, an annual fee for the cost of soliciting new investors to the fund. In reality, though the fee is expressed as an annual percentage of total net assets, it is imposed pro-rata for every day that the investor holds the shares.
Which of the following individuals will be denied federal registration as an investment adviser? A person who: I was suspended from FINRA II caused a suspension of a firm for which he formerly worked III was imprisoned for 2 years for counterfeiting IV is the subject of a current court proceeding that might cause the person's suspension if found guilty A. I and II B. III and IV C. I, II, III D. I, II, III, IV
The best answer is C. Statutory Disqualification of an individual from becoming an investment adviser will occur if the applicant or its officers: •has been suspended or expelled from another Self Regulatory Organization; •is the subject of an SEC order suspending or revoking registration; •while associated with a firm caused that firm's suspension or expulsion; •willfully filed a misleading or false application; •has been convicted of any securities or money related fraud within the past 10 years; or •has been temporarily or permanently enjoined from engaging in the securities business. Also, any person who has a criminal record and has spent 1 year or more in prison will be denied registration. Note that the current court proceeding is not a reason for statutory disqualification unless that individual is actually found to be guilty. If a self regulatory organization takes disciplinary action against a broker-dealer; then the SEC can take similar action against an affiliated investment adviser. Remember, investment advisers are not regulated by FINRA; only broker-dealers are. The event that gave cause to FINRA to discipline the broker-dealer would probably result in the SEC taking a similar action against the affiliated investment adviser.
Which statements are TRUE about the recordkeeping requirements for communications sent to potential clients under the provisions of the Investment Advisers Act of 1940 I A record of the name and address of each person to whom the communication is sent must be retained II A record of the name and address of each person to whom the communication is sent is not required for communications sent to more than 10 persons III For communications sent to a list of individuals, a memorandum describing the list and its source must be retained IV Proof of mailing in the form of a postal receipt must be retained for each printed communication that is distributed A. I and III only B. II and IV only C. I, II, III D. I, II, III, IV
The best answer is C. The Investment Advisers Act of 1940 covers this situation under Rule 204-2. It requires that if an adviser sends any notice, circular or advertisement, it must keep a record of the names and addresses of the persons to whom the communication was sent. If the communication is sent to more than 10 persons, this detailed record is not required to be kept, however if the communication is sent to a list of individuals, a copy of the communication, along with a memorandum describing the list and its source, must be retained. There is no requirement to retain proof of mailing or distribution of the communication.
A Federal Covered Adviser registered with the SEC holds a meeting with its employees and verbally warns them about the prohibited practice of trading ahead of large customer orders that are likely to have a market impact. The firm has not yet included this prohibition in its policies and procedures manual, but intends to do so in the near future. Which statement is TRUE? A. There is no violation of the Investment Advisers Act of 1940 "insider trading" rules because the employees participated in the meeting B. There is no violation of the Investment Advisers Act of 1940 because the firm intends to include "trading ahead" restrictions in the next version of its policies and procedures manual C. The Investment Advisers Act of 1940 has been violated because the firm did not have written policies and procedures covering "front running" by its employees D. There is no violation of the Investment Advisers Act of 1940 because "front running" is not covered by the Act
The best answer is C. The Investment Advisers Act of 1940 requires that advisers have a written Code of Ethics that covers illegal practices on the part of its employees. The employees must sign that they received a copy of the Code. So, clearly, a verbal warning is not enough - the advisory firm must document the policy in writing.
An independent investment adviser is talking to a brokerage firm's research analyst about XYZ company. The analyst tells the adviser that she is going to issue a report stating that the company will miss its revenue projections. The adviser was planning to add the stock to her portfolio. What should the adviser do? A. The adviser cannot act on the information because it is "inside information" B. The adviser must purchase the stock as planned C. The adviser can change her mind about buying the stock D. The adviser must report the conversation to the State Administrator
The best answer is C. The adviser was planning to buy the stock; and the analyst thinks the stock isn't a good investment right now. There is no "inside information" here, so the adviser can take the opinion of the analyst and change her decision to buy the stock. Note, however, that if the adviser and the research analyst worked for the same parent company, then the answer would change. The restrictions on "trading ahead of a research report" would apply to all employees of the parent company and the stock could not be purchased or sold prior to the public release of the report.
Which statements are TRUE about the solicitor's brochure under the Investment Advisers Act of 1940? I It must disclose the specific dollar fee, or percentage of advisory fee paid by the customer, that the solicitor will earn for referring the customer II It can be incorporated into the investment adviser's brochure, so that only one document is provided to the customer III It must disclose that the solicitor will be compensated for referring the client to the investment adviser IV The customer must sign that he or she received the solicitor's brochure A. I and II only B. III and IV only C. I, III, and IV D. I, II, III, IV
The best answer is C. Under the Investment Advisers Act of 1940, the solicitor's brochure must be separate from the investment adviser's brochure - they cannot be combined. The solicitor's brochure must disclose the specific dollar fee, or percentage of advisory fee paid by the customer, that the solicitor will earn for referring the customer. It must disclose that the solicitor will be compensated for referring the client to the investment adviser and the customer must sign and date an acknowledgment that he or she received the solicitor's brochure (and the adviser's brochure).
The Securities Exchange Act of 1934 requires that: I there are 3 SEC Commissioners II there are 5 SEC Commissioners III SEC Commissioners have no outside work and cannot trade their own accounts IV SEC Commissioners cannot be affiliated with any political party A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Under the Securities Exchange Act of 1934, there are 5 SEC Commissioners, with no more than 3 from one political party. Commissioners must work full time; cannot have any outside work; and cannot trade their own securities accounts. The SEC has 5 commissioners appointed by the President of the United States, with the advice and consent of the Senate. Each commissioner is appointed for a term of 5 years. No more than 3 Commissioners can be from 1 political party. During his or her term, each Commissioner cannot have any another job; and cannot effect securities transactions (whether disclosed or not!).
A securities analyst employed by a major regional brokerage house tells a portfolio manager at a mutual fund managed by that firm to look for him on television being interviewed on CNBC that afternoon. He tells the portfolio manager that he will be putting a "buy" recommendation on ABCD stock, which the portfolio manager has been considering purchasing for the fund that he manages. Which statement is TRUE? A. Because the analyst and the portfolio manager are employed by the same broker-dealer, the portfolio is permitted to buy the stock immediately B. The portfolio manager is permitted to buy the stock immediately because he had previously been considering the purchase of ABCD shares C. The portfolio manager is prohibited from buying the stock immediately under the "trading ahead of research" prohibition but can buy the stock once the television interview has been broadcast D. The portfolio manager is prohibited from buying the stock immediately unless he contacts all of his customers that own shares in the fund that he manages and discloses the information to them
The best answer is C. When a securities firm is going to issue a research report on a security, the firm and its employees are prohibited from trading that stock until the research report is broadly disseminated to the public. Technically, the firm and its employees are treated as "insiders." Trading ahead of a research report is a prohibited practice. Note that once the report has been distributed, then it would be acceptable for the firm and its employees to trade that stock.
A broker-dealer MUST maintain physical possession of which of the following? A. Securities issued by municipalities B. Securities traded in an omnibus trading account C. Securities held as collateral for derivative trading components D. Securities that are unregistered and non-exempt
The best answer is C. When securities are purchased for a customer by a broker-dealer, they can be held in custody of the broker-dealer (or the broker-dealer's clearing firm); or they can be held by a custodian bank; or they can be transferred and shipped to the customer (some customers still want to put physical certificates under their mattresses!) However, if a customer buys a derivative security (such as a CMO created from underlying mortgage backed pass through securities), he or she cannot get the underlying physical security - it must be held in custody.
Which of the following are "federal covered" advisers? I Investment adviser to an investment company with $2,500,000 of assets under management II Investment adviser to an investment company with $25,000,000 of assets under management III Investment adviser to an investment company with $100,000,000 of assets under management A. I only B. II and III only C. III only D. I, II, III
The best answer is D. 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. These advisers are known as "federal covered" advisers. An investment adviser to an investment company (regardless of the dollar amount) need only register with the SEC and is exempt from registration in the State. One of main intents of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation.
Violations of the Investment Company Act of 1940 are punishable by: A. 3 years in jail and a $5,000 fine B. 3 years in jail and a $10,000 fine C. 5 years in jail and a $5,000 fine D. 5 years in jail and a $10,000 fine
The best answer is D. 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 violations.
Which of the following is disclosed in Form ADV Part 1? A. Investment policies of the adviser B. Type of investments made by the adviser C. Investment practices of the adviser D. States in which the adviser is registered
The best answer is D. 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, educational, 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.
Under the Investment Advisers Act of 1940, copies of all advertising, notices and circulars must be retained: I if distributed to at least 1 person II if distributed to at least 10 people III for a minimum of 3 years IV for a minimum of 5 years A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. The Investment Advisers Act of 1940 requires that copies of advertising, notices and circulars be retained as a record for 5 years if distributed to 10 or more people.
An investment adviser is called by one of her clients who wishes to sell a security in the client's portfolio. The investment adviser recommends that another one of her clients buys that same security. Which statement is TRUE? A. This is a "principal transaction" and is prohibited B. This is an "agency cross transaction" and is prohibited C. This is a "principal transaction" and is permitted only if the customer is informed of the circumstances and consents to the transaction D. This is an "agency cross transaction" and is permitted only if the customer is informed of the circumstances and consents to the transaction
The best answer is D. An "agency cross transaction" occurs when an investment adviser recommends that a client buy a security from another client who is selling the same security. If an investment adviser effects an agency cross transaction with the customers, it must: •recommend the transaction to only 1 side of the cross (i.e., only one of the customers could have been solicited) •act in the best interest of both clients and obtain the best price •obtain written consent from the customer that discloses that the adviser will be acting as broker for both the buyer and seller, that a commission will be received from both parties by the adviser, and that a potential conflict exists. Also, the adviser must send to each client, at least annually, a written disclosure statement, identifying the total number of agency cross transactions and total commissions received from these transactions during the past year.
Which of the following is (are) defined as "affiliated persons" under the Investment Company Act of 1940? I Officer of the management company II Employee of the management company III A 5% holder of the management company's shares A. I only B. II only C. I and III D. I, II, III
The best answer is 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.
In connection with a new issue offering, a broker-dealer would be permitted to send which of the following to a customer if it were accompanied by a copy of the final prospectus? A. An internal report prepared by the issuer that projects increasing product line market share over the next 3 years B. Copies of advertisements used by the issuer to promote its products during the past year C. An advance copy of the broker-dealer's research report on that issuer that will be released after the restriction period ends D. Copies of the issuer's audited financial statements showing performance over the prior year
The best answer is D. Delivery of prospectuses cannot be accompanied by promotional material of any type. The only information that can accompany a prospectus would be a "tombstone;" or information that has been filed with the SEC - such as audited financial reports.
An investment adviser makes an offer to send, by mail, a "free" analysis covering his top 50 stock picks in an advertisement. In order for an individual to get the report, the adviser could require that individual to: A. fill out a questionnaire detailing that individual's financial resources B. pay a shipping and handling fee of $38 to get the report sent out C. provide the names and addresses of 3 other persons who would be interested in the adviser's reports D. telephone the adviser and listen to a brief sales pitch before taking the mailing information
The best answer is D. Free means just that - free. Charging a high shipping fee for the "free" report means that it is not free, so this is prohibited. The offer of a free service cannot be made conditional, so requiring the customer to complete a detailed financial questionnaire crosses the line; as does asking for 3 customer references in order to get the "free" report. Making the individual call the adviser to get the "free" report is OK; and making the customer listen to a brief sales pitch to get the report is OK as well.
All of the following are considered to be "compensation" to an investment adviser who charges "no fee" to customers EXCEPT: A. commissions paid to the investment adviser on recommended securities transactions B. commissions paid to the investment adviser on recommended insurance purchases C. payments received from issuers for recommending their securities D. capital gains on securities recommended to customers that have also been purchased for the adviser's personal account
The best answer is D. If an adviser claims to charge "no fee"; but then receives payment (from anyone, including issuers!) based upon transactions recommended to customers, then the adviser really is being paid for rendering such services and is being "compensated" under the IA-770 compensation test. If an adviser has a capital gain on a security position held personally, this is not compensation to the adviser. Rather, this is an investment, where the adviser is "at risk." If the adviser recommends the same investment to his customers, the existence of the personal position must be disclosed to those customers.
A partner in an investment advisory firm that has been accredited as a Chartered Financial Analyst may use all of the following descriptive terms on his or her business card EXCEPT: A. Managing Partner B. Investment Counsel C. Chartered Financial Analyst D. Registered Investment Adviser
The best answer is D. Since this individual is a partner in an advisory firm, he or she can use the title "Managing Partner" on a business card. Since this individual has passed the CFA exam, the business card can say "Chartered Financial Analyst." The term "Investment Counsel" is permitted as long as this is the firm's primary business - and this is an investment advisory firm. However, the term Registered Investment Adviser can't be used because it is the "firm" that is the RIA; not the individual associated with the firm.
The term "loan value" when applied to equity securities, is the: I percentage of the purchase price that must be deposited when the securities are bought II percentage of the purchase price that can be borrowed when securities are bought III reciprocal of the Regulation T requirement IV complement of the Regulation T requirement A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. The "loan value" of a security is the amount that may be borrowed against the position under the margin rules as set forth under Regulation T of the Federal Reserve for non-exempt securities. For example, if a security has a Regulation T requirement of 60%, then its loan value is 40%. If a security has a Regulation T requirement of 50%, then its loan value is 50%. The "loan value" is the "complement" of the Regulation T requirement. The complement of a fraction is the remaining fraction that makes both add to "1". (The reciprocal is "1" divided by the fraction.)
An investment adviser is selling a Wrap Account where the assets are held in custody of the advisory firm. The Wrap Fee Brochure must include: I information on investment advisory fees II information on participation or interest in client transactions III the balance sheet of the investment adviser A. I only B. III only C. I and III D. I, II, III
The best answer is D. Under the Investment Advisers Act of 1940, the investment adviser brochure must be delivered to clients, at or prior to, entering into a contract to provide advisory services. It details, among other things, the fees charged and conflicts of interest (Choices I and II). A copy of the investment adviser's balance sheet is included in the brochure if the adviser will take prepaid advisory fees of $1,200 or more, 6 months or more in advance of rendering services.
