Investment Advisers Act of 1940

Under the requirements of the Investment Advisers Act of 1940, what must be disclosed in the initial holding report filed by an access person? A Number of shares held B Portfolio investment history C Most recent transactions D Current portfolio return

A. An "access person" is an individual employed by an investment adviser who has "access" to the adviser's recommendations or client holdings. An initial "holding report" must be filed by an access person with the SEC no later than 10 days after becoming an access person and then they must be filed yearly thereafter, within 45 days of the report date. The report must include: Each security position held, with number of shares (for stock) or principal amount (for bonds); The name of any broker, dealer or bank where an access person maintains an account; and The date the report is submitted. In addition, each access person must file a quarterly transaction report, within 30 days of each calendar quarter.

An investment adviser is permitted to identify the name of an existing customer in communications to potential new clients if which of the following consents? A Existing customer B FINRA C SEC D State Administrator

A. The use of an existing customer's name by an investment adviser to promote the sale of the firm's advisory services is prohibited, unless the customer consents to such disclosure. The only disclosure of customer information that may be made without customer consent is required disclosures to governmental bodies such as the IRS.

If an investment adviser, for the first time, takes a $1,200 prepaid advisory fee, more than 6 months in advance of services rendered: I an audited balance sheet must be filed with the SEC along with Form ADV Part 1 II an audited balance sheet must be filed with the SEC along with Form ADV Part 2 III promptly IV within 90 days A I and III B I and IV C II and III D II and IV

C. If an investment adviser takes a prepaid advisory fee of $1,200 or more, 6 months or more in advance of services rendered, the investment adviser is obligated to include an audited balance sheet in Part 2A of Form ADV. If this was not filed previously, then an amended Form ADV Part 2A with a balance sheet must be filed with the SEC promptly.

Criminal violations of the Investment Advisers Act of 1940 are punishable by: A $5,000 fine and 3 years in jail B $10,000 fine and 3 years in jail C $5,000 fine and 5 years in jail D $10,000 fine and 5 years in jail

D. Criminal violations of the Federal securities laws are punishable by a fine of $10,000 and up to 5 years in jail. In contrast, the criminal penalties under Uniform State law are a fine of up to $5,000 and 3 years in jail.

Past performance, if shown by an investment adviser in an advertisement, must be based on: A Gross investment income B Gross investment income, reduced by advisory fees paid C Gross investment income, reduced by commission paid D Gross investment income, reduced by advisory fees, commissions and expenses paid

D. Performance charts must show investment results with all expenses deducted out.

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

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 registered with the SEC under the Investment Advisers Act of 1940 changes from an S Corporation to a C Corporation. Which statement is TRUE? A An amendment to Form ADV must be filed promptly with the SEC B An amendment to Form ADV must be filed with the SEC within 15 days C An amendment to Form ADV must be filed with the SEC within 30 days D An amendment to Form ADV must be filed with the SEC within 90 days

A. A change in business form for an investment adviser would require a prompt amendment of the Form ADV filed with the SEC. Note, in contrast, that the NASAA rule for an "other-than-annual" updating amendment is that it be filed in 30 days; as opposed to the SEC rule requiring the amendment to be filed "promptly."

Which statements are TRUE? I An investment adviser offering its services in a State must either be registered in that State or must be registered with the SEC as a Federal Covered adviser II An investment adviser offering its services in a State is not required to be registered in that State nor is it required to be registered with the SEC as a Federal Covered adviser III A third party solicitor for an investment adviser offering that adviser's services in a State must be registered as either an investment adviser or an adviser representative in that State IV A third party solicitor for an investment adviser offering that adviser's services in a State is not required to be registered as either an investment adviser or an adviser representative in that State A I and III B I and IV C II and III D II and IV

A. In order to offer its services in a State, an investment adviser must either be registered in that State or must be registered with the SEC as a Federal Covered adviser. Furthermore, any of the adviser's employees that are offering its services in the State must be registered in the State as adviser representatives in that State. A third party (non-employee) can be hired by the adviser to find clients in that State. The solicitor does not have to be an employee of the adviser, nor does he or she have to be registered as an adviser representative of that adviser. There are independent solicitors (such as CPAs) that refer clients to advisers for a referral fee. However, to act as a solicitor requires that the individual (the CPA in this case) either be registered in that State as an investment adviser (which the CPA can do by him- or herself) or be registered as an investment adviser representative (which could be done by that individual registering through any adviser registered in that State).

An adviser that charges a performance fee to clients MUST disclose that such a fee arrangement: A gives the adviser the incentive to be more aggressive with the customer's asset management than if a fixed fee were charged B negates the fiduciary duty that the adviser has to the customer C better aligns the customer's interests with those of the investment adviser D is only permitted if the customer signs a liability waiver in the advisory contract

A. The Investment Advisers Act of 1940 allows performance fees to be charged if a customer is wealthy ($1,100,000 of assets with the firm or a $2,200,000 net worth. However, such performance fees can give the adviser the incentive to take on higher levels of risk in order to increase portfolio return (and hence increase the adviser's compensation). Advisers must disclose all material information regarding their performance fees, including that the fee arrangement may cause the adviser to enter into more speculative investments than would be the case otherwise; and that the adviser will receive increased compensation based on realized and unrealized appreciation of the customer's securities.

An investment Adviser avails itself of the exemption rule under the Investment Advisers Act of 1940 for Private Fund Advisers. Which statement is TRUE about an IAR located in a state who works for this advisory firm? A The IAR is exempt from registration in the state because the IA is exempt B The IAR must register in the state because he or she is not covered by the IA's exemption C The IAR is only required to register in the state if he or she has more than 5 clients in the state D The IAR must register federally with the SEC, but is not required to register in the state

A. The general rule is that an IAR, whether employed by a state-registered or federal covered adviser, must register in the state where he or she is physically located. However, NASAA has stated in its model rule, that if a Private Fund Adviser is exempt from SEC-registration, then it is also exempt from state registration, and its IARs are exempt as well. So this is the exception to the general rule, and of course, it is a tested item!

An investment adviser to a hedge fund with $250 million of AUM has invested 100% of fund assets in gold, anticipating a steep stock market decline and flight to safety by investors. The investment adviser: A must register with the SEC B must register with the CFTC C must register with both the CFTC and the SEC D is neither required to register with the SEC nor the CFTC

A. A private fund adviser with at least $150 million of assets under management (AUM) must register with the SEC, and therefore will not register with any State. When counting AUM, all assets are counted, regardless of how they are invested. The CFTC is the Commodities Futures Trading Commission - never an answer on these exams!

Under SEC rules, an "access person" must report all personal securities transactions: A quarterly within 30 calendar days of quarter end B quarterly within 45 calendar days of quarter end C annually within 30 calendar days of year end D annually within 45 calendar days of year end

A. An "access person" at an investment advisory firm has access to nonpublic information and is in a position to use it for personal profit (which is illegal, of course). Access persons must report all personal transactions to the IA in a quarterly report within 30 calendar days of quarter end; and must file an annual report of all securities holdings (positions) within 45 days of the account statement used to prepare the report.

Delivery of the brochure under the "Brochure Rule" is NOT required for: I impersonal advisory services requiring payment of less than $500 annually II prepaid advisory fees requiring payment in advance of $1,000 or more III advisory contracts with investment companies IV advisory contracts with pension plans A I and III B I and IV C II and III D II and IV

A. Delivery of the "Brochure" to customers is not required for the sale of impersonal advisory services calling for no more than a $500 annual fee; or for the sale of advisory services to investment companies.

If an investment adviser is recommending that a customer buy a security, that the adviser will sell to the customer out of its own inventory, which of the following statements are TRUE? I This is a "principal transaction" II This is an "agency cross transaction" III This transaction is permitted only if the customer is informed of the circumstances and consents to the transaction IV This transaction is prohibited A I and III B I and IV C II and III D II and IV

A. If an investment adviser is recommending that a customer buy a security that the adviser will sell to the customer out of its inventory (or vice-versa), this is a principal transaction (the adviser is the "principal," buying the security into its own investment portfolio, or selling the security to the customer from its own investment portfolio). If the adviser is going to act as the principal in a transaction recommended to a customer, it must disclose this fact to the customer prior to the completion of the transaction, and must obtain the consent of the customer to the transaction.

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 A I and III only B II and IV only C I, II, III D I, II, III, IV

A. 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.

Which of the following would be defined as "being in the business" of giving investment advice? A 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 B A newsletter that discusses in general terms, the advisability of investing in securities, as part of a broad discussion of the future direction of the U.S. economy C A lecturer that is hired to give an annual talk to the employees of an investment adviser, where the merits of specific Blue Chip stocks are discussed D A consultant, who, on a rare and isolated basis, prepares reports or analyses on asset allocation across various asset classes

A. 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).

A Registered Investment Adviser plans on offering options strategies as part of his services. For this added investment strategy, he will charge .6% of assets monthly. This information is added to the RIA's disclosure statement and the RIA tells all of his clients of the fees orally in seminars. Each of his clients signs an agreement regarding the options strategies and fees. Which statement is TRUE? A The actions taken by the RIA are permitted because clients got full disclosure of all strategies and fees and agreed to such in writing B The actions taken by the RIA are permitted because the fees charged to clients do not exceed 10% annually C The actions taken by the RIA are prohibited because clients cannot be charged separately for options transactions D The actions taken by the RIA are prohibited because options strategies are prohibited in managed accounts unless they conform to ERISA standards

A. This RIA made full disclosure, both verbally and in writing, to his clients, of the options strategies to be employed and the fees involved. This is the right way to do it!

An investment adviser is a private fund adviser that is not required to register with the SEC. All of the following would be permitted investors in order to retain its exempt pool status EXCEPT: A an individual who is an accredited investor under Regulation D B an individual who has at least $5 million of assets available for investment C an hedge fund with at least $25 million of assets under management D a trust with at least $5 million of assets available for investment

A. 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 investment adviser is a private fund adviser that is not required to register with the SEC. It has a pool of qualified investors and wants to add to the pool to increase its customer base and assets under management. In order to retain its exempt pool status, the investment adviser: A can only solicit potential investors who are qualified B can solicit potential investors who are either qualified or non-qualified as long as the number of investors solicited is limited to a maximum of 50 persons C can solicit as many potential investors as desired as long as there are no more than 100 investors in the private fund D must start a new private fund

A. 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.

Under the Investment Advisers Act of 1940, which of the following person(s) is (are) exempt from registration with the SEC? I An investment adviser whose only clients are insurance companies II An investment adviser whose only clients are investment companies III An investment adviser whose only clients are pension plans A I only B I and II C II and III D I, II and III

A. Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration. The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an investment adviser, therefore such advisers are not required to register with the SEC. This exemption does not extend to persons who give advice to investment companies or pension plans (note that under State law, the adviser to pension plans would be exempt from State registration if it had no office in the State; and the investment adviser to investment companies would be excluded from State registration since it is a federal covered adviser).

An investment adviser can call itself an "investment counsel" if the: A adviser's principal business is rendering investment supervisory services B adviser is a broker-dealer registered in the state C adviser's principal business is the custody of customer's monies only D adviser's principal business is the custody of customer's monies and securities

A. 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. Having custody of the customer's monies or securities does not mean the firm is also advising about securities.

Under SEC rules, an "access person" employed by an investment adviser has access to: A investment adviser accounting systems B nonpublic information on client transactions C investment adviser electronic software and hardware D nonpublic information on client portfolio performance

B. An "access person" at an investment advisory firm has access to nonpublic information and is in a position to use it for personal profit (which is illegal, of course). Access persons at IAs include: officers and directors of the IA; all supervised employees that have access to nonpublic information on client transactions (this would mainly be institutional client activity such as mutual fund clients, which could be making large purchases and sales); portfolio managers employed by the IA (who could trade personally to take advantage of upcoming large portfolio trades that they place); and anyone making securities recommendations to clients or who has access to such recommendations that are nonpublic.

If an investment adviser maintains an account that will hold customer securities positions at a broker-dealer, but the broker-dealer does not know the identity of the individual customers: I this is known as an omnibus account II this is known as a prime brokerage account III trade confirmations and statements are sent by the broker-dealer to the IA's customers IV trade confirmations and statements are sent by the IA to its customers A I and III B I and IV C II and III D II and IV

B. Investment advisers that take custody will typically open a brokerage account to hold all customer securities positions. If the investment adviser opens an "omnibus account," then the clients' funds and securities are held together in 1 account, where the broker-dealer does not know the identity of the IA's clients. In such an arrangement, it is the responsibility of the IA to send out customer account statements and trade confirmations, since the broker-dealer does not know who the individual customers are. Prime brokerage is used by hedge funds, where the hedge fund uses a clearing "prime broker" to settle all trades and maintain custody of the positions. However, the prime broker agrees to accept trade executions from a list of broker-dealers given up by the hedge fund. In this way, a hedge fund can route its trade executions to differing brokers in return for getting research and investment insight from those firms.

An investment adviser representative (IAR) is also a commissioned representative at a brokerage firm. The IAR has developed an asset allocation portfolio model for the client, who approves of the plan and acknowledges all fees associated with the implementation of the plan. These include a management fee and commissions on securities transactions. The IAR: A cannot implement the plan B can implement the plan C can implement the plan only if no commissions are charged D can implement the plan only if no management fee is charged

B. Since the customer was given disclosure of all fees, and acknowledged these, the Investment Adviser Representative can implement the plan. Note that the only type of fee that is prohibited is one based on gain or loss; and even this can be waived for very wealthy investors (a client who has at least $1,100,000 invested; or who has a net worth of at least $2,200,000 under the Investment Advisers Act of 1940).

Investment advisers that manage under $100,000,000 of assets are subject to: A Federal registration only B State registration only C Both Federal and State registration D Neither Federal nor State registration

B. 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. The smaller advisers (under $100,000,000 of assets under management) are only required to be registered at the State level.

An exempt reporting adviser: A must file Form PF with the SEC B must file Form ADV with the SEC C must file both Form PF and Form ADV with the SEC D is neither required to file Form PF nor Form ADV with the SEC

B. An "exempt reporting adviser" is a private fund adviser (such as a hedge fund adviser) with less than $150 million of AUM (assets under management). Exempt reporting advisers are not required to register with the SEC (which is accomplished with Form PF - as in Private Fund adviser). However, they must still report to the SEC on Form ADV Parts 1 and 2 annually - and this information is made public.

Under the Investment Advisers Act of 1940, all of the following can be considered to be compensation received by an investment adviser EXCEPT: A a commission received on the sale of a life insurance policy to an advisory client B interest paid on a margin loan by an advisory client C a fee for creating a financial plan that is refundable if the client purchases an annuity contract D shares of stock received from a client for creating an asset allocation plan

B. Compensation given to an adviser in any form (whether it be cash, securities, gold, etc.), that is "tied" to the delivery of any other service, is still compensation under SEC rules. Thus, the commission received for selling the life insurance policy to an advisory client; the "refundable" fee for creating a financial plan if another product is purchased; and the shares of stock given to the adviser for creating an asset allocation plan; are all compensation. Interest charges on margin loans are not compensation.

Under the Investment Advisers Act of 1940, if an investment adviser has an impaired financial condition, this must be disclosed to customers: A by all investment advisers B only by investment advisers that take custody of customer funds; or those that accept prepaid advisory fees of $1,200 or more C only if the investment adviser files for bankruptcy D only if the investment adviser is also a broker-dealer

B. Disclosure of an impaired financial condition to customers by an investment adviser is only required where the investment adviser already has his "hands in the customer's pocket," and thus, could use the customer's monies to help the firm through its financial difficulties! Thus, this disclosure is required only if the adviser takes custody of client funds or securities; or if the adviser accepts prepaid advisory fees of $1,200 or more, 6 or more months in advance of rendering services.

Which statement is TRUE about the education of investment adviser key employees who establish investment strategy or manage client accounts? A Education standards are established by the SEC B Education and work background are disclosed on Form ADV Part 2B C Higher education standards are required for advisers that will take custody of client funds than for those that do not D Minimum education standards are established for advisers that will exercise discretion over customer accounts

B. Form ADV Part 2B requires the disclosure of the education and work background of the key personnel affiliated with the investment adviser who set investment strategy, make investment selections or who will be managing customer assets. However, there are no minimum standards for education or work background established by the SEC.

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

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.

An advertisement is being prepared by an federal covered adviser whose principal business is rendering advice to customers. Which of the following statements are TRUE? I Showing past performance is allowed II Showing past performance is prohibited III Using a paid testimonial is allowed with no additional disclosures IV Using a paid testimonial, which discloses that a payment was made to the maker, is allowed A I and III B I and IV C II and III D II and IV

B. Past performance may be shown in an advertisement, as long as there is the disclaimer that "past performance does not predict future results." Specific prior recommendations cannot be shown; however, illustrative charts can be used. Under the Investment Advisers Act of 1940, paid testimonials are prohibited in investment adviser advertising unless it is disclosed that the maker was paid and if the maker is a client of the adviser.

A private fund adviser with less than $150 million of assets under management: A must register with the SEC B must report to the SEC C must register with, and report to, the SEC D is neither required to register with, nor report to, the SEC

B. Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. 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.

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: A at least 48 hours prior to entering into an advisory contract B at, or prior to, entering into an advisory contract C within 48 hours of entering into an advisory contract D within 10 days of entering into an advisory contract

B. 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.

Which of the following persons is EXCLUDED from registration as an investment adviser under the Investment Advisers Act of 1940? A A person who renders advice only on foreign securities B A person who renders advice only on U.S. Government securities C A person who renders advice only on municipal securities D All of the above

B. The Investment Advisers Act of 1940 excludes from registration any adviser that only gives advice on U.S. Government guaranteed securities. There is no exclusion given to advisers who only give advice about municipal or foreign securities.

In order to promote its services, an investment adviser that normally charges a $100 initial consultation fee wishes to publish an advertisement offering "an initial consultation and a free evaluation of the tax status of the customer's portfolio for $150." Which statement is TRUE? A Prior to publishing the advertisement in the news media, a copy must be filed with the State Administrator B The advertisement can be published if the word "free" is removed from the statement C The advertisement can be published if the terms of the offer are made to the adviser's existing customers as well as to new customers D The advertisement can only be published if the date when the offer becomes void is prominently displayed

B. The problem here is that the tax analysis is not free - the adviser is charging an extra $50 for that analysis. If the word "free" is taken out of the advertisement, then it no longer is untruthful.

To be registered with the SEC as an investment adviser, which of the following are required? I Filing of Form ADV Part 1 II Filing of Form ADV Part 2 III Filing of a consent to service of process IV Filing of registration information for each representative A I only B I and II C III and IV D I, II, III, IV

B. To register with the SEC as an investment adviser, Form ADV Part 1 and Part 2 must be filed. The SEC only registers firms as advisers; it does not register the firm's representatives, making Choice IV incorrect. A consent to service of process is only filed for State registration, not for SEC registration.

Under the Investment Advisers Act, of 1940, required information in the registration application for an investment adviser includes: A employees of the investment adviser B officers, directors, and non-participating shareholders of the investment adviser C remuneration of all officers and directors and non-participating shareholders of the investment adviser D record of any disciplinary actions taken during the past 15 years by regulatory organizations against persons associated with the investment adviser

B. Under the Investment Advisers Act of 1940, registration applications name the officers, directors and shareholders of the investment adviser. The names of the investment adviser's employees are not included. The remuneration of the officers and directors is not disclosed. Any disciplinary actions taken against the adviser by a self-regulatory organization must be disclosed in the registration application (there is no time limitation on this).

Investment advisers that have a broker-dealer entity are permitted to accept which of the following compensation items? I Commissions on trades effected for clients II Annual fees based on a percentage of assets under management III Monthly fees based on performance in the account IV Annual fees based on a fixed dollar amount A I and IV B I, II, III C I, II, IV D II, III, IV

C. Investment advisers cannot accept fees based on performance unless the client has at least $1,100,000 of assets under management or a $2,200,000 net worth. Fixed annual fees, wrap fees, fees based on a percentage of assets under management, and commissions on trades where the adviser has a separate broker-dealer entity, are all permitted compensation items.

Under the Investment Advisers Act of 1940, which of the following are requirements for a family office to be excluded from the definition of an Investment Adviser? I The family office must only provide investment advice to clients who are part of that family II The family office must be wholly owned by family clients and exclusively controlled by family members or entities III The family office cannot hold itself out as an investment adviser IV The family office must have less than $100 million of assets under management A I and III B II and IV C I, II, III D I, II, III, IV

C. The Investment Advisers Act of 1940 excludes "family offices" from the definition of an investment adviser, so they are not required to register. Regarding the "family office" exclusion, extremely wealthy persons often set up a "family" office to manage the finances of family members (think of very wealthy persons like Bill Gates or Jeff Bezos, where the family office would manage the assets of their spouses, children, parents, etc.). As part of its work, the family office often gives investment advice, and the employees of the family office are compensated, so they would fall into the "dragnet" of Investment Adviser registration. Because these are wealthy, "sophisticated," individuals, they are not in need of the "protection" given by SEC IA registration.

In order for an investment adviser to charge a "performance fee" under the Investment Advisers Act of 1940, the customer must have: I at least $1,100,000 of assets to invest II a net worth of at least $1,100,000 III at least $2,200,000 of assets to invest IV a net worth of at least $2,200,000 A I and II only B III and IV only C I and IV only D II and III only

C. The Investment Advisers Act of 1940 prohibits a performance fee unless the customer has at least $1,100,000 invested with the adviser; or has a net worth of at least $2,200,000.

Under the Investment Advisers Act of 1940, which of the following are defined as "investment advisers"? I A firm that prepares research reports about the NYSE market II A firm that solely prepares research reports about the municipal securities market III A firm that prepares asset allocation reports covering securities, real estate, commodity and insurance investments IV A firm that prepares reports on the outlook for the U.S. economy A I and IV only B II and III only C I, II, III D I, II, III, IV

C. A firm that prepares research reports about the NYSE market or municipal securities is included within the definition of an investment adviser; as is a firm that prepares asset allocation models for investors. A firm that prepares reports about the outlook for the U.S. economy is not giving advice about securities, and thus is not an investment adviser.

Which of the following are considered to be "compensation" to an investment adviser under the Investment Advisers Act of 1940? I Commissions paid to the investment adviser for executing recommended securities transactions II Commissions paid to the adviser on recommended insurance purchases III Payments made by the issuer to the adviser for recommending the issuer's securities IV Profits on securities positions held by the adviser where the adviser recommended those securities to its customers A I and II only B III and IV only C I, II, III D I, II, III, IV

C. Advisers' compensation is defined broadly and includes payments received from the sale of advisory services; payments received for referring customers to other advisers or broker-dealers; commission payments received for executing customer portfolio trades through an affiliated broker-dealer; commission payments received for selling that customer non-securities products like insurance or real estate; and payments made by issuers to the adviser to recommend that issuer's securities (though this is illegal, it is still compensation to the adviser). Profits on securities positions held by the adviser are specifically excluded from adviser compensation.

An investment adviser is called by a customer who wishes to sell a security; and then the adviser solicits another customer to buy that same security. Which of the following statements are TRUE? I This is a "principal transaction" II This is an "agency cross transaction" III This transaction is permitted only if the customer is informed of the circumstances and consents to the transaction IV This transaction is prohibited A I and III B I and IV C II and III D II and IV

C. 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 statements in an advertisement by an investment adviser would NOT be in violation of the Investment Advisers Act of 1940? A "We will achieve a 20% rate of return annually over the next 5 years" B "We guarantee that the rate of return on our investments will not fall below the inflation rate" C "We have achieved a 20% rate of return annually over the past 5 years" D "We are likely to achieve a 20% rate of return over the next 5 years"

C. An investment adviser cannot guarantee future results; and cannot imply that a specific future result will be achieved - thus Choices A, B and D are prohibited. The investment adviser can show past performance; but must state how the market performed over the same period; and must include the disclaimer that "past performance does not predict future results."

If an investment adviser wishes to hire an individual to solicit business for the advisory firm: I the solicitor must be registered as an agent of that investment adviser in the State II the adviser must be registered with either the SEC or the State as appropriate III there must be a written agreement between the adviser and the solicitor IV there must be a written agreement between the adviser and the SEC or the State Administrator, as appropriate A I and III B I and IV C II and III D II and IV

C. An investment adviser solicitor must be registered in the State; however, the solicitor can be an independent third party that is not a representative of that investment adviser, making Choice I incorrect. The investment adviser (the firm) must be registered with the SEC if it has $100,000,000 or more of assets under management (a federal covered adviser). If the firm has less than $100,000,000 of assets under management, then it only is required to register with the State. To use a solicitor, there must be a written agreement between the adviser and the solicitor that spells out the work to be performed and the compensation to be paid.

Under IA-1092, which of the following are defined as "giving advice about securities"? A person who: I advises on the selection of an investment adviser II prepares a list of securities that may be purchased without making specific recommendations III prepares an asset allocation plan that specifies percentage investments in stocks, bonds, real estate and insurance IV charts the price movements of stocks and distributes them to subscribers A I only B III and IV C I, II, III D I, II, III, IV

C. 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."

Which of the following persons is defined as an "investment adviser" under SEC Release IA-770? A A professor who teaches a class open to the general public on investment strategy B An insurance agent that sells insurance products to customers for compensation C A financial planner who charges no fee for a financial plan and who takes commissions on recommended securities transactions D A broker-dealer that recommends securities transactions to clients but does not charge for the recommendations

C. If a financial planner claims to charge "no fee;" but then receives payment (from anyone) 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. Professors who teach classes about investing are specifically excluded from the definition of an investment adviser; insurance agents who only sell insurance are not recommending securities, so they are excluded; and broker-dealers who do not charge separately for advice are excluded.

Under the Investment Advisers Act of 1940, which of the following MUST be disclosed to customers by an investment adviser? I An investment adviser takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is having financial difficulties II An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is having financial difficulties III 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 IV 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 A I and III only B II and IV only C I, III and IV D I, II, III, IV

C. 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 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

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.

All of the following statements are true about "agency cross transactions" under the Investment Advisers Act of 1940 EXCEPT: A to effect an agency cross transaction, written consent from the client must be obtained B agency cross transactions cannot have been recommended to both the buyer and seller by the investment adviser C each client must be sent a quarterly account statement detailing activity in the account for that period D each client must be sent an annual statement identifying the total number of agency cross transactions effected; and the remuneration received by the adviser for these transactions

C. If an investment adviser wishes to effect an agency cross transaction for a customer, it cannot have recommended the transaction to both the buyer and the seller. To effect the transaction, the adviser must obtain written consent of the customer; must disclose the remuneration that will be received from the transaction; and must send the customer an annual statement identifying the total number of agency cross transactions effected by the adviser and the remuneration received. There is no requirement to send these statements quarterly to customers.

All of the following statements are true regarding an investment adviser that wishes to take custody of clients funds under the Investment Advisers Act of 1940 EXCEPT the investment adviser: A must send an itemized statement of account to each customer at least quarterly B must be audited, on a surprise basis, at least annually C must segregate each customer's funds from those of other customers D need not comply with the custody rules if the firm is already a registered broker-dealer

C. If an investment adviser wishes to take custody of client funds or securities, under the Investment Advisers Act of 1940, the investment adviser must deposit customer funds and securities in an account that is separate from the adviser's account. It is permitted to "commingle" all customer positions together in one account, as long that there is a record of each customer's individual positions. However, customer securities positions cannot be commingled with the investment adviser's positions. Each customer must get a quarterly account statement; and the adviser must be audited, on a surprise basis, at least annually. If the investment adviser is already a broker-dealer, it is complying with these requirements under a similar SEC rule for broker-dealers (SEC Rule 8c-1); so this is not required for investment advisers that are also registered as broker-dealers.

Under the Investment Advisers Act of 1940, if an investment adviser wishes to renew an advisory contract which will allow it to start taking prepaid advisory fees of $1,200 or more, 6 months in advance of rendering services, which of the following statements is TRUE? A A revised "Brochure" must be sent to each of the adviser's customers B The adviser's customers must be given a "Brochure" at least 48 hours prior to contract renewal; and then decide during that time frame whether or not they wish to accept the terms of the new contract. C The investment adviser must file a Form ADV 2A and balance sheet with the SEC promptly, and must make the revised "Brochure" available to its customers D The investment adviser is prohibited from changing the terms of the advisory contract.

C. If the adviser wishes to renew an advisory contract with a customer where the terms of the contract are changed, this requires that a revised "Brochure" be given to that customer. However, if, for the first time, the adviser will accept $1,200 or more of prepaid fees 6 months or more in advance of services rendered, then the adviser must file an ADV Part 2A with an audited balance sheet promptly.

Under the Investment Advisers Act of 1940, if an investment adviser wishes to renew an advisory contract which will allow it to start taking prepaid advisory fees of $1,200 or more, 6 months in advance of rendering services, which statement is TRUE? A A revised "Brochure" must be sent to each of the adviser's customers B The adviser's customers must be given a "Brochure" at least 48 hours prior to contract renewal; and then decide during that time frame whether or not they wish to accept the terms of the new contract. C The investment adviser must file a Form ADV Part 2A and balance sheet with the SEC promptly D The investment adviser is prohibited from changing the terms of the advisory contract.

C. If the adviser wishes to renew an advisory contract with a customer where the terms of the contract are changed, this requires that a revised "Brochure" be given to that customer. However, if, for the first time, the adviser will accept $1,200 or more of prepaid fees 6 months or more in advance of services rendered, this is a material change that requires the adviser to file an ADV Part 2A with an audited balance sheet promptly.

Under the Investment Advisers Act of 1940, an SEC registration application as an investment adviser must be granted; or a proceeding must be initiated denying registration, within: A 10 days B 30 days C 45 days D 60 days

C. Investment adviser registration applications filed with the Securities and Exchange Commission must be granted; or a proceeding started to deny registration; within 45 days of filing.

All of the following provisions would be found in an advisory contract EXCEPT: A the term of the contract B the requirement for customer approval if the contract is to be assigned to someone else C an exculpatory clause holding the adviser harmless for gross negligence or rule violations D notification to customers if there is a change in the composition of the advisory partnership

C. Investment advisory contracts must be in writing under the Investment Advisers Act of 1940; must detail the advisory fee; must provide for customer approval if the account is assigned to another investment adviser; and must provide for notice to the customer if there is a change in the composition of the advisory partnership (for those advisers that are partnerships). An "exculpatory" clause is legal language that the adviser cannot be held liable for negligence or rule violations, and such a "hedge" clause is not legally enforceable and is prohibited.

Under the "Brochure Rule," existing customers of an investment adviser MUST: A receive a "Brochure" at least quarterly only if there are material changes B receive a "Brochure" at least quarterly whether or not there are material changes C receive a "Brochure" at least annually only if there are material changes D receive a "Brochure" at least annually whether or not there are material changes

C. New customers of the investment adviser must receive the "Brochure" at or prior to entering into an advisory contract. Existing customers must be sent an updated "Brochure" at least annually if there are material changes. As an alternative, the customer can be sent the "Summary of Material Changes" section of the current brochure along with the offer of the revised Brochure.

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 without disclosure of payment III Entering into an oral advisory contract with the customer IV Accepting a prepaid advisory fee from a client A I and II only B III and IV only C I, II, III D I, II, III, IV

C. 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 unless it is disclosed that the maker was paid and if the maker is a client of the adviser.

Which soft dollar remuneration arrangement is NOT permitted between a broker-dealer and a registered investment adviser? A The broker-dealer providing research reports to the investment adviser in return for the investment adviser directing its portfolio trades to the broker-dealer B The broker-dealer providing real time stock quotes to the investment adviser in return for the investment adviser directing its portfolio trades to the broker-dealer C The broker-dealer paying the salary of a research assistant employed by the investment adviser in return for the investment adviser directing its portfolio trades to the broker-dealer D The broker-dealer providing conference calls with its research analysts to the investment adviser in return for the investment adviser directing its portfolio trades to the broker-dealer

C. So-called "soft dollar" arrangements between broker-dealers and investment advisers do not provide for actual money payment to the broker-dealer for rendering services to the investment adviser. Instead, the broker-dealer gives "free" services to the investment adviser such as research reports or real time stock quotes, in return for the adviser directing its portfolio trades to that broker. This is a typical arrangement in the securities business. What is not permitted is "hard" dollar payment (meaning that a check goes from the broker-dealer to the adviser).

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

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.

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

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.

Which of the following are NOT required to register as investment advisers under the Investment Advisers Act of 1940? Persons who give advice: I on U.S. Government securities II solely to insurance companies III solely to investment companies IV to customers within one State, where the investment adviser is a resident of that State A II and III B III and IV C I, II, IV D I, II, III, IV

C. The Investment Advisers Act of 1940 exempts from registration, an adviser that gives advice to insurance companies. It does not exempt an adviser who gives advice to investment companies (which is true under State law). The Investment Advisers Act of 1940 also exempts from registration advisers who only give advice on U.S. Government securities; and advisers who wholly operate within one State, trading securities only in that State. Because such an "intrastate adviser" does not conduct business across State lines, the SEC does not have jurisdiction. For the SEC to have jurisdiction over an adviser, the adviser must operate "interstate."

Under the Investment Advisers Act of 1940, copies of all advertising, notices and circulars must be retained if distributed to at least: A 1 person B 5 people C 10 people D 15 people

C. 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.

The "Brochure Rule" applies to: A oral advisory contracts only B written advisory contracts only C both of the above D none of the above

C. The SEC states that the "Brochure Rule" it 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.

The SEC would revoke the registration of a federal covered adviser for all of the following reasons EXCEPT the adviser: A has been convicted of violating the Securities Exchange Act of 1934 five years ago B has been convicted of a misdemeanor involving securities nine years ago C is the subject of an adverse ruling in State Supreme Court in a civil lawsuit with a client D has been enjoined in a court of law of another state from being in the commodities business

C. The SEC will deny or revoke the registration of an investment adviser if the adviser has been convicted in a court of law of violating Federal securities law. If the adviser is convicted of a misdemeanor or felony involving money or securities (e.g., theft, misappropriation of funds, etc.) in the last 10 years, then the SEC will deny or revoke registration. If the adviser has been suspended or expelled by any self-regulatory body over the securities or commodities markets (e.g., FINRA, the CBOT, etc.), then registration will be revoked. If the adviser loses a lawsuit with a customer, this is not a reason for revocation of the adviser's SEC registration.

Under the Investment Advisers Act of 1940, which statement is TRUE regarding an investment adviser's registration renewal? A The investment adviser's registration is renewed quarterly by filing an electronic amendment to Form ADV Part 1 B The investment adviser's registration is renewed annually by filing an electronic amendment to Form ADV Part 1 C The investment adviser's registration is renewed annually by filing an electronic amendment to Form ADV Part 1 and Part 2, if there are any changes to the Brochure D There is no need to renew an investment adviser's registration, as long as there are no formal (written) customer complaints against the adviser

C. The investment adviser's registration is renewed annually; and is accomplished by filing an electronic amendment to Form ADV Part 1 and also Part 2 (the Brochure) if there are any changes, within 90 days of the adviser's fiscal year end. To withdraw from registration, Form ADV-W is filed.

Under the Investment Advisers Act of 1940 which of the following is (are) disclosed in an investment adviser registration? I The approximate number of advisory clients II The approximate market value of the portfolios managed III The names and addresses of the adviser's clients IV The compensation basis to the adviser A IV only B I, II, III C I, II, IV D I, II, III, IV

C. The names and addresses of the adviser's clients are not in the Form ADV filed with the SEC. However, the approximate number of clients; approximate market value of portfolios managed; and the compensation basis to the adviser are all disclosed in the Form ADV.

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

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.

An investment adviser is permitted to identify the names of clients in communications to potential new customers: A if the clients are compensated by the investment adviser B if the clients are public figures C if the clients have consented D under no circumstance

C. The use of customer names by an investment adviser to promote the sale of the firm's advisory services is prohibited, unless the customer consents to such disclosure. The only disclosure of customer information that may be made without customer consent is required disclosures to governmental bodies such as the IRS.

An investment adviser wishes to include a clause in its advisory contract that "all controversies that may arise between the customer and us shall be determined by binding mediation." Which statement is TRUE? A This clause is permitted in advisory contracts under NASAA rules B This clause is permitted because mediation is a negotiated settlement process that avoids the adversarial nature of litigation C This clause is prohibited because it requires the customer to waive his or her right to reject the mediator's settlement proposal that is permitted under Federal and State law D This clause is prohibited because only a mandatory arbitration requirement is permitted in a broker-dealer's or investment adviser's contract with a customer

C. This is interesting. There is no such thing as "binding mediation" - only "binding arbitration." Disputes can be handled by arbitration, mediation, or litigation. Arbitration is binding on all parties. Mediation, on the other hand, is simply a negotiation between the parties and is non-binding - either side can reject the decision of the mediator. So a contract that calls for "binding mediation" is unenforceable.

Under the Investment Advisers Act of 1940, an investment adviser's advertising: I cannot show past performance II can show past performance as long as it is not deliberately selective in which clients' results are shown III cannot use specific client names when showing performance unless the client approves IV can use specific client names when showing performance regardless of client approval A I and III B I and IV C II and III D II and IV

C. Under the Investment Advisers Act of 1940, advertisements by advisers can show past performance, as long as the adviser is not deliberately selective in which clients' results are shown. In addition, specific customer names when showing performance cannot be used in advertising unless the customer consents.

All of the following are considered to be "giving advice about securities" under SEC Release IA-1092 EXCEPT a person who: A issues reports about securities to customers B develops an overall financial plan for customers C advises customers on the selection of an investment adviser D advises customers on the selection of a broker-dealer

D. A person who advises customers on the selection of a broker-dealer to effect their recommended trades is not an investment adviser. However, a person who recommends other investment advisers to customers can be considered by the SEC to be an investment adviser that must register; as can a person who issues reports about securities (for years, the SEC has chased subscription investment newsletters to register as investment advisers - the newsletters claim that they are excluded under the "general circulation publication" exclusion; the SEC claims that they are not a "general circulation newsletter," but rather are circulated only to those buying their investment advice, and thus they should register!) Finally, anyone developing financial plans for customers for a fee, of which securities investments may be a minor part, is defined as an "investment adviser" that must register.

When a 3rd party solicitor retained by an Investment Adviser (IA) visits a potential client to make a presentation, what must be given to the customer, and what must be signed by the customer? I The Investment Adviser's Brochure must be delivered to the client II The Solicitor's Brochure must be delivered to the client III The client must sign an acknowledgment that the Investment Adviser's Brochure was received IV The client must sign an acknowledgment that the Solicitor's Brochure was received A I and III only B II and IV only C I and II only D I, II, III, IV

D. A solicitor for an Investment Adviser must give any potential client a copy of the IA Brochure and a copy of the "Solicitor's Brochure" which details the nature of the relationship between the IA and the solicitor and the additional fees that will be paid to the solicitor. The client must sign an acknowledgement of receipt of both the IA Brochure and the Solicitor's Brochure.

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

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.

Which of the following are "federal covered" advisers? I An investment adviser with $400,000,000 of assets under management II An investment adviser to an investment company with $400,000,000 of assets under management III An investment adviser to an investment company with $40,000,000 of assets under management A I only B I and II C II and III D I, II, III

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. The smaller advisers are only required to be registered at the State level. Thus, the adviser with $40,000,000 of assets under management need only register with the SEC; and is exempt from registration in the State. The adviser to the investment companies (regardless of the dollar amount) need only register with the SEC; and is exempt from registration in the State.

Which of the following are prohibited in investment adviser advertising under the Investment Advisers Act of 1940? I Offers of free services that require the purchase of another item II The use of testimonials without disclosure that the maker was paid III Showing a selected list of past recommendations IV Showing future performance A I and II only B III and IV only C I, II, III D I, II, III, IV

D. All of the items listed are prohibited in investment adviser advertising. Offers of free services must really be free; testimonials are prohibited unless it is disclosed if the maker was paid; showing prior recommendations is prohibited; and showing future performance is prohibited. It is permitted to show past performance in such advertising; as long as a statement is made as to the market conditions at the time; and the disclaimer that "past performance does not predict future results" is included.

Delivery of the brochure under the "Brochure Rule" is required for which of the following? I Impersonal advisory services requiring payment of less than $500 annually II Prepaid advisory fees requiring payment in advance of $1,000 or more III Advisory contracts with investment companies IV Advisory contracts with pension plans A I and III B I and IV C II and III D II and IV

D. Delivery of the "Brochure" to customers is not required for the sale of impersonal advisory services calling for no more than a $500 annual fee; or for the sale of advisory services to investment companies. Prepaid advisory fees requiring payment in excess of $500; or advisory contracts with anyone other than investment companies, requires the delivery of a brochure.

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

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.

Under the Investment Advisers Act of 1940, if the SEC suspends or revokes the registration of an investment adviser, an appeal may be filed: I in State Court II in Federal Court III within 30 days IV within 60 days A I and III B I and IV C II and III D II and IV

D. 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.

Under SEC Release IA-1092, which of the following would be required to register with the SEC as investment advisers? I A Certified Financial Planner who only provides general financial planning for a fee; but who does not take commissions on recommended transactions II An attorney who manages the business affairs of athletes for a fee III An accountant who manages the business affairs of entertainers for a fee IV An economist who gives advice to pension plans for a fee on the outlook for the securities markets A II and III only B I and IV only C II, III, IV D I, II, III, IV

D. Investment adviser Release IA-1092 specifically includes advisers to entertainers and athletes, and advisers to pension plans, as investment advisers that must register with the SEC. In addition, the SEC in this release, states that a financial planner that provides general financial planning for a fee comes under the definition and must register with the SEC. It makes no difference whether or not the financial planner takes commissions on recommended trades - if this person gives general "non-specific" advice for a fee, he or she is still considered to be an "investment adviser" that must register.

Investment advisers MUST register with the SEC only if their assets under management equal, or exceed: A $25,000,000 B $50,000,000 C $100,000,000 D $110,000,000

D. Investment advisers are only required to register with the SEC if their assets under management are $100,000,000 or more - however, the SEC has issued an interpretation that advisers that have between $100-$110 million of assets under management have the option of registering with the SEC. Once the adviser hits $110 million or more of assets under management, has no choice and must register with the SEC.

An investment advisory contract states that the annual fee will be "½% of the market value of all assets under management," payable quarterly. All of the following statements are true under the Investment Advisers Act of 1940 EXCEPT: A this statement cannot be made orally; it must be in writing B the arrangement cannot be changed without customer consent C a brochure must be delivered to the customer at, or prior to, entering into the contract D the customer has the right to rescind the contract for 30 days

D. Investment advisory contracts must be in writing under the Investment Advisers Act of 1940. Such contracts cannot be changed without the customer approving. The customer must receive a "Brochure" (Form ADV Part 2A) and a "Brochure Supplement" (Form ADV Part 2B) at, or prior to, entering into the advisory agreement.

An investment adviser representative has recently passed her Series 7 and Series 66 exams. Which of the following statements can she make to potential clients regarding these registrations? A "The State Administrator approves of my doing business in each of the States in which I am registered." B "Because I only recommend investment grade securities, the SEC endorses my activities in each of the States in which I am registered." C "The SEC or State Administrator views all of the recommendations that I make to be suitable, as long as an investment profile has been completed for each new customer." D "I am now registered with FINRA and the State"

D. It cannot be stated that "registration" means that the SEC, FINRA or the State Administrator approves of the adviser, or endorses, recommends, or certifies the adviser. It can be stated that the adviser is "registered" - in this case, the IAR is registered in the State, and as a Series 7 representative, this individual is federally licensed as a representative. The federal Series 7 license is given by FINRA, which is an SRO (self-regulatory organization) operating under SEC oversight.

Private Fund Advisers: A are not required to register with the SEC as long as they have no more than 5 clients B are not required to register with the SEC because their clients are all "accredited investors" C must register with the SEC once assets under management reach $100 million D must register with the SEC once assets under management reach $150 million

D. Regular investment advisers must register with the SEC as "Federal Covered Advisers" once assets under management reach $100 million. Private Fund Advisers, who only advise pooled investment vehicles like hedge funds, were exempt from SEC registration until 2012. At that point, they were required to register with the SEC once their assets under management reached $150 million. The intent was to make sure that there was public disclosure about the world of hedge funds.

All of the following are defined as impersonal advisory services under the Investment Advisers Act of 1940 EXCEPT: A oral advice that is not based upon specific customer situations B written advice that is not based upon specific customer situations C statistical information prepared using a computer program about the performance of a security or group of securities D financial plan prepared using a computer program based upon statistical information provided by the customer

D. 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.

Under the requirements of the Investment Advisers Act of 1940, the separate disclosure document that the solicitor must provide to a potential investment advisory client must include all of the following EXCEPT: A the nature of the relationship between the solicitor and investment adviser B a statement that the solicitor will be compensated by the investment adviser for the referral C disclosure of the specific amount or percentage being paid to the solicitor by the investment adviser for the referral D a copy of the written agreement between the investment adviser and the solicitor

D. The Investment Advisers Act of 1940 requires that any solicitor for an investment adviser provide the customer with a solicitor's brochure, in addition to the adviser's brochure. The solicitor's brochure must include the nature of the relationship between the solicitor and investment adviser; must include a statement that the solicitor will be compensated by the investment adviser for the referral; and must include disclosure of the specific amount or percentage being paid to the solicitor by the investment adviser for the referral.

The Code of Ethics required to be written and adhered to by each investment adviser must cover all of the following topics EXCEPT: A insider trading B front running C trading ahead of research D short selling

D. The Investment Advisers Act of 1940 requires that investment advisers adopt a written Code of Ethics that covers permitted and prohibited actions on the part of its officers and employees. The Code of Ethics must specifically cover the prohibited practices of front running customer orders, the "trading ahead of research prohibition" and the insider trading laws, since the larger investment advisers are in a position to obtain information about issuers that is not generally available to the public, and they cannot trade on this information until it is publicly released. Short selling is a legal practice of speculating on the price of a security declining and is not unethical.

Which of the following is NOT a form of compensation to an investment adviser? A Soft dollar arrangements B Commissions C Wrap fees D Bid-ask spreads

D. The bid-ask spread is earned by the market marker in a security; it is not earned by the adviser. Forms of compensation to an adviser are commissions earned on portfolio trades performed; management fees earned; wrap fees earned; and so-called "soft dollar" arrangements, for example where investment research is given free to the investment adviser by a brokerage firm in return for the adviser directing its portfolio trades to that broker.

Which of the following records of an investment adviser that takes custody of customer funds is NOT required to be retained under the provisions of the Investment Advisers Act of 1940? A Cash receipts and disbursements journal B Statement of financial position C Customer account statements D Beneficiary designations for each customer account

D. 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.

A federal covered adviser whose principal business is rendering advice to customers about securities wishes to prepare an advertisement. Which of the following are allowed? I Showing past performance II Using illustrative performance charts III Using the term "investment counsel" IV Using a paid testimonial which disclosed that a payment was made to the maker. A I and II B III and IV C I, II, III D I, II, III, IV

D. Under the Investment Advisers Act of 1940, paid testimonials are prohibited in investment adviser advertising unless it is disclosed that the maker was paid and if the maker is a client of the adviser. Past performance may be shown, as long as there is the disclaimer that "past performance does not predict future results." Specific prior recommendations cannot be shown, however, illustrative charts can be used; and the term "investment counsel" can be used as long as the principal business of the advisory firm is the rendering of investment advice.

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

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.