Unit 6 Test
**Which two of the following statements accurately describes the time limits for investment adviser documents? I. Filing of the annual updating amendment to the Form ADV with the appropriate regulatory body is within 90 days of the end of the adviser's fiscal year II. Filing of the annual updating amendment to the Form ADV with the appropriate regulatory body is within 120 days of the end of the adviser's fiscal year III. Delivery of the investment adviser's brochure to the customer is due within 90 days of the end of the adviser's fiscal year IV. Delivery of the investment adviser's brochure to the customer is due within 120 days of the end of the adviser's fiscal year A. I and III B. I and IV C. II and III D II and III
***Answer: B. The investment adviser must get its paperwork into the state (or SEC) prior to the end of the 90 day period. (must file annual updating amendment to SEC within 90 days of the end of the advisers fiscal year) The Investment Adviser has another 30 days to get the information into the brochure to be sent to the clients. (must deliver the brochure to customer within 120 days of the end of the advisers fiscal year)
*** According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT A) whether or not the contract grants discretionary authority B) the amount of prepaid fee to be returned if the contract is terminated C) that assignment of the contract cannot occur without client consent D) any record of securities industry violations by the investment adviser
***D An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. **The investment advisory contract must include the amount of prepaid fee to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority.
Unless an exemption applies, under the Investment Advisers Act of 1940, an investment adviser is required to A) furnish an audited balance sheet each year to customers for whom the advisor maintains custody B) maintain a bond for an amount based on the assets under management C) provide each advisory client with a brochure or a summary of material changes within 120 days of the end of its fiscal year D) furnish a statement of the total dollar amounts of securities bought and sold each year to customers
**C Unless an exemption applies (the client is an investment company or the adviser is providing impersonal advisory services costing less than $500 per year), SEC rules require that a brochure containing summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. The summary itself may be sent with instructions as to how to receive the entire brochure if the client desires. If there are no material changes, a brochure does not have to be sent. Under federal law, the balance sheet is only required when the IA requires or charges a substantial prepayment of fees (it is only state registered advisers who must supply balances sheets when maintaining custody). Bonding requirements apply only to state registered investment advisers.
An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the Uniform Securities Act, A) the agent is describing a guaranteed security B) a guaranteed security only guarantees payment of interest or dividends C) agents should always recommend securities that are familiar to the investor D) the agent is possibly committing fraud
A A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee.
The agreement between an investment adviser and client is the advisory contract. To be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they A) must be in writing B) must disclose the amount or method of calculation of the adviser's fee C) generally do not provide for discretion D) typically are renewed on an annual basis
A Although it is not the general practice, the federal law does permit oral contracts, whereas the USA requires that all initial and renewal contracts be in writing.
Nifty Advisers Group made an announcement on its website that the firm was going to create a Facebook account to keep all its clients and prospective clients updated on the market. To get the word out, Nifty sent an email notice to its current clients and asked them to please refrain from airing complaints through that account; any negative comments would be addressed through the normal channels. Also, contained in the email was an announcement that anyone simply clicking like on the company Facebook page would receive a one-time 5% decrease in the client's quarterly fees. For this campaign, which of the following are not true? A) This would not be considered a testimonial and therefore permitted under the regulations. B) Third-party use of the "like" feature on an investment adviser's social media site could be deemed a testimonial. C) "Likes" posted to the personal accounts of IARs are treated the same as those posted to the firm's account. D) The SEC Investment Adviser Marketing Rule permits testimonials, such as a like on the firm's Facebook page as long as certain disclosures are made
A Please note that this question is looking for the statement that is not true—in other words, find the false statement. That rule permits testimonials (a like on a Facebook page is considered a testimonial) as long as certain disclosures are made. One of those disclosures is the receipt of any direct or indirect compensation. The 5% decrease in fees is considered a form of compensation and simply clicking "like" does not give any indication that compensation for the testimonial is being given to the client.
Antonia, a customer of Leroy (an agent of Gibraltar Securities), is considering the purchase of 2,000 shares of Kansas Plains Gas and Electric Company common stock. Antonia has stock in 10 other utilities companies in her portfolio, and this stock trades on the Chicago Stock Exchange (CHX). Leroy tells Antonia that the company has been increasing its dividend for the past 19 years and will surely continue to do so. Which of the following statements best reflects this situation? A) Leroy has acted unethically, misleading Antonia by implying that increased dividend distributions from Kansas Plains Gas and Electric Company are a sure thing. B) Leroy has acted unethically because he made an unsuitable recommendation to Antonia. C) Leroy has acted ethically in recommending the purchase of a stock with a long history of dividends. D) Leroy has acted ethically because he did not guarantee profits or the absence of potential loss to Antonia.
A The agent has acted unethically, misleading the customer by implying that increased dividend distributions from the utility corporation are guaranteed. Given the customer's history of purchasing stock in other utilities, nothing in the question indicates that the trade is unsuitable for the customer.
Under the Investment Advisers Act of 1940, an investment adviser that becomes registered may A) place the abbreviation RIA after its name on their business card B) state on its stationery that it is registered with the SEC C) state in a brochure that its registration is approved by the SEC D) tell a client its qualifications have been approved by the SEC
B It is illegal to imply in any way that the SEC sponsors or approves the adviser.
A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. The terms of the account call for discretionary power to be given for the account and all required forms have been received. In the opinion of the IAR, the purchase of 500 shares of RMBM common stock is an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted A) lawfully in that disclosure of capacity is not necessary when executing trades in managed accounts B) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity C) lawfully in that the disclosure of capacity was made on the confirmation D) unlawfully in that any stock the broker-dealer is a market maker in is probably not suitable for a managed money client
B The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. *any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.*
Which of the following statements is NOT true concerning the wrap fee programs brochure under the Uniform Securities Act? A) The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A. B) It contains a statement that the program will generally cost the client less than purchasing these services separately. C) It lists the services provided under the program, including the types of portfolio management services. D) Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end.
B The wrap fee brochure must contain a statement that the program may cost the client more or less than purchasing these services separately. The brochure must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. *Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end.*
**A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) interest on debit balances in margin accounts B) markups and markdowns on trades done as a principal C) the cost of overnight delivery services D) safekeeping of customer funds and securities
B There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: - commissions; - markups and markdowns; and - advisory fees for those firms that are also registered as investment advisers.
Manhattan Brokerage Associates (MBA) specializes in bringing midwestern companies public. Shortly after underwriting the IPO of a farm equipment manufacturer, MBA publishes a research report that is highly favorable regarding that company's growth potential. Doing so would require MBA to A) obtain permission from the Administrator to issue a report on a new company B) refrain from underwriting any further issues of that company for a period of 2 years C) disclose the potential conflict of interest D) agree to repurchase any shares tendered at the original offering price
C A common industry conflict of interest is underwriting a new issue and then preparing a favorable research report about that company. There is nothing improper about doing so, as long as the potential conflict of interest is disclosed.
An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require A) disclosure of the length of time the charting system has been used B) a graph showing the results of back-testing the system C) a statement as to the limitations of and difficulties involved in using this system D) a display of past performance for at least the most recent 12-month period
C Anytime an adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use.
LinkedIn is a popular social media tool for business people. The nature of the information posted poses risks for investment advisers because of the prohibition against testimonials. A step that advisers should consider taking to minimize the risk of an improper endorsement appearing on their page is A) only allow clients to endorse an adviser for a new skill that does not already appear on the adviser's profile B) only allow clients to endorse an adviser for a skill that is already listed on his profile C) to select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile D) only allow unsolicited recommendations from clients to be shown on the page
C If you do a good job, it is only natural that your clients want to say good things about you. Unfortunately, that can lead to a violation of the rule against testimonials for IAs and IARs. The LinkedIn service allows people to either endorse a listed individual's skills (or add new ones) or post recommendations. Either of these would not be acceptable. The safest thing to do is turn off the ability to endorse skills.
**A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) it would be permissible only if consent was obtained, and written disclosure of the firm's capacity was disclosed prior to execution B) WSWM would be engaging in a prohibited practice C) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction D) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation
C In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the *completion* of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer. (NO CONSENT REQUIRED FOR BDs)
An investment adviser prepares a slick advertising piece containing the relevant information from the firm's Form ADV - Part 2. One of the firm's IARs secures a contract with a new client and presents the brochure at that time. While explaining the terms of their agreement, the IAR mentions that the client may withdraw within the first 48 hours without any penalty. Upon returning to the office, the IAR realizes that he forgot to have the client sign a receipt for the disclosure document. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract. B) there is a violation because the IAR failed to obtain the signed receipt. C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege D) there is no violation as long as the customer signs a waiver agreeing to these terms.
C The problem here is that the client has 5 days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; *or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within 5 business days after entering into the contract.* A signed receipt is not necessary and waivers are never allowed.
Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) directing a securities transaction to an affiliated broker-dealer B) the trade was being executed by an officer or partner of the firm C) engaging in an agency cross transaction D) shares held in the account of an advisory client are purchased by the investment adviser
D There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from the client who owns them places the IA in the position of being 1 of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an agent—that's the reason for the term.
**In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940, this activity requires written A) disclosure to the client B) consent of the client C) consent of and the disclosure to the client prior to execution of the transaction D) disclosure to the client and consent prior to completion of the transaction
D Investment Adviser Consent -The client receives full written disclosure as to the capacity in which the adviser proposes to act. -Client consent is obtained.
Which of the following would NASAA consider to be a substantial prepayment of fees? A) $500 covering the next six months B) $600 covering the next calendar quarter C) $1,000 covering the next month D) $600 covering the entire contract year
D NASAA defines a substantial prepayment of fees to be more than $500 six or more months in advance. A payment of $600 covering a full year qualifies on both points;
***Under the brochure rule of the Investment Advisers Act of 1940 A) each client must be delivered a written disclosure statement no later than 48 hours after signing the contract B) each client must be offered a written disclosure statement at the time of signing the contract C) each client must be offered a written disclosure statement at least 48 hours before signing a contract D) each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services
D No agreement between an investment adviser and a client may commence without delivery of the adviser's brochure. ADV Delivery Rules: Federal covered investment Adviser - must deliver to each client, a copy of the most recent ADV Part 2A no later than at the time of entering into the advisory agreement. (state-registered adviser - requirement to deliver the brochure at least 48 hours in advance, unless the contract calls for a penalty-free termination)
Under the Uniform Securities Act, an agent may NOT make which of the following statements to a customer? A) This security is not registered with the Administrator. B) This security is registered with the state. C) This security is exempt from registration. D) This security is approved by the Administrator.
D The state Administrator does not approve any security.
