regs - s66 -fsa
A Regulation Aoffering is given an exemption from registration with the SEC for new issue offerings that do not exceed: $10,000,000 within a 12 month period $15,000,000 within a 12 month period $25,000,000 within a 12 month period $50,000,000 within a 12 month period
$50,000,000 within a 12 month period Regulation A under the Securities Act of 1933 gives an exemption from registration method to issues of no more than $50,000,000.
Form ADV parts:
*The ADV Part I* gives basic information about the adviser. - The ADV Part 1 is the basic registration information filed with the SEC - such as name of firm, address, phone number, officers, shareholders, States where the adviser is registered, etc. *Part 2A* describes the adviser's business, services rendered, fees charged, investment philosophy, number of clients, assets under management, conflicts, etc. - Part 2A, which details the adviser's business, analytic methods, types of clients, assets under management, fees, conflicts of interest, etc. Part 2A must include a balance sheet of the firm if it will take custody of customer funds or securities; or will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. This is the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract. *Part 2B* gives the educational background and work history of the key personnel who set investment strategy or manage accounts. - Part 2B is the "Brochure Supplement" that must be delivered to new customers at the same time as Part 2A. Part 2B details the educational and work background of the key personnel who set investment strategy or manage accounts.
To be defined as a *diversified* management company, a fund must have at least what percentage of its assets invested in securities?
75% To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.
Under the Investment Advisers Act of 1940, which of the following persons is exempt from registration with the SEC? A) An investment adviser whose only clients are insurance companies B) An investment adviser whose only clients are investment companies C) An investment adviser whose only clients are pension plans D) All of the above
A) An investment adviser whose only clients are insurance companies The best answer is 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 Representative(IAR) is also a commissioned agent at a brokerage firm. The IAR has a young client who has a $250,000 account. The client has been trading the account aggressively himself and has been successful in the strategy. The customer now wants the IAR to take over the management of the account, with the IAR to be compensated on a performance basis. The IAR should tell this young client that the account: A) cannot be traded on a performance basis B) can be traded on a performance basis C) can be traded based only on a per trade commission charge D) must be closed
A) cannot be traded on a performance basis Performance fees are only allowed for wealthy clients (at least $1,000,000 invested; or a minimum $2,100,000 net worth) under the Investment Advisers Act of 1940 - so this client does not qualify. The account cannot be traded on a performance basis - a commission or fixed fee arrangement must be established. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.)
Under the Investment Advisers Act of 1940, if a registered investment adviser, for the first time, decides to require prepayment of $1,200 or more of advisory fees, 6 months or more in advance of rendering services, the adviser must: A) file an audited balance sheet promptly with the Securities and Exchange Commission B) file a new brochure with the Securities and Exchange Commission promptly C) file a new initial ADV application with the Securities and Exchange Commission D) notify customers no later than with the next trade confirmation
A) file an audited balance sheet promptly with the Securities and Exchange Commission If an investment adviser, for the first time, will take custody of client funds or securities; or if the adviser takes $1,200 or more of prepaid advisory fees, 6 months or more in advance of rendering services; then the adviser must file a balance sheet with the Form ADV Part 2A filed with the SEC. *This filing is required "promptly*."
Which of the following are exempt issues under the Securities Act of 1933? I Government Bonds II Municipal Bonds III State Chartered Bank Issues IV Small Business Investment Companies
All of the issuers listed are exempt from the provisions of the Securities Act of 1933 - government bonds, municipal bonds, state chartered bank issues(regulated by the banking laws) and small business investment companies (regulated by other Federal legislation).
Which of the following is NOT a form of compensation to an investment adviser? Soft dollar arrangements Commissions Wrap fees Bid-ask spreads
Bid-ask spreads 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.
An Investment Adviser Representative(IAR) is also a registered broker-dealer. The IAR has a brokerage client who has a $1,200,000 account; and a net worth of $2,500,000. The client wants the IAR to take over the management of the account, with the IAR to be compensated on a performance basis. The IAR should tell this client that the account: A) cannot be traded on a performance basis B) can be traded on a performance basis C) can be traded based only on a per trade commission charge D) must be closed
B) can be traded on a performance basis Under the Investment Advisers Act of 1940, performance fees are only allowed for wealthy clients with at least $1,000,000 invested; or have a minimum $2,100,000 net worth - so this client qualifies. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.)
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) interest paid on a margin loan by an advisory client 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.
Past performance: A) may not be shown in an investment adviser advertisement B) may only be shown in an investment adviser advertisement if it reflects the deduction of advisory fees, brokerage commissions and any other expenses that a client would pay C) may only be shown in an investment adviser advertisement if a comparison is made to a relevant market index D) may only be made in an investment adviser advertisement if the advertisement is filed in advance with the SEC
B) may only be shown in an investment adviser advertisement if it reflects the deduction of advisory fees, brokerage commissions and any other expenses that a client would pay Past performance may be shown in investment adviser advertising(*pretty sure its past 12 months) (it is testimonials that are prohibited). Results shown must deduct all expenses that a customer would incur. There is no requirement for a comparison to be made of results to a relevant market index; nor is there a requirement for the advertisement to be filed with the SEC.
An investment adviser that solely follows and recommends listed securities is: A) exempt from State registration B) exempt from Federal registration C) subject to State registration only D) subject to either State or Federal registration
D) subject to either State or Federal registration There is no exemption from registration for an investment adviser that follows only listed securities, at either the State or Federal level. The adviser must be registered in the State if it manages assets of less than $100,000,000; and if the adviser manages assets of $100,000,000 or more, it must register with the SEC.
An independent investment adviser is talking to a brokerage firm's research analyst about XYZ company. The analyst tells the adviser that she is going to issue a report stating that the company will miss its revenue projections. The adviser was planning to add the stock to her portfolio. What should the adviser do? A) The adviser cannot act on the information because it is "inside information" B) The adviser must purchase the stock as planned C) The adviser can change her mind about buying the stock D) The adviser must report the conversation to the State Administrator
C) The adviser can change her mind about buying the stock The adviser was planning to buy the stock; and the analyst thinks the stock isn't a good investment right now. There is no "inside information" here, so the adviser can take the opinion of the analyst and change her decision to buy the stock. *Note, however, that if the adviser and the research analyst worked for the same parent company, then the answer would change. The restrictions on "trading ahead of a research report" would apply to all employees of the parent company and the stock could not be purchased or sold prior to the public release of the report*.
Which of the following is a conflict of interest for an affiliated person on the Board of Directors of a mutual fund? A) The affiliated person being compensated by the fund for being a member of the Board of Directors of the fund B) The affiliated person voting for choice of an investment manager for the fund C) The affiliated person being compensated by the broker-dealer that the fund uses to execute portfolio transactions D) The affiliated person voting on the implementation of a 12b-1 plan for the fund
C) The affiliated person being compensated by the broker-dealer that the fund uses to execute portfolio transactions An affiliated person on a mutual fund Board of Directors is someone who works for the fund; or who works for the fund's attorneys, accountants, advisers, or broker-dealers used to execute portfolio trades (among many possibilities). These persons can have an inherent conflict of interest - for example, an attorney who is being paid by the fund to sit on the Board might not be that objective when the Board of Directors is deciding whether the renew the contract that the fund has with the law firm (for whom this attorney works). *The clear conflict of interest in this example is the affiliated person being compensated by the broker-dealer to whom the fund directs its portfolio trades. When it comes time for the Board to vote on who the fund will use to execute its portfolio transactions, the fact that the broker-dealer is compensating this individual can clearly influence his or her decision on how to vote*! There is no prohibition on a fund compensating persons who are on its board - how else would it get people to do this? There is no conflict with Board members voting on typical business decisions, such as who the fund will choose as its manager; or whether the fund will adopt a 12b-1 plan (Such a plan allows the fund to charge to current shareholders, an annual fee for the cost of soliciting new investment into the fund. This is permitted under SEC Rule 12b-1.)
Investment advisers, without exception, are prohibited from: A) disclosing private customer account information to an unaffiliated third party B) charging advisory fees based on account performance C) placing the interests of the advisory firm ahead of those of the customer when making recommendations D) having conflicts of interest when dealing with customers
C) placing the interests of the advisory firm ahead of those of the customer when making recommendations Investment advisers are fiduciaries, who must always act in the best interests of the customer - without exception. They cannot place their interests first. An investment adviser cannot disclose customer account information to a third party, unless the customer approves. An investment adviser cannot charge advisory fees based on account performance, unless the client has a net worth of a least $2,100,000 or has at least $1,000,000 under management with the investment adviser. Finally, the investment adviser cannot have a conflict of interest when dealing with customers, unless this is disclosed in advance of opening the customer account. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.)
All of the following statements are true regarding the appointment of SEC commissioners EXCEPT: A) each commissioner holds the office for a term of 5 years B) there are 5 SEC Commissioners appointed by the President of the United States with the consent of the Senate C) commissioners are not permitted to engage in any other business or employment D) commissioners are permitted to engage in securities transactions as long as they are publicly disclosed
D) commissioners are permitted to engage in securities transactions as long as they are publicly disclosed The SEC has 5 commissioners appointed by the President of the United States, with the advice and consent of the Senate. Each commissioner is appointed for a term of 5 years. No more than 3 Commissioners can be from 1 political party. During his or her term, each Commissioner cannot have any another job; and cannot effect securities transactions (whether disclosed or not!).
EXCLUDED from the definition of an investment adviser under the Investment Advisers Act of 1940:
Excluded from the definition of an investment adviser under the Investment Advisers Act of 1940 are lawyers, accountants, engineers and teachers, whose performance of advisory services is incidental to their regular professional practice; and who do not charge separately for advice.
If a person accumulates a 5% or greater holding in a publicly held company with the intention of being a passive investor:
Form 13g must be filed within 45 calendar days of year end Anyone who accumulates a 5% position in one company and intends to remain a passive investor must make a 13g filing with the SEC within 45 calendar days of year-end.
An investment adviser has decided to change its fee structure and will begin charging a prepaid advisory fee for new clients, but will keep its pre-existing fee structure for its existing clients. Under the requirements of the Investment Advisers Act of 1940, which statements are TRUE? I A revised brochure must be provided to new clients II Prompt amendment of Form ADV filed with the SEC is required III Approval of the investment adviser's existing clients must be obtained IV Filing with the SEC of the fee change must be completed within 30 days
I A revised brochure must be provided to new clients II Prompt amendment of Form ADV filed with the SEC is required Since this fee change only affects new clients, there is no requirement to get existing client approval (Choice III). This is a material fee change, so the Form ADV filed with the SEC must be amended promptly and a copy of the Adviser's balance sheet is now required (non-material changes are dealt with by filing a year-end amendment with the SEC within 90 days of fiscal year end).
Investment advisersthat have separate broker-dealer entities are permitted to accept which of the following compensation items? I Fixed annual fees II Fees based on a percentage of assets under management III Commissions based on trades IV Fees based on the capital appreciation of the securities in the portfolio
I Fixed annual fees II Fees based on a percentage of assets under management III Commissions based on trades Investment advisers cannot accept fees based on performance unless the client has at least $1,000,000 of assets under management or a $2,100,000 net worth. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.) 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.
Which of the following is (are) defined as "affiliated persons" under the Investment Company Act of 1940? I Officer of the management company II Employee of the management company III A 5% holder of the management company's shares
I Officer of the management company II Employee of the management company III A 5% holder of the management company's shares An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company. The Board of Directors of a management company cannot consist of more than 60% of these affiliated persons. Other persons that the fund compensates, such as accountants and lawyers for the fund, are termed "interested" persons.
generally considered to be investment advisers under Federal law:
IA-1092 essentially defines financial planners; and specifically defines pension consultants; as investment advisers that must register. In addition, investment newsletters can be defined as an investment adviser that must register under Federal law if they make recommendations of securities (The SEC keeps attempting to get these newsletters to register as IAs; and they keep resisting). Of the choices given, the one least likely to be considered to be an investment adviser is a "market newsletter" - which would typically make general market predictions; as opposed to making specific investment recommendations.
The Securities Act of 1933: I prevents fraud in the sale of new issue securities to the public II prevents fraud in the trading of securities in the secondary market III provisions apply to non-exempt securities only
I prevents fraud in the sale of new issue securities to the public III provisions apply to non-exempt securities only The Securities Act of 1933 regulates the primary (new issue) market. It requires non-exempt new issues to be registered with the SEC and sold with a prospectus that gives full disclosure to investors. The Act states that "omissions or misstatements of material fact in a registration statement or prospectus are fraud." Exempt securities such as Treasuries and Municipals are exempt from the provisions of this Act.
Under the provisions of the Investment Advisers Act of 1940, which statements are TRUE about sending account statements to customers? I Account statements must be sent monthly by advisers that take custody of customer funds or securities II Account statements must be sent quarterly by advisers that take custody of customer funds or securities III Account statements must be sent quarterly by advisers that do not take custody of customer funds or securities IV There is no account statement mailing rule for advisers that do not take custody of customer funds or securities
II Account statements must be sent quarterly by advisers that take custody of customer funds or securities IV There is no account statement mailing rule for advisers that do not take custody of customer funds or securities The Investment Advisers Act of 1940 requires that if an adviser takes custody of customer funds or securities, account statements must be sent to the customer by the adviser at least quarterly. There is no such rule for advisers that do not take custody.
The term "loan value" when applied to equity securities, is the: I percentage of the purchase price that must be deposited when the securities are bought II percentage of the purchase price that can be borrowed when securities are bought III reciprocal of the Regulation T requirement IV complement of the Regulation T requirement
II percentage of the purchase price that can be borrowed when securities are bought IV complement of the Regulation T requirement The "loan value" of a security is the amount that may be borrowed against the position under the margin rules as set forth under Regulation T of the Federal Reserve for non-exempt securities. For example, if a security has a Regulation T requirement of 60%, then its loan value is 40%. If a security has a Regulation T requirement of 50%, then its loan value is 50%. The "loan value" is the "complement" of the Regulation T requirement. The complement of a fraction is the remaining fraction that makes both add to "1". (The reciprocal is "1" divided by the fraction.)
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
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 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.
requirements for: Under the Investment Advisers Act of 1940, if an investment adviserwishes to effect an agency cross transactionfor a customer
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 monthly statements to customers.
Mutual funds must send their financial statements to shareholders:
semi - annually Mutual funds send their financial statements to shareholders semi-annually.
Under the Securities Exchange Act of 1934, the SEC can suspend trading in the securities markets if it gives prior notice to the: CEOs of the companies traded on the securities markets United States Senate United States Congress President of the United States
President of the United States Under the Securities Exchange Act of 1934, the SEC can suspend trading in the securities markets if it gives prior notice to the President of the United States of this action; and if the President does not disagree with this action.
All of the following must register with the SEC as an investment company under the Investment Company Act of 1940 EXCEPT: Management Companies Face Amount Certificate Companies Unit Investment Trusts Real Estate Investment Trusts
Real Estate Investment Trusts The Investment Company Act of 1940 requires that investment companies (management companies, unit investment trusts and face amount certificate companies) register with the SEC.
Rule 147 offerings under the Securities Act of 1933 are exempt from: SEC registration State registration Both of the above Neither of the above
SEC registration Rule 147 under the Securities Act of 1933 exempts intrastate offerings from SEC registration - since the transaction never crosses a State line, the SEC does not have jurisdiction. However, such an offering must still be registered in that State.
Licensing of investment adviser representatives occurs at the: State level only Federal level only Both the Federal and State level Neither the Federal nor State level
State level only Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. *Note that the SEC registers the investment adviser only - it does not register investment adviser representatives*. The smaller advisers are only required to be registered at the State level. However, the State can require registration of investment adviser representatives for any investment adviser firm.
Under the Investment Advisers Act of 1940, a person is "in the business" of giving investment advice if he or she is:
To be "in the business" of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice. Investment advice includes recommendations, analyses, or reports about specific securities or specific categories.
requirements for solicitor's brochure (1940):
Under the Investment Advisers Act of 1940, the solicitor's brochure must be separate from the investment adviser's brochure - they cannot be combined. The solicitor's brochure must disclose the specific dollar fee, or percentage of advisory fee paid by the customer, that the solicitor will earn for referring the customer. It must disclose that the solicitor will be compensated for referring the client to the investment adviser and the customer must sign and date an acknowledgment that he or she received the solicitor's brochure (and the adviser's brochure).
13D report:
a report filed with the SEC by anyone who accumulates a 5% or greater holding in a publicly traded company, this is a public announcement that this person may intend to exercise "*control*" over the corporation, or may attempt to take over the company.
13F report:
a report filed with the SEC by investment managers who exercise discretion over the accounts of customers who collectively hold $100,000,000 or more of equity securities. The 13F must be filed within 45 days of the quarter ending where the $100,000,000 dollar limit was reached.
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.
Under SEC Release IA-1092, which of the following are considered to be compensation to an investment adviser? I Prepaid advisory fees that will be refunded in part if the contract is canceled II Hourly advisory fees III Fixed advisory fees IV Commissions received on transactions that result from the implementation of a financial plan created for "free" by the adviser
all "Compensation" to an investment adviser can basically be received in any form - it includes fixed fees, hourly fees, fees based upon assets under management, prepaid fees; and any compensation received from anyone else in connection with that investment advice.
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
all 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 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 III Showing a selected list of past recommendations IV Showing future performance
all All of the items listed are prohibited in investment adviser advertising. Offers of free services must really be free; testimonials are prohibited; 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.
13G report:
an annual report filed with the SEC by anyone who acquires a 5% or greater holding in a publicly traded company and intends to remain a *passive investor*. The report is due within 45 days of year end.
If the SEC suspends or revokes the registration of an investment adviser registered under the Investment Advisers Act of 1940: the action is binding and non-appealable the adviser can take the case to binding arbitration an appeal may be filed with the State Administratorwithin 60 days an appeal may be filed in Federal Court within 60 days
an appeal may be filed in Federal Court within 60 days 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*.
Management companies are permitted to: buy securities on margin sell securities short borrow from banks lend monies to shareholders
borrow from banks Management companies may borrow up to 1/3 of their total net assets from a bank. However, they cannot buy securities on margin; cannot lend monies to shareholders; and cannot sell securities short (which requires margin to do so).
The "Brochure Rule" applies to: oral advisory contracts only written advisory contracts only discretionary advisory contracts only both oral and written advisory contracts
both oral and written advisory contracts The SEC states that the Brochure Rule applies to both oral and written advisory contracts. Note that this does conflict with the Investment Adviser Act of 1940's requirement that advisory contracts be in writing; but this is a later rule, written by someone who wanted the broadest interpretation possible.
Indication of interest:
during the 20-day "cooling off" period for a new non-exempt securities issue that is in registration under the Securities Act of 1933, orders to buy the issue cannot be solicited; however, underwriters are permitted to accept non-binding indications of interest from customers to get an idea of investor interest in the securities.
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?
existing customer 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.
Delivery of the investor brochure under the brochure rule can be satisfied by giving the customer a copy of the investment adviser's Form:
form ADV part 2A 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) at, or prior to, entering into a contract to provide advisory services. The ADV Part I gives basic information about the adviser. Part 2A describes the adviser's business, services rendered, fees charged, investment philosophy, number of clients, assets under management, conflicts, etc. Part 2B gives the educational background and work history of the key personnel who set investment strategy or manage accounts. Before the National Securities Markets Improvement Act of 1996, the investment adviser had to file an ADV-S (Subsequent year) with the SEC to renew its registration. Now, the Schedule 1 of Form ADV must be filed for the investment adviser to renew its registration. The Form ADV-W is used to withdraw from registration.
A publicly held corporation has 100,000,000 shares outstanding. A wealthy investor that buys 8,000,000 shares of the company as a passive investor: must file a 13d report with the SEC must file a 13g report with the SEC must file a 13f report with the SEC is not required to file a report with the SEC
must file a 13g report with the SEC If a 5% or greater holding is accumulated in a publicly held company, and the purchaser does not intend to exercise control over that company (that is, will be a passive investor), then a 13g filing is made with the SEC. If the purchaser intends to exercise control, then a 13d filing is made.
An investment adviser that is registered with the SEC under the Investment Advisers Act of 1940 moves to a new location. An amendment to Form ADV MUST be filed with the SEC: promptly within 1 day within 30 days within 90 days
promptly A new address for an investment adviser would require a prompt amendment of the Form ADV filed with the SEC (remember, the SEC wants to know who you are and where you can be found at all times). 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."
The Securities Act of 1933 was enacted to: provide full and fair disclosure in new issue offerings prevent manipulation and fraud in the secondary market require registration of securities and exchanges with each State require registration of individuals associated with broker-dealers in each State
provide full and fair disclosure in new issue offerings The Securities Act of 1933 is the Federal law that regulates the issuance of new securities. The Securities Exchange Act of 1934 is Federal legislation aimed at preventing manipulation and fraud in the secondary (trading) market. State securities laws are established by the Uniform Securities Act.
All of the following are disclosed in Form ADV Part 2A EXCEPT: investment policies of the adviser type of investments made by the adviser investment practices of the adviser states in which the adviser is registered
states in which the adviser is registered The Form ADV Part 2 is broken down into Part 2A, which details the adviser's business, analytic methods, types of clients, assets under management, fees, conflicts of interest, etc. Part 2A must include a balance sheet of the firm if it will take custody of customer funds or securities; or will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. This is the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract. Part 2B is the "Brochure Supplement" that must be delivered to new customers at the same time as Part 2A. Part 2B details the educational and work background of the key personnel who set investment strategy or manage accounts. The ADV Part 1 is the basic registration information filed with the SEC - such as name of firm, address, phone number, officers, shareholders, States where the adviser is registered, etc.
Cooling off period:
the 20-day period following the filing of a registration statement with the SEC for a new non-exempt securities offering. During the "cooling off" period, the issue cannot be sold, advertised, recommended; nor can orders to buy the issue be solicited from customers. During the "cooling off" period, the SEC reviews the filing for "full and fair disclosure."
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 by filing an electronic amendment to Form ADV Part 1 and Part 2, if there are any changes to the Brochure 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.
All of the following are included in the Form ADV filed with the SEC under the Investment Advisers Act of 1940 EXCEPT a list of the: A) officers of the advisory firm B) shareholders of the advisory firm C) customers of the advisory firm D) States in which the advisory firm is registered
C) customers of the advisory firm The Form ADV Part 1 filed with the SEC includes the officers of the firm, the States in which the firm is registered, and if the firm is a partnership, a schedule of the partners' names is included; while if the firm is a stock company (privately held) a schedule of the shareholders is included. There is no listing of the customers of the adviser in the Form ADV. Note, however, the Part 2A, which constitutes the "Brochure" does include the type and approximate number of customers and the approximate value of assets under management.
Under the Investment Advisers Act of 1940, all of the following are requirements for a family office to be excluded from the definition of an Investment Adviser EXCEPT: A) The family office must only provide investment advice to clients who are part of that family B) The family office must be wholly owned by family clients and exclusively controlled by family members or entities C) The family office cannot hold itself out as an investment adviser D) The family office must have less than $100 million of assets under management
D) The family office must have less than $100 million of assets under management 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. The Investment Advisers Act includes a rule that details when these "family offices" will be excluded from the definition of an Investment Adviser, so no SEC registration is required. Under SEC Rule 202(a)(11)(G)-1 (the "Family Office Rule"), there are 3 basic requirements that must be met for the exclusion: The family office must only provide investment advice to clients who are part of that family. The family office must be wholly owned by family clients and exclusively controlled by family members or entities - it cannot be owned or controlled by the key employees (though key employees can make investments). The family office cannot hold itself out as an investment adviser - thus it cannot advertise or market itself to non-family clients. Note that there is no asset size test for this exclusion.
An Investment Adviser (IA) hires a 3rd party to solicit new investors for the IA. The 3rd party is an independent contractor who will be paid a referral fee for each new client. Under NASAA and SEC rules, which statement is TRUE? A) The solicitor is not required to be registered as an Investment Adviser Representative because he or she is not an employee of the Investment Adviser B) The solicitor is not required to be registered as an Investment Adviser Representative because he or she is receiving referral fees only C) The solicitor must be registered as an Investment Adviser Representative but is under no obligation to disclose the nature of the relationship between the solicitor and the Investment Adviser D) The solicitor must be registered as an Investment Adviser Representative and is obligated to disclose the nature of the relationship between the solicitor and the Investment Adviser
D) The solicitor must be registered as an Investment Adviser Representative and is obligated to disclose the nature of the relationship between the solicitor and the Investment Adviser Both NASAA and the SEC require that solicitors for Investment Advisers be registered as Investment Adviser Representatives. The registration of IARs occurs in the State for both IARs of State-registered and Federal covered advisers. It makes no difference if the solicitor is an employee or independent contractor - he or she must be registered. Furthermore, the solicitor 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.
All of the following statements are true regarding an investment adviser wishing to take custody of client funds or securities EXCEPT: A) Form ADV Part 2A must be provided to the customer B) the investment adviser must be audited, on a surprise basis, at least annually C) customers must receive account statements at least quarterly D) prior permission from the SEC must be obtained
D) prior permission from the SEC must be obtained If an investment adviser wishes to take custody of client funds or securities, Part 2A of Form ADV (which is given to customers as a disclosure document) must be provided to the customer. All customer funds must be maintained in a bank account or securities account that is separate from the adviser's personal accounts. Customers must receive notification of the name and location where the funds and securities are being held. Customers must receive account statements at least quarterly. Finally, the adviser must be audited, on a surprise basis, at least annually - with a copy of the audit report filed with the SEC. Note, however, that there is no requirement for prior permission of the SEC for an adviser to take custody of customer funds or securities.
Under the Investment Advisers Act of 1940, all of the following are defined as "investment advisers" EXCEPT a firm that prepares: A) research reports about the NYSE market B) research reports about the municipal securities market C) asset allocationreports covering securities, real estate, commodity and insurance investments D) reports on the outlook for the U.S. economy
D) reports on the outlook for the U.S. economy 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.
Under the Securities Act of 1933, which statements are TRUE regarding a Regulation D private placement exemption? I Advertising is permitted II Advertising is not permitted III Commissions can be received in connection with the offering IV Commissions cannot be received in connection with the offering
II Advertising is not permitted III Commissions can be received in connection with the offering Regulation D permits an exemption from registration for private placements with the SEC under the Securities Act of 1933. To qualify for the exemption, the securities cannot be sold to more than 35 "non-accredited" investors; and they may be sold to an unlimited number of accredited investors. No advertising is permitted, since this would be considered to be a "public" offer of these securities, which would then require registration with the SEC. (Note that an exception to the "no advertising" prohibition is given if an offering is only made to accredited investors - however, this is not mentioned in the question and cannot be assumed.) The State law private placement exemption under the Uniform Securities Act is quite different. It permits an exemption from State registration if the securities are offered to no more than 10 investors; and no commissions or other compensation may be received in connection with the offering. There is no such limitation under Federal law for private placements.
A broker-dealer MUST maintain physical possession of which of the following? I Fully paid customer securities II Customer securities that are collateral for a margin loan III Securities held as collateral for derivative trading components IV Bearer bonds that have remaining interest coupons attached
II Customer securities that are collateral for a margin loan III Securities held as collateral for derivative trading components When securities are purchased for a customer by a broker-dealer, they can be held in custody of the broker-dealer (or the broker-dealer's clearing firm); or they can be held by a custodian bank; or they can be transferred and shipped to the customer (some customers still want to put physical certificates under their mattresses!) However, if a customer buys a derivative security (such as a CMO created from underlying mortgage backed pass through securities), he or she cannot get the underlying physical security - it must be held in custody. Finally, customer securities held as collateral for a margin loan must remain in custody since the broker-dealer retains the right to keep those securities if the customer does not repay the debit balance. Finally, bearer bonds can be shipped to the customer, just like any other physical security - as long as they are fully paid.
Which of the following statements are TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering? I The indication is binding on the customer II The indication is not binding on the customer III The indication is binding on the underwriter IV The indication is not binding on the underwriter
II The indication is not binding on the customer IV The indication is not binding on the underwriter An indication of interest is taken during the 20 day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These are not binding because the issue cannot be legally "offered or sold" until the effective date.
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
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 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.
Under SEC Investment Adviser Release 1092, which of the following statements are TRUE about the "in the business" test? I To be considered to be "in the business," giving advice about securities must be the principal business of the firm II To be considered to be "in the business," giving advice about securities must occur with regularity at the firm III A person who gives isolated, non-periodic advice is considered to be "in the business" IV A person who gives isolated, non-periodic advice is not considered to be "in the business"
II To be considered to be "in the business," giving advice about securities must occur with regularity at the firm IV A person who gives isolated, non-periodic advice is not considered to be "in the business" To be considered to be "in the business" under IA-1092, giving advice must be performed regularly; but does not have to be the principal business of the advisory firm. A person who gives isolated, non-periodic advice about securities is not defined as being "in the business."
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
II an audited balance sheet must be filed with the SEC along with Form ADV Part 2 III promptly 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.
An investment adviseris considered to be "in the business" of rendering investment advice under SEC Release IA-1092 if: advice is rendered on non-exempt securities giving advice on securities is one of the businesses of the firm the firm advertises its services the firm prepares economic reports or analyses
the firm advertises its services An investment adviser is considered to be "in the business" if it advertises itself as an investment adviser; or if giving advice about securities for compensation is a regular business of the firm. It makes no difference if the advice is rendered on exempt or non-exempt securities (*with the 1 exception that an adviser who solely gives advice about U.S. Government guaranteed securities is excluded from the definition of an adviser under the Investment Advisers Act of 1940, but not under the Uniform Securities Act*).
