Chapter 4 - Flashcards - 55%

According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is:

10 or fewer An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising. (89056)

A multi-state adviser must file a Form ADV-W to withdraw from federal registration if the number of states in which it is required to register is less than:

15 A person, who is required to register as an investment adviser based on the laws of 15 or mores states, is considered a multi-state adviser and, therefore, must register with the SEC. If the number of states in which the adviser is required to register falls below 15, the adviser is required to file Form ADV-W indicating a partial withdrawal at the time of filing its annual updating amendments. (63127)

Which of the following investment advisers would most likely NOT be required to register with the Administrator?

A firm that provides advice on fixed annuities Investment advisers provide securities-related investment advice. A fixed annuity is not considered a security by state Administrators. Since the firm is not considered to be providing securities-related advice, it would be exempt from the definition of an investment adviser. (67536)

Which of the following firms would be required to register as an investment adviser in the state of Utah?

A firm with $90 million in assets under management and an office in Utah that deals exclusively with four small institutional customers. Advisers are not required to register as investment advisers in a state if they have no office in the given state and deal only with institutions in the state or send communications to five or fewer non-institutional customers in the state within a 12-month period. If a firm has a place of business in a state, but has assets under management (AUM) between $100 million and $110 million, it can choose to register with the either the state Administrator OR the SEC. If a firm has a place of business in a state and has AUM of less than $100 million, it must register with the state. Lastly, if a firm has AUM of more than $110 million, it must register with the SEC. These large advisers are referred to as federal covered investment advisers and are not required to register in any state. (32430)

Every investment advisory contract must be in writing and it must include which of the following provisions?

A statement that defines the length of time for which the services are contracted. An investment adviser's contract must be in writing and clearly disclose the specific length of time that it is in force. Provided customer consent is obtained, advisory contracts may be assigned to another advisory firm. Advisory contracts may not include a clause which attempts to limit an adviser's liability. Also, an adviser is prohibited from sharing in a client's capital gains unless the client is qualified and meets specific financial criteria. (67615)

Under the Uniform Securities Act, which of the following is exempt from the definition of an investment adviser?

A trust company that provides investment advice to trust clients for a fee. Under the Uniform Securities Act, a trust company is exempt from the definition of an investment adviser. The other persons that are exempt from the definition include: *Banks and/or savings institutions *Lawyers, accountants, teachers, and engineers (remember L,A,T,E) whose advice is incidental to their profession *Broker-dealers whose advisory services are incidental to their business *Bona fide publishers *Federal covered advisers *Any other person that is designated by the Administrator A firm that provides advice about securities (even if they are municipal bonds) for a fee is considered an investment adviser. (32512)

Under the Investment Advisers Act, which of the following forms must be filed if an investment adviser has custody of customer funds and securities?

ADV-E Submission of Form ADV-E with the SEC is required if the adviser has custody of client funds and securities. The form is filed by an independent public accountant hired by the adviser who has audited the adviser's records. Form ADV-H is filed by an adviser seeking an exemption for a temporary or continuing hardship. Form ADV-NR is filed by a nonresident general partner or nonresident managing agent of a U.S. registered investment adviser. Form ADV-W is filed by an adviser that is either seeking a partial or full withdrawal from registration. (62547)

Klearkettle Associates is a registered investment adviser in Delaware. Due to the retirement of the firm's senior partner and namesake, Horace Klearkettle, the firm decides to close it doors permanently, effective Thanksgiving weekend. What is the status of the registrations of Klearkettle's IA representatives upon the firm's closing?

All registrations will be ineffective upon the closing of the firm. Investment adviser representative registrations only remain in force as long as the IA representative is affiliated with a firm that has a current registration. An agent is not permitted to act independently if her firm goes out of business. (62666)

According to the Uniform Securities Act, which of the following investment adviser representatives (IARs) is considered to have custody of customer funds?

An IAR who has been hired by a customer to act as the trustee for the customer's account. Trustees are responsible for the care, custody, and control of the assets of another person. An IAR who acts as a trustee has check-writing privileges in his customer's account and is considered to have custody of the customer's assets. If an IAR receives a customer check that's made payable to a third party, he avoids any custody issues by returning it to the customer within three business days. Simply having discretionary authority to make investment decisions (i.e., having limited discretion) does not meet the threshold for custody. (32472)

Which of the following investment advisers is subject to registration with the SEC?

An Internet investment adviser If an investment adviser provides advice to clients exclusively through an interactive website based on information that has been submitted by its clients, the adviser is considered an Internet investment adviser and is subject to SEC registration. Additionally, the IA must maintain a record which demonstrates that the advice was exclusively provided through the interactive website. Advisers that are required to register in fewer than 15 states and hedge fund advisers that manage less than $150 million in assets are required to register with the Administrator, not the SEC. A newly formed investment adviser is permitted to register with the SEC as long as it meets the eligibility requirements within 120 days of its formation, not within 120 days of its second anniversary. (89084)

Which of the following investment advisers is subject to registration with the SEC?

An Internet investment adviser. If an investment adviser provides advice to clients exclusively through an interactive website based on information that has been submitted by its clients, the adviser is considered an Internet investment adviser and is subject to SEC registration. Additionally, the IA must maintain a record which demonstrates that the advice was exclusively provided through the interactive website. Advisers that are required to register in fewer than 15 states and hedge fund advisers that manage less than $150 million in assets are required to register with the Administrator, not the SEC. A newly formed investment adviser is permitted to register with the SEC as long as it meets the eligibility requirements within 120 days of its formation, not within 120 days of its second anniversary. (89084)

Which of the following choices is TRUE regarding performance-based fees under the Investment Advisers Act of 1940?

An adviser may charge a performance-based fee to qualified clients. Under the Investment Advisers Act of 1940, advisers may charge a performance-based fee to "qualified clients." A qualifed client is one with at least $1 million under management with the adviser OR a net worth of more than $2.1 million. Performance-based fees MAY also be charged to non-U.S. residents, registered investment companies, and "qualified purchasers." A qualified purchaser is a person who owns not less than $5 million in investments. (89441)

If an adviser has custody of customer funds and securities, the submission of Form ADV-E must be performed by:

An independent accountant within 120 days after the completion of an audit. Submission of Form ADV-E with the SEC is required if the adviser has custody of client funds and securities. The form must be filed by an independent accountant, not the adviser, within 120 days after the completion of the audit. (79297)

Under the USA, which of the following entities could be considered an investment adviser?

An insurance company. Under the Uniform Securities Act, banks, trust companies, and saving institutions are specifically exempt from the definition of investment adviser. There is no specific exemption for insurance companies. (62559)

For disclosure purposes on Form ADV, a felony (as compared to a misdemeanor) is defined by all of the following choices, EXCEPT:

An offense that's punishable by a fine of at least $500. All the choices are considered felonies, except an offense that's punishable by a fine of at least $500. A felony is an offense that's punishable by a prison sentence of at least one year and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial or an offense that's punishable by a prison sentence of less than one year and/or a fine of less than $1,000. (32474)

The Administrator may require the filing of advertisements related to which of the following securities?

An oil lease certificate of interest A certificate of interest is a security regulated by the Administrator along with its advertising. Advertisements sent to existing stockholders, as well as those related to investments issued by an insurance company, are exempt from filing. Also, mutual fund advertising is regulated by FINRA, not by a state Administrator. (67485)

Under the Investment Advisers Act, the form that is filed annually with the SEC and determines an adviser's continued eligibility for federal registration is called:

Annual Updating Amendment. The Annual Updating Amendment is submitted to confirm that an SEC registered investment adviser is still eligible for federal registration. The form must be filed within 90 days after the end of the adviser's fiscal year. (62394)

All of the following would be considered an investment adviser representative under the Uniform Securities Act, EXCEPT a(n):

Broker-dealer offering wrap accounts to its clients. An investment adviser representative is any person who is associated with an investment adviser and makes recommendations, manages accounts, provides advice, solicits advisory services, negotiates the sale of advisory services, or supervises persons engaged in these activities. A broker-dealer offering wrap accounts would be considered an investment adviser, not an investment adviser representative. (62453)

Under the Uniform Securities Act, an IA would MOST LIKELY need to be registered in a state if it has no place of business in the state but its:

Clients are all considered accredited investors. If an IA has no place of business in a state, it would only be required to register in that state if it provides advisory services or directs business communications to more than five noninstitutional (individual) clients there. If an advisory firm is state-regulated and has a large number of accredited investors in a state, it will most likely be required to register in that state. Remember, the Uniform Securities Act does not recognize accredited investors as institutional investors. (67628)

Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE?

Clients must receive a statement at least annually that discloses certain details of the funds held by the firm. Client account statements are sent on a quarterly basis and must include the amount of funds in the firm's possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided. (67660)

If an IA or any advisory affiliate pleads nolo contendere to a felony that was committed in a foreign jurisdiction, this action is:

Disclosed to clients on Form ADV Part 2 An investment adviser is required to provide clients with disclosure of certain disciplinary events on Form ADV Part 2 and then must complete a Disclosure Reporting Page (DRP) to provide details regarding the event. DRPs are sections of three different regulatory forms that are used in the financial industry to provide information to the public and/or to regulators about specific criminal, regulatory, and civil actions. Any felony or misdemeanor charges or convictions against an IA must be reported on a Criminal Action DRP. For any actions that are taken by the SEC, state, or a foreign financial regulatory authority, reporting is done on a Regulatory Action DRP. For proceedings in a civil court, reporting is done on a Civil Judicial DRP. (89098)

In reference to storing customer books and records, an adviser is permitted to store records on:

Disks, provided the information cannot be altered. Books and records must be maintained in an easily accessible place for five years. During the first two years, the records must be maintained in an appropriate office of the investment adviser. Records may be preserved on microfilm, microfiche, or any similar device. They may also be kept on various electronic storage media such as CD-ROMs, provided the disks are tamper-evident (write once read many). This means that any attempt to alter the records would become obvious and easily determined upon examination. These files do not need to be password-protected, but the adviser must be able to limit access to the records to authorized personnel and regulators.

An advisory firm has 30 individuals who are registered as IARs. What record is the investment adviser required to keep in regard to its IARs?

Form U4 for each IAR Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, an IA is required to maintain all documents which are filed with the state and/or federal regulators that relate to the firm and its IARs (e.g., Form U4, amendments, and renewal filings). IARs are not required to obtain fingerprints from law enforcement. (32510)

According to the Uniform Securities Act, the Administrator may require federal covered advisers to:

Give notice or notice file in any state where they transact business with six or more individual retail clients. The Administrator may require federal covered investment advisers to notice file if they transact business with more than five noninstitutional clients over a 12-month period. Notice filing is not a form of registration. Instead, it is the process of a federal covered adviser sharing information with the Administrator that it has filed with the SEC. (67640)

Under the Uniform Securities Act, which of the following activities of an investment adviser would constitute impersonal advisory services?

Giving a client a list of mutual funds with the lowest expense ratios for the past five years. Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not render an opinion of the investment merits of a particular security. (62037)

According to the Uniform Securities Act, an entity can avoid meeting the definition of a broker-dealer if it: 1) Has no office in the state 2) Only deals with institutional clients 3) Does not hold customer funds or securities

I and II only If a broker-dealer has no office in a state and effects transactions only with institutional clients, it would be exempt from the definition of a broker-dealer. An institutional broker-dealer cannot qualify for this exemption if it has an office in the state, even if it avoids holding customer funds and securities. (62990)

All of the following choices are maintained for five years by an IA, EXCEPT: 1. Partnership agreements 2. Articles of incorporation 3. A copy of audited financial statements 4. Written complaints 5. A copy of a solicitor's written disclosure documents

I and II only Partnership agreements, articles of incorporation, minute books from board meetings, and stock certificate books are preserved for the life of the firm and for at least three years after termination of the firm. All other records are retained for five years. (62834)

Under the Uniform Securities Act, an individual applying for an investment adviser representative registration may be required by the Administrator to: 1) Pass an examination 2) Pay a filing fee 3) Maintain a minimum net capital

I and II only When an individual applies for an investment adviser representative registration, the Administrator may require the individual to pass an examination (which may be oral, written, or both) and pay a filing fee. Investment advisers and broker-dealers may be required to maintain a minimum net capital in addition to meeting the two previously mentioned requirements. (62988)

The Administrator of the state of Wisconsin has designated the Investment Adviser Registration Depository (IARD) as the approved method for filing registration applications in that state. All filings must be done electronically through the IARD. Under which TWO conditions would an investment adviser requesting an application in Wisconsin NOT need to file electronically with the IARD? 1) The IARD is not able to recognize the form that is filed. 2) The application is not filed during normal business hours. 3) The investment adviser claims a hardship exemption from filing. 4) The firm has not previously filed a Form ADV.

I and III In states where the Administrator has designated the IARD as the method for filing registration applications electronically, two exemptions are available. The exemptions are given in cases where the form that is filed cannot be accepted by the IARD and for hardships incurred through unexpected technical difficulties in filing. In such cases the investment adviser may file a manual application. (62008)

If an investment advisory firm decides to increase its fees for all new business, which of the following steps must it take to properly disclose its new fees? 1) Change its brochure to reflect the new fee schedule 2) Deliver a copy of its brochure with the new fee schedule to all current clients 3) Deliver a copy of its brochure with the new fee schedule to all new clients 4) Continue to use the current brochure while it awaits the Administrator's approval

I and III only If an investment adviser changes its fee schedule, it is considered a material change and it must update its Form ADV Part 2 to reflect the new fees. Many IAs use Form ADV Part 2 as the disclosure document that they provide to their clients. After the update is made, the revised brochure must be provided to all new clients; however, the firm is not required to deliver the brochure to current clients. (Note: investment advisers must offer to deliver their disclosure brochures to all of their clients annually.) If an IA changes its fee schedule, it is considered a material change and the firm must amend its Form ADV Part 2. (89080)

According to the NASAA Recordkeeping Rule, which of the following documents must be retained in a file by an investment adviser? 1) Correspondence 2) Photos of all employees 3) The registration applications of its IARs 4) Employment applications

I and III only NASAA's Recordkeeping Requirements for investment advisers include the retention of all documents that are filed with either the state or federal regulators regarding the adviser and its representatives. Some of the required documents are registration applications, amendments, renewal filings, and correspondence. However, there is no retention requirement for employee photos and employment applications. (89041)

Under the Investment Advisers Act, records that MUST be maintained by an investment adviser include: 1) All checkbooks, bank statements, and cancelled checks 2) A record of the personal securities transactions of the adviser and its employees 3) Copies of all circulars, advertisements, and newspaper articles sent to ten or more persons

I, II, and III The Investment Advisers Act specifies which records an adviser must keep and maintain. All of the choices listed are required. (62078)

Under the Uniform Securities Act, an Administrator who requires the posting of a surety bond MAY: 1) Accept cash 2) Accept securities 3) Use discretion as to whether the type of securities and the amount of the deposit are appropriate 4) Disallow the deposit of cash or securities instead of a bond

I, II, and III only The state Administrator may accept a deposit of cash or securities in lieu of a surety bond. The Administrator may determine the type of securities acceptable for deposit but may not altogether disallow deposits of securities in lieu of a bond. (62987)

Moral Financial Planning Services is a small investment adviser whose main office is located in Kennebunkport, Maine. It has two retail clients in Maine and six retail clients that live in Vermont. It also has 10 clients located in New Hampshire (four individuals and six institutions). Its most important client is the Haley Trust Company, which is located in Hyannis Port, Massachusetts. Moral Financial just opened a small satellite office there in order to better service this client. Moral must register as an investment adviser in which of the following states? 1) Maine 2) Massachusetts 3) New Hampshire 4) Vermont

I, II, and IV only Moral must register in Maine and Massachusetts since a firm must register in any state in which it maintains an office regardless of the number of clients it has. Moral must also register in every state in which it has more than five retail clients—it has six retail clients in Vermont. It does not need to register in New Hampshire since only four of its clients there are retail investors—the other six are institutions and the firm does not maintain an office in that state. (79480)

An Administrator receives a written notice indicating that an IA has just violated the net capital rule and is currently below the minimum requirement. Which of the following reports would the Administrator demand? 1) A current balance sheet 2) Contact information for the qualified custodian that handles the clients' funds 3) A client ledger 4) A list of all client-owned securities and nonsegregated funds

I, III, and IV only According to NASAA rules, if an IA violates the net capital rule, the Administrator may require the adviser to provide its balance sheet, client ledger, and a list of all customer-owned securities and nonsegregated funds. However, the Administrator would not require the qualified custodian's name since that information is already disclosed in the investment adviser's Form ADV. (67560)

ABC Investment Adviser is a federal covered adviser and requires its IARs to have an MBA degree before they are able to provide advice to its clients. For any of the firm's IARs who provides advice, in what document(s) must their education be disclosed? 1. ADV Part 1 2. ADV Part 2 3. Schedule E 4. The adviser's brochure

II and IV only If an investment adviser requires a specific level of education or business experience for its IARs to be able to provide advice, it must be disclosed in its ADV Part 2, which may also be used as the adviser's brochure. (89067)

Mammoth Investments is a federal covered investment adviser with offices in 42 states. Which of the following statements concerning the firm's registration is TRUE?

Mammoth's federal registration is sufficient to do business in all states and state registration of the firm is not required. The federal government and the states have divided the responsibility for regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requirement to register at both the federal and state levels. The basis for the federal/state division is usually the amount of assets under management. If an investment adviser has $110 million or more under management, registration with the SEC as a federal covered adviser is mandatory. Smaller advisers generally register with one or more states. (Note: An IA may also choose to register with the SEC if it has AUM of $100 million up to $110 million.)

An adviser is permitted to store records on:

Microfilm or microfiche. Books and records must be maintained in an easily accessible place for five years. During the first two years, the records must be maintained in an appropriate office of the investment adviser. Records may be preserved on microfilm, microfiche, or any similar media. They may, but are not required to, be kept on various electronic storage media such as CD-ROMs, provided the disks are tamper-evident, i.e., the information cannot be easily altered. This means that any attempt to alter the records would be easily determined upon examining them. These files do not need to be password-protected, but the adviser must be able to limit access to the records to authorized personnel and the regulators. (62631)

Megamerger is a federal registered investment adviser with offices in all fifty states. John is an investment adviser representative with Megamerger. He is registered in New York where his primary office is located but often travels to New Jersey and uses one of Megamerger's offices there to conduct business. John:

Must register as an IAR in New Jersey. Investment adviser representatives who work for federal covered investment advisers must register in every state in which they maintain a place of business. (62688)

Robin works part-time for an investment adviser and develops financial plans for the advisory clients. The customized financial plans that she creates for a fee often include recommendations for clients to purchase insurance or variable annuities as well as open IRAs or some other types of retirement accounts. Robin does not earn commissions for selling variable annuities and insurance products to implement the clients' plans. Is Robin an investment adviser?

No, she is an investment adviser representative. The stem of the question is full of information that distracts from the fundamental point. Robin is an employee of the investment adviser; therefore, she is considered an investment adviser representative. An investment adviser (IA) is a firm, while investment adviser representatives (IARs) are the employees, officers, and directors of the IA who provide securities-related advice and solicit advisory service for the firm. (89045)

On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator?

On Thursday, June 5 If an IA's net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its financial condition by the next business (in this question, Thursday, June 5). Thereafter, the Administrator may require the IA to post a bond for the deficiency. (89048)

As of the close of business on Monday, a state-regulated IA has fallen below its minimum financial requirement. When must the IA file a statement of financial condition?

On the business day following the date that it reported the issue to the state Administrator. If an IA falls below the minimum financial requirement, it must provide notice to the state Administrator by the next business day. The IA must then file a statement of its financial condition by the next business day after providing notice. The statement of financial condition includes: * A trial balance * A statement which indicates all client funds or securities which are not segregated *A computation of the aggregate amount of client ledger debit balances * A statement as to the number of accounts

An IA may charge a client an investment advisory fee for rendering investment advice while receiving compensation for effecting securities transactions related to such advice:

Only if disclosed to the client. Under NASAA's Model Rule on Prohibited Conduct of IAs, IARs, and federal covered advisers, this practice is acceptable if it is disclosed to the client before effecting transactions pursuant to the advice. (62836)

An investment adviser is both registered in and located in State A. One of the firm's IARs has three non-institutional clients and one institutional client in State B. A different IAR of the firm has four non-institutional clients in State B. If the investment adviser does NOT have an office in State B, who must register in State B?

Only the investment adviser. An advisory firm that has more than five non-institutional clients residing in a state is required to register in that state. Since one IAR of the firm has three non-institutional clients and the another IAR of the firm has four non-institutional clients in State B, the investment adviser has a total of seven non-institutional clients in the state and must register there. However, since neither IAR has more than five non-institutional clients in the state, neither one needs to register in State B. Notice that all persons (the IA and both of the IARs) need to be registered in State A. (18619)

If TopJob Advisers has limited discretionary authority over client funds, it is required to:

Prepare a balance sheet and file it with the Administrator. If a registered investment adviser has discretionary authority over client funds or securities, it is required to file a balance sheet; however, the balance sheet is not required to be audited. An audited balance sheet is required to be created and filed if an adviser has custody or full discretion. (89054)

Hi-Growth Investments is a state-registered investment adviser that has increased the number of its branch offices and expanded its product line due to the recent acquisition of Static Advisers, a smaller regional boutique investment advisory firm. Hi-Growth must inform the Administrator of any amendments to its registration statement:

Promptly The Administrator must be informed promptly of any material change in the registration of either the firm or an individual employed by the firm. (62620)

Walck Asset Management has $67.5 million in assets under management. Under the Uniform Securities Act (USA), if Walck transacts business with clients in State A, it is:

Required to pay an initial and renewal filing fee to State A. Advisers with assets of $110 million or more must register with the federal government and are known as federal covered advisers. Advisers with assets of $100 million up to $110 million may register with the federal or state government. Those with fewer assets generally fall under state jurisdiction. Since the Advisory firm has assets under management of less than $100 million, it must register with State A and pay a registration fee and annual renewal fee, as well as in any state in which the firm is required to register. (79481)

Under the Uniform Securities Act, all of the following statements are TRUE regarding the requirements for investment advisers that have a place of business in a state, EXCEPT:

The Administrator will inspect their books and records annually. An Administrator will not inspect the books and records of an investment adviser on an annual basis. However, if an IA has custody of customer funds, an independent public accountant must perform an annual audit. All of the other choices are true. (67596)

While meeting with a client, an investment adviser representative (IAR) is asked if she is registered. The client also questions the IAR as to whether being registered indicates that she is qualified to be an IAR. According to the Uniform Securities Act, how should the IAR respond?

The IAR should tell her client that being registered does not equate to the Administrator considering her to be capable or qualified to act as an IAR. Being registered does not signify that an individual has all of the necessary skills to be an effective agent or investment adviser representative (IAR). The Administrator has no qualification requirements and being registered does not guarantee that an individual will act ethically. (67671)

According to NASAA Model Rule 411(c), an investment adviser is required to keep a record of all the following documentation, EXCEPT:

The IARs personal e-mails. All of the documentation listed is required to be maintained by investment advisers with the exception of the personal e-mails of their representatives. (18580)

Under the Uniform Securities Act, an investment adviser who has no place of business in a state is exempt from registration if:

The adviser has no more than five clients who are residents of the state. Under the Uniform Securities Act, an adviser does not need to register in a state if it has no place of business in the state and does not have more than five clients who are residents of that state. This is referred to as the de minimis exemption. (62400)

Which of the following statements is FALSE regarding an investment adviser's contract?

The contract may stipulate that the adviser will receive a share of the gains and appreciation that are generated in the account as long as the time period is disclosed to the customer. The regulators consider sharing in the gains of a customer's account to be a form of performance-based fee. These fees are generally prohibited in advisory contracts unless the customer qualifies for a waiver or exemption based its status (e.g., institutional investors or officers/directors of the firm), net worth, or assets under management. Asset-based fees are not considered performance-based fees if they are calculated based on the value or average value of the assets and not the appreciation. (67561)

An investment adviser contracts with a person who is not affiliated with the firm. In fact, the contractor is not registered with any state Administrator or with the SEC. Under the Investment Advisers Act of 1940, if the IA intends to give the contractor a finder's fee for any investment advisory client that's secured through her service, which of the following statements is TRUE?

The contractor doesn't need to register with the SEC as a solicitor. In this question, the contractor is acting as a solicitor for the investment adviser. Registered investment advisers are permitted to pay solicitors as long as they have a written contract. If the solicitor is only referring clients and not providing advice directly, the solicitor doesn't need to register with the SEC. However, most states do require solicitors to register as investment advisers or investment adviser representatives. In comparison, broker-dealers are prohibited from paying any fees or commissions to non-registered persons. (15611)

An investment adviser is registered in 10 states. The firm wants to transact business with three clients in a state in which it is not registered. According to the Uniform Securities Act, which of the following statements is TRUE?

The firm would not be required to register as an investment adviser if it did not lease an office in the state in which it is not registered. According to the Uniform Securities Act, if a firm has five or fewer clients in a state (during a 12-month period) in which it has no office, it is exempt from registration in that state. Also, if all the clients, regardless of their number, are banks, trust companies, insurance companies, or employee benefit plans, the firm is exempt from state registration. (62967)

The Administrator may require an investment adviser to file which of the following documents along with its initial ADV application?

The firm's current financial condition. Of the items listed, a new adviser would only be required to file a statement regarding its financial condition. (67510)

ABC Inc., a financial services company, is registered as both a broker-dealer and an investment adviser. On a regular basis, ABC is required to provide its clients with disclosures and obtain written agreements from them regarding acting in both a broker-dealer and investment adviser capacity. In which of the following situations is ABC not required to obtain a written agreement from the client prior to effecting the transaction?

The investment adviser side of ABC makes no recommendation to the client, but the client decides to effect a securities transaction through the broker-dealer The investment adviser side of ABC makes no recommendation to the client, but the client decides to effect a securities transaction through the broker-dealer.

According to the recordkeeping requirements for IAs, if a client trade is executed, which of the following items is NOT required to be included on the order memorandum?

The time that the order was executed. According to the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, the order memoranda (order ticket) should show the terms and conditions of the order, instructions, modification, or cancellation, the person connected with the IA who recommended the transaction, and the person who placed the order. (89063)

According to the Investment Advisers Act of 1940, when is an investment adviser required to provide an audited balance sheet to its clients?

When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service. Since state and federal laws overlap regarding the concept of providing an audited balance sheet, it is important to identify which regulator is asking the question. According to the Investment Advisers Act of 1940 (federal law) an adviser is required to provide clients with an audited balance sheet if it collects prepaid fees of more than $1,200, six months or more in advance of providing advisory services. However, according to the Uniform Securities Act (state law), an adviser is required to provide clients with an audited balance sheet if 1) the firm collects/solicits prepaid fees of more than $500, six months or more in advance of the service, or 2) the firm maintains custody or discretionary control of clients' assets. (89126).

When trading authorization is granted to a third-party for accounts held at an investment adviser, NASAA's model rules state that:

Written authority is required for third party trading. Third-party trading authorization must always be in written form. Investment advisers may act in a discretionary capacity based on verbal authorization for up to 10 days, but thereafter written authorization is required. (67717)