Quiz 6
The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a Code of Ethics. Which of the following is charged with the responsibility of enforcing that Code?
Chief compliance officer of the IA. Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the Code of Ethics is being followed. Although each individual IAR must follow that Code, it is the CCO with the supervisory responsibility. Reference: 3.21 in the License Exam Manual
Which of the following statements is NOT true?
Exempt securities must reestablish their exemptions at least annually. Exempt securities need not reestablish their exemptions annually or otherwise. Exempt securities are exempt because their issuers are exempt while the basis for an exemption for a transaction must be established before each transaction. Neither the exempt security nor the transaction exemptions are mutually exclusive and a security or transaction may qualify for two or more of these exemptions. The term "federal covered securities" includes registered investment companies as well as securities listed on national exchanges. Reference: 2.6.2 in the License Exam Manual
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may borrow money from which of the following clients? A broker-dealer not affiliated with the adviser. A bank not affiliated with the adviser. A mutual fund not affiliated with the adviser. A corporation affiliated with the adviser.
I, II and IV. An adviser may only borrow from a client that is in the business of loaning money, such as a bank or broker-dealer, or a client that is affiliated with the adviser. Reference: 2.11.25
According to the Uniform Securities Act, after an agent passes the Series 66 exam and the Series 7 exam, asset-based compensation is permitted: immediately. after notification of investment adviser representative status by the appropriate supervisory person of the firm. when registration has been granted by the state Administrator. when permission is received from the SEC.
II and III. Passing the Series 7 licensing exam qualifies an individual to solicit securities but not to receive asset-based compensation. Once the Series 66 has been passed, the state Administrator must actually issue a registration, and the individual must be associated with an investment adviser before engaging in asset-based compensation in a particular state. Reference: 2.4.4
Which of the following statements referring to renewal of a broker-dealer's registration under the Uniform Securities Act are CORRECT? Annual renewal takes place on the anniversary of the registrant's initial registration. Each renewal application must be accompanied by the appropriate fee. Each renewal application must be accompanied by a consent to service of process signed by an authorized supervisory person of the firm. Registrations expire December 31 unless renewed or canceled.
II and IV. The consent to service of process is filed with the initial application for registration and becomes a permanent part of the registrant's file. The USA states that all registrations of persons expire on December 31 unless renewed, withdrawn, or canceled. Reference: 2.4.4 in the License Exam Manual
Under the Uniform Securities Act, the term person would include: a minor who has a valid U.S. passport. a political subdivision. an unincorporated association. an inter vivos trust.
II, III and IV. The term person has an extremely broad definition. It is best to remember the three things that are not persons: minors, individuals who have been judged incompetent, and deceased individuals. Reference: 2.1.4
Which of the following statements is (are) TRUE? A person with a place of business in the state who transacts business exclusively for the accounts of banks and savings institutions is not a broker-dealer under the Uniform Securities Act. A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator. A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator. Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration.
III and IV. A person who conducts business exclusively with banks and savings institutions is a broker-dealer under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers. Reference: 3.4 in the License Exam Manual
Under the Investment Advisers Act of 1940, which of the following statements is NOT true regarding custody of a client's funds or securities?
The adviser must report the location of funds or securities at 6-month intervals. Advisers who have custody must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client's funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account. Annually, the adviser must arrange for an independent audit of the client's account and the results must be forwarded to the SEC. Thus, the adviser reports every three months, not every six months. Reference: 3.11
Rule 482 of the Securities Act of 1933 permits the use of an omitting prospectus if it does NOT:
contain an application to purchase shares of the fund. An omitting prospectus is a mutual fund tombstone advertisement. It must include information on obtaining a prospectus and may include the fund's past performance. It will never include an application to purchase shares and may or may not make mention of the fund's expense ratio. Reference: 1.4.4.1
Under federal law, the statute of limitations for civil liability is:
one year after discovery or three years after the action, whichever is sooner. In the federal regulations, the statute of limitations for a civil action is the sooner of one year after discovery or three years after the action. Under the USA, it is the sooner of two years after discovery or three years after the action. Reference: 1.4.6
All of the following statements about an agent's need to be registered in a state are correct EXCEPT:
registration is required in each state in which the employing broker-dealer has a place of business. The fact that the broker-dealer does business in a state has nothing to do with a specific agent. Many broker-dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer and there is no de minimis exemption available. Finally, registration is not required when making use of the "snowbird" exemption. Reference: 2.3.2.3
One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser
shall obtain client consent before completion of the transaction In order to act as an agent (or principal) in a trade with an advisory client, there are 2 requirements: The client receives full written disclosure as to the capacity in which the adviser proposes to act Consent of the client Both of these are required before the completion of the transaction. Reference: 3.12.3
One of the surest ways to explain to a client that an investment opportunity presented via social media is likely to be a scam is
the promise of high returns with low risk A high return with low risk is almost always an indication that something is not right about an investment. Even though SEC-registration is no guarantee of success, at least we know the issuer has gone through the rigor of filing the registration statement and making full disclosure. An escrow account offers investors protection and audited financial statements allow for a true look at the issuer's financial condition. Reference: 2.4.6.1.1
When a security is registered with the Administrator, it means that
the security may be legally sold in the state We can never misrepresent a security's registration. The Administrator, in registering a security, declares that the security is legal for sale in the state. Never use the word approved when referring to registration of a security or a securities professional. Only exempt securities and exempt transactions are exempt from the advertising filing requirements, and federal covered securities don't register with the Administrator; they notice file. Reference: 2.10.1.1 in the License Exam Manual
Under the Uniform Securities Act, an agent's request for withdrawal of registration takes effect:
30 days after receipt of an application to withdraw or within such a shorter period of time as the Administrator may determine. The Administrator has the power to shorten the time period for both withdrawal and initial registration. Always choose the answer that is the most correct. Reference: 2.14.5.1 in the License Exam Manual
The Uniform Securities Act specifically exempts certain issues from the registration and advertising filing requirements of the act. Which of the following securities does NOT carry that exemption?
Bank holding company stock. The securities of banks, trust companies, and savings institutions are exempt; the securities of bank holding companies are not. Commercial paper with a maturity of 270 days or less is also included in the list of exempted securities. Reference: 2.8.1
