Investment advisors act of 1940

An investment adviser to a hedge fund with $200 million of AUM has invested 50% of fund assets in gold, anticipating a stock market decline and flight to safety by investors. The investment adviser must register: A. with the SEC B. with the CFTC C. in the State where the IA is physically located D. with the SEC, CFTC and the State where the IA is physically located

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

An investment adviser representative (IAR) prepares an investment plan for a customer and explains to the customer that he places trades through ABC broker-dealer with whom the IAR has a soft dollar relationship. The customer tells the IAR that he wants ½ of the trades placed through DEF broker-dealer. The IAR should: A. place ½ the trades with ABC broker-dealer and ½ the trades with DEF broker-dealer B. place all of the trades through ABC broker-dealer since the customer has no say in which broker performs the IAR's trades C. place all the trades though DEF broker-dealer since such an arrangement is a conflict of interest D. close the account and refund all monies to the customer

The best answer is A. A "soft dollar" relationship is where a broker-dealer provides "free" research or stock quotes to an adviser, in return for the adviser directing its portfolio trades to that broker-dealer. Since this can be viewed as a conflict of interest, it must be disclosed to customers. If the customer wants his or her trades placed through another broker-dealer, follow the customer's instructions - after all, it is the customer's account.

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

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

A private fund adviser must file: I Form PF with the SEC II Form BD with the SEC III Form ADV with the SEC IV Form RIA with the SEC AI and III BI and IV CII and III DII and IV

The best answer is A. A private fund adviser (such as a hedge fund adviser) with at least $150 million of AUM (assets under management) is required to register with the SEC. This is accomplished by filing Form PF - as in Private Fund adviser. In addition, private fund advisers must file Form ADV Parts 1 and 2 with the SEC and update these annually. These are all public documents. Broker-dealers file Form BD to register with the SEC. There is no such thing as Form RIA.

Licensing of investment adviser representatives occurs at the: A. State level only B. Federal level only C. Both the Federal and State level D. Neither the Federal nor State level

The best answer is A. 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.

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

The best answer is A. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. The smaller advisers are only required to be registered at the State level.

Which of the following statements is TRUE regarding an investment adviser who renders advice solely to investment companies? The investment adviser: A. must register with the SEC only B. must register with the State only C. must register with the SEC and State D. is exempt from registering as it renders advice to "professional investors"

The best answer is A. Advisers that:manage $100,000,000 or more of assets; orrender advice to investment companies; are not regulated at the State level and must register with the SEC only. One of main intents of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation.

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

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

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

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

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

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

Under the Investment Advisers Act of 1940, which of the following statements are TRUE about the acceptance of prepaid advisory fees by an investment adviser? I The fees must be detailed in writing in the advisory contract II The fees cannot amount to more than 6 months' payment in advance III Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" IV Acceptance of a prepaid fee constitutes taking "custody" of customer funds AI and III only BII and IV only CI, II, III DI, II, III, IV

The best answer is A. Prepaid advisory fees are permitted, as long as they are detailed in the advisory contract; and there is a refund of such fees if the contract is canceled prematurely. There is no restriction on the amount of prepaid fees that can be accepted - but remember that under the Statement of Policy on unethical practices, adviser fees must be similar to those charged by other advisers for comparable services. If an adviser accepts $1,200 or more of prepaid fees, for 6 months or more of service in advance, then a balance sheet must be included in the "Brochure" given to customers (the "Brochure" is Part 2A of Form ADV). Acceptance of prepaid fees is not the same as taking custody of customer funds or securities.

An investment adviser sends quarterly account statements to each of its clients instead of having the statements sent by the qualified custodian. Under the Investment Advisers Act of 1940, this is permitted as long as the: A. adviser is subject to an annual surprise audit by an independent public accountant B. SEC or State Administrator conducts an annual inspection of the investment adviser C. adviser files a Form ADV-E with the SEC indicating that it will send out customer account statements D. adviser certifies on an ADV-E filing that it has notified the qualified custodian that it takes responsibility for mailing customer account statements

The best answer is A. Rule 206(4)-2 of the Investment Advisers Act of 1940 requires that investment advisers that are registered under the Act maintain custody of client funds with a "qualified custodian." The rule requires customer account statements to be sent out at least quarterly, and this can be done by either the qualified custodian or the investment adviser. If the adviser sends account statements, an independent auditor must conduct surprise audits at least once a year verifying all funds and securities. Within 120 days of completion, the auditor must file a certificate with the SEC on Form ADV-E (as in "Exam").

An adviser that charges a performance fee to clients must disclose that such a fee arrangement: A. will give the adviser increased compensation based on realized and unrealized appreciation of the customer's securities B. better aligns the customer's interests with those of the investment adviser C. is only permitted if the customer signs a liability waiver in the advisory contract D. negates the fiduciary duty that the adviser has to the customer

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

Under the Investment Advisers Act of 1940, all of the following are exempt or excluded from registration as investment advisers EXCEPT persons who give advice: A. to other investment advisers B. solely to insurance companies C. relating to obligations guaranteed as to principal and interest by the U.S. Government D. to customers within one State, where the investment adviser is a resident of that State

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

Which of the following statements are TRUE regarding the actions of an investment adviser and its accounts? I The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm must be approved by the customer of the acquired firm II The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm does not have to be approved by the customer of the acquired firm III The transfer of a customer account due to the retirement of the investment adviser must be approved by the customer whose account is being transferred IV The transfer of a customer account due to the retirement of the investment adviser does not have to be approved by the customer whose account is being transferred AI and III BI and IV CII and III DII and IV

The best answer is A. The transfer of an investment adviser account to another investment adviser must be approved by the customer. If an investment adviser is "acquired" - its accounts are being transferred to another adviser and consent of each of the acquired adviser's clients is required. If the adviser is retiring and transferring his or her accounts to another firm - again, in this case, the clients must consent to the transfer.

Which of the following would be defined as "being in the business" of giving investment advice? A. A market timing service that does not recommend securities but which gives customers "buy" and "sell" signals on heavily traded ETFs based on technical factors B. A newsletter that discusses in general terms, the advisability of investing in securities, as part of a broad discussion of the future direction of the U.S. economy C. A lecturer that is hired to give an annual talk to the employees of an investment adviser, where the merits of specific Blue Chip stocks are discussed D. A consultant, who, on a rare and isolated basis, prepares reports or analyses on asset allocation across various asset classes

The best answer is A. There are advisers that specialize in offering market timing services (of about 8,000 SEC registered advisers, there are 200 or so of these firms). They are considered to be "in the business" of giving investment advice for a fee and must register. A newsletter that discusses investing in securities in general terms as part of a broad discussion of the U.S. economy is not giving advice about investing in securities. The giving of isolated advice means that one is NOT "in the business" of giving advice (Choices C and D).

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

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

An investment adviser has an institutional customer that wishes to sell 5,000 shares of ABC Stock. The adviser believes that ABC Stock would be a suitable investment for another institutional client. The adviser wishes to arrange a trade between the 2 institutions at the current market price, for which the adviser would charge a token fee. Because there will be no brokerage commissions, the institutional customers will get a better execution price. Which statement is TRUE about this? A. This is permitted only if the adviser discloses that it is acting as a broker, discloses its fee and gets written consent from each client B. This is not permitted because of the conflict of interest that exists if an investment adviser that recommends a transaction as a fiduciary then acts as the broker, executing that transaction for a fee C. This is permitted because both of the customers are getting a better execution than if they went to the market for a fill D. This is not permitted because a fee is being charged

The best answer is A. This is an agency cross transaction. 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 - which is the case here. 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.

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

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).

Under the Investment Advisers Act of 1940, which statements is (are) TRUE regarding the use of advertising? I Past performance may be shown in advertising II Prior recommendations may be shown in advertising III A testimonial may be shown in advertising without disclosure of payment made to the maker AI only BI and II CII and III DI, II, III

The best answer is A. Under the Investment Advisers Act of 1940, the showing of past performance is permitted as long as there is an accompanying statement about general market conditions during this period and a disclaimer is included that "past performance does not predict future results." The showing of prior recommendations is prohibited. The use of testimonials is prohibited in advertising unless it is disclosed that payment was made to the maker and if the maker is a client of the adviser.

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

The best answer is A. Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm. Having custody of the customer's monies or securities does not mean the firm is also advising about securities.

All of the following are "federal covered" advisers EXCEPT an adviser: A. with $400,000,000 of assets under management B. with $40,000,000 of assets under management C. to an investment company with $400,000,000 of assets D. to an investment company with $40,000,000 of assets

The best answer is B. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. The smaller advisers are only required to be registered at the State level. Thus, the adviser with $400,000,000 of assets under management need only register with the SEC; and is exempt from registration in the State (Choice A). The adviser to an investment company (Choices C and D) need only register with the SEC and is exempt from registration in the State. In contrast, the adviser with $40,000,000 of assets under management need only register with the State; and is not required to be SEC registered.

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

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

When is an Investment Adviser obligated to deliver an updated Brochure to an existing client? A. Annually, within 120 days of fiscal year end B. Annually, within 120 days of fiscal year end, if there are material changes C. Semi-annually, within 65 days of the fiscal mid-year date and 120 days of fiscal year end D. Semi-annually, within 65 days of the fiscal mid-year date and 120 days of fiscal year end, if there are material changes

The best answer is B. An IA is only required to provide an updated Brochure to a client annually, within 120 days of fiscal year end, if there are any material changes from the last Brochure delivered. The exception here is if the IA has been subject to a disciplinary action, in which case an amended Brochure must be delivered to clients promptly, describing the material facts of the disciplinary action.

Which of the following persons is LEAST likely to be defined as an investment adviser? A. A Certified Public Accountant who makes recommendation to customers of portfolio allocations in their 401(k) accounts after preparing their tax returns B. The publisher of an investment newsletter specializing in making small cap stock recommendations that is distributed to paid subscribers monthly C. A lawyer who offers financial planning services only to its existing customers at a discounted rate as compared to the rate charge to the customers for legal services D. A financial planner that sets up a website that includes a retirement calculator that, based on customer input to a series of questions, creates a basic financial plan at no charge to the customer; the site includes advertisements placed by brokerage firms and insurance companies.

The best answer is B. Choice C is clearly an investment adviser because the lawyer is separately charging for financial planning services. Choice D is also an investment adviser, because a financial plan is being created that is unique to each customer and the adviser is being paid for the advice (by the advertisers instead of the customers, but the law doesn't care about this distinction - the fact is the planner is being compensated). Choice A is a bit vague - it doesn't say if the CPA is separately charging for the recommendation, so this choice could go either way. Choice B is more clear - this is a newsletter that is not making recommendations based on specific client situations, so it is not an "investment adviser." It is the best of the choices offered.

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

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

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

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

An individual who is a registered representative with a broker-dealer prepares financial plans for customers under the supervision of the broker-dealer and does not charge for the plans. The individual takes commissions on transactions that result from the implementation of the recommendations included in the plans. Under SEC Release IA-1092: A. both the individual and the broker-dealer must register with the SEC as an investment adviser representative and an investment adviser, respectively B. neither the individual nor the broker-dealer need register with the SEC as an investment adviser representative and an investment adviser, respectively C. the individual must register with the SEC as an investment adviser representative; the broker-dealer is not required to register with the SEC as an investment adviser D. the individual need not register with the SEC as an investment adviser representative; the broker-dealer is required to register with the SEC as an investment adviser

The best answer is B. If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".

Under the Investment Advisers Act of 1940, if an adviser accepts prepaid advisory fees of $1,200 or more, 6 months or more in advance of services rendered, each new client MUST: A. give discretionary authority to the adviser B. receive a copy of the adviser's balance sheet C. be provided with a "Brochure" at least 5 days in advance of signing a contract D. be reported to the Securities and Exchange Commission

The best answer is B. If an investment adviser accepts prepaid advisory fees of $1,200 or more, for 6 months or more of services to be rendered; then the adviser must include a balance sheet in the ADV Form Part 2A that constitutes the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract.

An investment adviser has decided to move its headquarters into a new office building that is directly across the street from the existing office. The investment adviser should: A. move, followed up by the mailing of a letter to all of the adviser's clients disclosing the new address B. mail a letter to all of the adviser's clients detailing the upcoming change of address and amend Form ADV disclosure document promptly C. mail a letter to all of the adviser's clients detailing the upcoming change of address, but there is no requirement to amend the adviser's Form ADV disclosure document D. amend its Form ADV disclosure document filing promptly, but there is no requirement to send notice of the address change to each of the adviser's clients

The best answer is B. If an investment adviser changes its street address, the Form ADV filed with either the SEC or State (depending on whether the adviser is Federal registered or State registered) must be amended. This is required because the regulators need to know the physical location of the adviser if they wish to audit or inspect the adviser's books and records; plus they need to know the address if the adviser is going to receive legal papers or other such notices.For Federal Covered advisers, the SEC rule is that the amendment must be filed "promptly, while the NASAA rule for filing an "other-than-annual" updating amendment by a State registered adviser is that it be filed in 30 days. While it is not stated in any rule that customers must be notified of a change of address, this one is common sense. Customers must know the adviser's current address (and it must be on any correspondence sent to customers) so they know where the correspondence came from, and where they can forward a response, if needed, to the communication.

Under the Investment Advisers Act of 1940, which of the following statements are TRUE regarding the investment adviser's relationship with a broker-dealer? I The investment adviser must disclose if it recommends the use of a specific broker-dealer to effect recommended trades II The investment adviser doesn't have to disclose if it recommends the use of a specific broker-dealer to effect recommended trades III The customer must effect trades through the broker-dealer of the investment adviser's choosing IV The customer doesn't have to effect trades through the broker-dealer of the investment adviser's choosing AI and III BI and IV CII and III DII and IV

The best answer is B. If an investment adviser receives compensation from anyone other than the customer; related to the rendering of advisory services to that customer; this must be disclosed to the customer. If the investment adviser recommends the use of a broker-dealer to effect recommended trades, (which it will do if the broker-dealer compensates the adviser for these trades); it must inform the customer that any broker-dealer can perform these transactions. The customer does not have to effect these trades through the broker-dealer favored by the investment adviser.

Under the Investment Advisers Act of 1940, if an investment adviser wishes to effect an agency cross transaction for a customer, which of the following statements are TRUE? I Agency cross transactions cannot have been recommended to both the buyer and seller by the investment adviser II Each client must be sent an annual statement identifying the total number of agency cross transactions effected; and the remuneration received by the adviser for these transactions III Each client must be sent a monthly account statement detailing activity in the account for that period IV To effect an agency cross transaction, written consent from the client must be obtained AI and III BI, II, IV CII, III, IV DI, II, III, IV

The best answer is B. 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.

An investment adviser believes that its sophisticated customers need better access to the IPOs of companies that are in their early rapid growth phase. The adviser enters into a contract with a finder to locate promising issuers. The adviser will give the finder a fee equal to 20% of the amount invested in each issuer by the adviser's customers. The finder is not an employee of the adviser and is not registered with the SEC or in any State. Which statement is TRUE? A. The finder is considered to be a statutory broker-dealer because it is receiving a commission and must register in the State B. The finder, by locating potential sellers of securities for the adviser for a fee, is considered to be a solicitor and this must be disclosed on Form ADV Part 2A C. The fee being charged by the finder is excessive and is prohibited under the NASAA Statement of Policy D. The arrangement between a finder and an investment adviser is outside the scope of both the Uniform Securities Act and the Investment Advisers Act of 1940

The best answer is B. Part of Form ADV Part 2A covers the solicitors that are hired by the adviser. In most States, a solicitor hired by an adviser is defined as any person who will "locate, introduce, or refer potential purchasers or sellers" to the adviser. So, a solicitor is not only a person who finds customers to purchase the adviser's services; a solicitor is also a person who finds someone that sells to the adviser. In this case, the solicitor is a finder - that is, a person who finds companies that wish to raise capital and introduces them to investors. The relationship between the finder and the adviser must be disclosed in the Form ADV Part 2A.

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

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

An exempt reporting adviser must file: I Form PF with the SEC II Form BD with the SEC III Form ADV with the SEC IV Form RIA with the SEC AI only BIII only CI and III DII and IV

The best answer is B. Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. To do so, it must file both Form PF (Private Fund adviser) and Form ADV. If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing. Broker-dealers file Form BD to register with the SEC. There is no such thing as Form RIA.

In an advertisement, an investment adviser offers "free" investment advice as long as the customer buys life insurance. Which statement is TRUE? A. This is permitted B. This is an unethical practice C. Such an advertisement must be prefiled with the SEC D. Such an advertisement must be dated

The best answer is B. Services that are advertised as "free" - must really be free! Tying the "free" service to the purchase of another product means that one is truly paying for that service (the cost of the service, in this case, is buried in the cost of the insurance being sold). This is an unethical practice.

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

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

Under the Investment Advisers Act of 1940 to satisfy the requirements of the "Brochure Rule," customers who wish to buy advisory services must receive a copy of the brochure: A. at least 48 hours prior to entering into an advisory contract B. at, or prior to, entering into an advisory contract C. within 48 hours of entering into an advisory contract D. within 10 days of entering into an advisory contract

The best answer is B. The "Brochure Rule" obligates an investment adviser to give a potential customer the disclosure document (Part 2A of Form ADV) and the Brochure Supplement (Part 2B of Form ADV) at or prior to entering into a contract to provide advisory services.

An Investment Adviser obtains a list of the 30 members of the local rotary club and sends each a letter that includes a coupon that gives a 20% discount to club members if they purchase the adviser's services. Which statement is TRUE under the provisions of the Investment Advisers Act of 1940? A. This is a fraudulent and prohibited practice B. A adviser must keep a record of the letter and a memorandum describing the mailing list C. The adviser is only required to keep a record of any rotary club members that use the coupon D. The adviser is not required to keep copies of prospecting letters

The best answer is B. The Investment Advisers Act of 1940 covers this situation under Rule 204-2. It requires that if an adviser sends any notice, circular or advertisement, it must keep a record of the names and addresses of the persons to whom the communication was sent. If the communication is sent to more than 10 persons, this detailed record is not required to be kept, however if the communication is sent to a list of individuals (as in this case), a copy of the letter, along with a memorandum describing the list and its source, must be retained.

Under the Investment Advisers Act of 1940, all of the following statements about investment advisory contracts are true EXCEPT investment advisory contracts: A. must be in writing B. must be filed with the SEC 10 days in advance of their effective date C. must provide for notification to customers if there is a change in the composition of the advisory partnership D. may provide for a fee that is partially based upon capital gains for customers who have at least $1,100,000 of assets invested; or who have a net worth of $2,200,000

The best answer is B. The Investment Advisers Act of 1940 requires that investment advisory contracts be in writing; that customers must be notified if there is a change in the composition of the advisory partnership (for those advisers formed as partnerships); and that compensation cannot be based upon capital gains. However, an exception for compensation based upon capital gains is given for the accounts of wealthy customers - that is customers who have a net worth of at least $2,200,000, or who have at least $1,100,000 invested with the adviser. There is no requirement to prefile investment advisory contracts with the SEC.

An investment adviser will NOT be required to be registered with the SEC if the: I adviser's only clients are investment companies II adviser's only clients are insurance companies III adviser is located in only 1 State and all of the adviser's clients reside in that State AI and II only BII and III only CI and III only DI, II, III

The best answer is B. The main intent of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation. SEC registration is not required for advisers to insurance companies because there is no worry that an insurance company (which is a sophisticated purchaser) will be overcharged. Because the Investment Advisers Act of 1940 is federal legislation, which only applies to transactions that "cross State lines," if a transaction occurs wholly within 1 State, then Federal law does not apply and only that State's law applies. This is an "intrastate" exemption.

The President of an investment club makes recommendations of securities to the club's members. The securities to be purchased are chosen by a majority vote of the club's members. The President is not paid for this; but does get to eat free snacks that are bought by the other members at the monthly meetings The President is: A. defined as an investment adviser under IA-1092 B. not defined as an investment adviser under IA-1092 C. "in the business" of giving investment advice D. "compensated" for giving investment advice

The best answer is B. This one is slightly judgmental, but getting a "free snack" does not meet the compensation test to be considered to be "in the business" of giving investment advice under IA-1092.

To be registered with the SEC as an investment adviser, filing of which of the following is required? A. Form ADV Part 1 only B. Form ADV Part 1 and Part 2 C. Consent to service of process D. Registration information for each representative

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

An investment adviser is a private fund adviser that is not required to register with the SEC. In order to maintain its exempt adviser status, it can only solicit investors who are: A. sophisticated B. qualified C. accredited D. registered

The best answer is B. Under the Investment Advisers Act of 1940, "private fund advisers" with less than $150 million of assets under management are exempt from registering with the SEC. A "private fund" is defined as one that would require registration with the SEC as an investment company, but it is not required to do so because either:it does not publicly offer its securities and has 100 or fewer beneficial owners of its securities (this is the typical structure for a hedge fund); orit does not publicly offer its securities and only limits its owners to qualified purchasers. To be a "qualified purchaser" is tougher than being an accredited investor under Regulation D. A qualified purchaser is an individual or trust with at least $5 million of assets available for investment; or an investment manager or company with at least $25 million of assets available for investment. In contrast, an accredited investor under the Regulation D Private Placement rule is an individual with $200,000 of annual income; a married couple with $300,000 of annual income; and individual with a net worth of $1,000,000; or an investment manager with at least $5,000,000 of assets available for investment.

Under the Investment Advisers Act of 1940, a person is considered to be giving advice about securities, if advice is given about: A. real estate investments B. commodities futures investments C. stock index option investments D. whole life insurance investments

The best answer is C. A stock index option is a security - so a person who gives advice about these for a fee is defined as an investment adviser. Real estate, commodities futures and whole life insurance policies are not securities. Thus, one who gives advice about these cannot be defined as an investment adviser.

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

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

A Federal covered investment adviser registered under the Investment Advisers Act of 1940 wants to include an exculpatory clause in the advisory contract. Which statement is TRUE about this? A. The clause is permitted because this is a Federal covered adviser B. The clause is permitted because it is beneficial to the client C. The clause is prohibited and unenforceable under Federal and State law D. The clause is prohibited because it denies the adviser the right to pursue claims against the client

The best answer is C. An "exculpatory" clause seeks to limit the adviser's liability for gross negligence or for acting in bad faith, and is not enforceable in a court of law. The adviser will always be liable for gross negligence, acting in bad faith or for violating any State or Federal law. Writing in a contract that the adviser is not liable for these is meaningless.

All of the following are required to be disclosed by investment advisers to their clients under the NASAA Statement of Policy EXCEPT that the: A. broker-dealer that effects recommended securities trades compensates the investment adviser with commissions B. investment company whose shares are recommended by the investment adviser compensates the investment adviser with management fees C. investment adviser will buy back any recommended securities at the original purchase price upon request D. investment adviser will be buying recommended securities for his personal account

The best answer is C. Guarantees of customer accounts are prohibited under the NASAA Statement of Policy. IA-1092 requires that disclosure be given to customers if anyone other than the customer will compensate the investment adviser for transactions that result from the investment adviser giving advice to that client - so if the investment adviser will get commissions on recommended trades, this must be disclosed; and if the investment adviser is paid management fees by an investment company whose shares are recommended, this must be disclosed as well. If an investment adviser takes the same securities position personally as that recommended to customers, this must be disclosed; and if the investment adviser is selling a security position that he is recommending that a customer buy; this must be disclosed as well.

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

The best answer is C. If a financial planner claims to charge "no fee;" but then receives payment (from anyone) based upon transactions recommended to customers, then the adviser really is being paid for rendering such services and is being "compensated" under the IA-770 compensation test. Professors who teach classes about investing are specifically excluded from the definition of an investment adviser; insurance agents who only sell insurance are not recommending securities, so they are excluded; and broker-dealers who do not charge separately for advice are excluded.

A broker-dealer is suspended by FINRA for rule violations. The officers of the broker-dealer are also the officers of an investment adviser registered with the SEC. Which statement is TRUE? A. FINRA's action has no impact on the investment adviser registration B. FINRA can suspend the investment adviser registration as well C. The SEC can suspend the investment adviser registration based upon FINRA's action D. The SEC can only suspend the investment adviser's registration if the FINRA suspension is for longer than 1 year

The best answer is C. If a self regulatory organization takes disciplinary action against a broker-dealer; then the SEC can take similar action against an affiliated investment adviser. Remember, investment advisers are not regulated by FINRA; only broker-dealers are. The event that gave cause to FINRA to discipline the broker-dealer would probably result in the SEC taking a similar action against the affiliated investment adviser.

An investment adviser is recommending that a customer buy a security that the adviser will sell to the customer from its own portfolio. Which statement is TRUE? A. This is a "principal transaction" and is prohibited B. This is an "agency cross transaction" and is prohibited C. This is a "principal transaction" and is permitted only if the customer is informed of the circumstances and consents to the transaction D. This is an "agency cross transaction" and is permitted only if the customer is informed of the circumstances and consents to the transaction

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

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 AI and III BI and IV CII and III DII and IV

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

If an investment adviser wishes to use a paid solicitor, under the Investment Advisers Act of 1940, which of the following statements are TRUE? I The solicitor must provide the customer with a copy of the investment adviser's brochure II The solicitor cannot be subject to statutory disqualification under the Securities Acts III The solicitor must disclose to the customer any additional costs of providing advisory services, due to the nature of the relationship between the solicitor and the investment adviser IV The solicitor must register with the SEC as an investment adviser AI and II BIII and IV CI, II, III DI, II, III, IV

The best answer is C. If an investment adviser uses a paid solicitor, there must be a written agreement between the solicitor and the adviser. The solicitor must provide the customer with a copy of the adviser's "Brochure" in addition to a copy of the solicitor's "Brochure," The solicitor must disclose to the customer any additional costs that the customer will pay due to the use of a solicitor. The solicitor cannot be a person subject to statutory disqualification under the Securities Acts - e.g., convicted of a money or securities related offense within the past 10 years, expelled by FINRA, currently under suspension by FINRA, etc. There is no requirement for the solicitor to register with the SEC; only the investment adviser is registered with the SEC. However, in most States, the solicitor must be registered either as an adviser or as an adviser representative.

An investment adviser is permitted to use a solicitor to sell that adviser's services to customers: A. under no circumstances B. only if no fees are paid to the solicitor by the adviser C. if there is an agreement in writing between the solicitor and the adviser D. if the solicitor has registered as an investment adviser with the SEC or that State

The best answer is C. If an investment adviser wishes to use a solicitor to sell its advisory services, it may do so as long as the adviser is registered with the SEC (Federal Covered adviser) or that State; there is a written agreement between the solicitor and the investment adviser; the solicitor agrees to provide to customers the investment adviser's "Brochure" in compliance with the "Brochure Rule"; the solicitor agrees to provide its own "Brochure" that describes the nature of the relationship between the solicitor and the adviser, and the fact that the adviser is paying the solicitor; and that this may result in a higher cost to the customer. Finally, the adviser must obtain written acknowledgment from the customer, that both brochures were received.

Under the Investment Advisers Act of 1940, the renewal of an advisory contract under different terms than the preceding contract: A. is made by filing a Form ADV-S with the SEC within 90 days of year end B. requires that the customer be given a revised "Brochure" at least 48 hours prior to contract renewal C. requires that a revised "Brochure" must be given to the customer at, prior to, contract renewal D. is prohibited unless the investment adviser files a Form ADV Part 2A and balance sheet with the SEC immediately

The best answer is C. If the adviser wishes to renew an advisory contract with a customer where the terms of the contract are changed, this requires that a revised "Brochure" be given to that customer. There is no requirement to file an ADV Part 2A with a balance sheet promptly, unless the adviser, for the first time, will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. The "2-Day Free Look" at the "Brochure" is only required under NASAA rules for customers that are signing an advisory contract with that adviser for the first time - so it only applies to State-registered advisers, not to Federal Covered Advisers. The Form ADV-S (Subsequent year) is a discontinued form.

Under the Investment Advisers Act of 1940, an SEC registration application as an investment adviser must be granted; or a proceeding must be initiated denying registration, within: A10 days B30 days C45 days D60 days

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

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

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

If an investment adviser maintains an account that will hold customer securities positions at a broker-dealer, but the broker-dealer does not know who the individual customers are, this is a(n): A. violation of Federal law B. prime brokerage account C. omnibus account D. discretionary account

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

Investment advisory contracts, under the Investment Advisers Act of 1940 MUST: I be in writing II detail the advisory fee III detail the States in which the adviser is registered IV provide for customer approval if the contract is to be assigned to someone else AI and II only BIII and IV only CI, II, IV DI, II, III, IV

The best answer is C. Investment advisory contracts must be in writing under the Investment Advisers Act of 1940; must detail the advisory fee; and must provide for customer approval if the account is assigned to another investment adviser. There is no disclosure in the advisory contract of the States in which the adviser is registered (though this is disclosed in the Form ADV Part I filed with the SEC).

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

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

A registered investment adviser has hired several investment adviser representatives and wishes to print up business cards for these individuals. Each business card will have the IAR's name, followed by "Registered Investment Adviser." Under the provisions of the Investment Advisers Act of 1940, the investment adviser has: A. not violated the Act B. violated the Act because the business card implies that the SEC approves of the representative C. violated the Act because the business card implies that the representative is registered with the SEC D. violated the Act because representatives may not have business cards under the provisions of the Act

The best answer is C. Only investment advisers register with the SEC; their representatives do not register with the SEC. The wording on the business card implies that the representatives are registered, which is not the case. Only the advisory firm would be registered with the SEC.

Under the Investment Advisers Act of 1940, which statement is TRUE about the acceptance of prepaid advisory fees by an investment adviser? A. The fees must be refunded in full with interest if the contract is cancelled prematurely B. The fees cannot amount to more than 6 months' payment in advance C. Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" D. Acceptance of a prepaid fee constitutes taking "custody" of customer funds

The best answer is C. Prepaid advisory fees are permitted, as long as they are detailed in the advisory contract; and there is a refund of such fees (pro-rated based on the amount of time left to the contract) if the contract is canceled prematurely. There is no restriction on the amount of prepaid fees that can be accepted - but remember that under the Statement of Policy on unethical practices, adviser fees must be similar to those charged by other advisers for comparable services. If an adviser accepts $1,200 or more of prepaid fees, for 6 months or more of service in advance, then a balance sheet must be included in the "Brochure" given to customers (the "Brochure" is Part 2A of Form ADV). Acceptance of prepaid fees is not the same as taking custody of customer funds or securities.

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

The best answer is C. 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.

Which statements are TRUE about the recordkeeping requirements for communications sent to potential clients under the provisions of the Investment Advisers Act of 1940 I A record of the name and address of each person to whom the communication is sent must be retained II A record of the name and address of each person to whom the communication is sent is not required for communications sent to more than 10 persons III For communications sent to a list of individuals, a memorandum describing the list and its source must be retained IV Proof of mailing in the form of a postal receipt must be retained for each printed communication that is distributed AI and III only BII and IV only CI, II, III DI, II, III, IV

The best answer is C. The Investment Advisers Act of 1940 covers this situation under Rule 204-2. It requires that if an adviser sends any notice, circular or advertisement, it must keep a record of the names and addresses of the persons to whom the communication was sent. If the communication is sent to more than 10 persons, this detailed record is not required to be kept, however if the communication is sent to a list of individuals, a copy of the communication, along with a memorandum describing the list and its source, must be retained. There is no requirement to retain proof of mailing or distribution of the communication.

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

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

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

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

Under the Investment Advisers Act of 1940, copies of all advertising, notices and circulars must be retained if distributed to at least: A1 person B5 people C10 people D15 people

The best answer is C. The Investment Advisers Act of 1940 requires that copies of advertising, notices and circulars be retained as a record for 5 years if distributed to 10 or more people.

Under the provisions of the Investment Advisers Act of 1940, if an adviser takes custody of customer funds or securities, account statements MUST be sent to the customer: A. upon written request B. monthly C. quarterly D. semi-annually

The best answer is C. 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.

The "Brochure Rule" applies to: A. oral advisory contracts only B. written advisory contracts only C. both oral and written advisory contracts D. neither oral nor written advisory contracts

The best answer is C. 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.

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

The best answer is C. 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.

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

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

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

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

An investment adviser places an advertisement that reads:"Over the last year, our top ten stock picks produced a 40% return. We can guarantee that an investment with us will produce the same or better results." Beneath this statement is the following: "Required Disclosure: Assumptions can not be made regarding future investment performance or profits." Which statement is TRUE? A. This advertisement is permitted because it includes the required disclaimer that past performance does not predict future results B. This advertisement is permitted because it is truthful and in good taste C. This advertisement is not permitted because it is misleading to make a "guarantee" of future results when investing in stocks D. This advertisement is not permitted because the word guarantee can only be used for advertisements relating to U.S. Government guaranteed obligations

The best answer is C. This advertisement guarantees a 40% return or better. Even though it has the disclaimer that "prior performance does not predict future results," guarantees of investment performance are prohibited.

An investment adviser that manages a portfolio for a client has not taken custody. The customer informs the adviser that he will be traveling overseas for 1 year on a round-the-world cruise and gives the adviser authority to write checks on his personal bank account to pay the quarterly custodian bank fees. Under the provisions of the Investment Advisers Act of 1940, the adviser: A. can follow the customer's instructions without additional action taken, since this is a service to the customer B. has not taken custody of client funds, unless the custodian bank and the investment adviser are under common ownership C. has taken custody of customer funds and must comply with the additional requirements of the custody rule D. has a conflict of interest that must be disclosed in writing to the customer

The best answer is C. This situation does not seem too likely! So this customer gives the adviser signing power over his personal bank account because he will be traveling for 1 year. What a trusting individual! By accepting this responsibility, the adviser is "taking custody" of customer funds and must comply with the custody rule. The custody rule requires that the adviser give prompt notice to the customer in writing of the name of the custodian, the custodian's address and the manner in which the customer funds or securities will be held - e.g., are they being held in a separate account for that customer or are they being held by the adviser as trustee for the customer.

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

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

Which statements are TRUE about the solicitor's brochure under the Investment Advisers Act of 1940? I It must disclose the specific dollar fee, or percentage of advisory fee paid by the customer, that the solicitor will earn for referring the customer II It can be incorporated into the investment adviser's brochure, so that only one document is provided to the customer III It must disclose that the solicitor will be compensated for referring the client to the investment adviser IV The customer must sign that he or she received the solicitor's brochure AI and II only BIII and IV only CI, III, and IV DI, II, III, IV

The best answer is C. 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).

Which of the following persons can use the term "investment counsel"? A. Investment advisers who are also attorneys admitted to the Bar in that State B. Investment advisers who are also broker-dealers registered in that State C. Investment advisers whose primary business is the rendering of investment advice D. Any investment adviser registered with the SEC under the Investment Advisers Act of 1940

The best answer is C. Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm.

Under the Investment Advisers Act of 1940, when a Registered Investment Adviser is renewing its annual contract with customers, which is NOT required to be disclosed? A. Business Address B. Fees C. History of RIA D. Type of clients

The best answer is C. Under the Investment Advisers Act of 1940, upon entering into an advisory contract, the advisor must provide the customer with the "brochure" - which is Form ADV Part 2A. In addition, within 120 days of year end, the client must be sent a free updated brochure; or a summary of material changes that offers to provide the free updated brochure. The brochure includes:Basic business contact information;Material changes from previous year;Description of the advisory firm and services offered including length of time in business;Fees and compensation;Types of clients;Methods of analysis;Disciplinary information; Code of ethics;Brokerage practices;Client referrals and compensation;Custody, discretion, and voting of client securities;IA financial information.

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

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

Investment advisers with assets of $110,000,000 or more must register: A. only with the State in which the investment adviser is incorporated B. in all of the States in which the investment adviser does business C. with the SEC and all of the States in which the investment adviser does business D. with the SEC only

The best answer is D. Even though a Federal Covered adviser, which must register with the SEC, is defined as one with assets under management are $100MM or more, the SEC has issued an interpretation that advisers with between $100MM and $110MM of assets under management have a choice of either registering with the SEC or registering in each State where they do business. Thus, an investment adviser is only required to register with the SEC if it has assets under management of $110MM or more.

All of the following are EXCLUDED from the definition of an investment adviser under the Investment Advisers Act of 1940 EXCEPT: A. teachers B. engineers C. lawyers D. actuaries

The best answer is D. 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.

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

The best answer is D. 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.

If a solicitor works for an investment adviser, selling that firm's advisory services to customers, then the customer MUST: I be given the investment adviser's brochure II be given the solicitor's brochure III sign an acknowledgment of receipt of the brochure(s) AI and III BII and III CI and II DI, II, III

The best answer is D. If an investment adviser wishes to use a solicitor to sell its advisory services, it may do so as long as the adviser is registered with the SEC; there is a written agreement between the solicitor and the investment adviser; the solicitor agrees to provide to customers the investment adviser's "Brochure" in compliance with the "Brochure Rule;" the solicitor agrees to provide its own "Brochure" that describes the nature of the relationship between the solicitor and the adviser; and the fact that the adviser is paying the solicitor; and that this may result in a higher cost to the customer. Finally, the adviser must obtain written acknowledgment from the customer, that both brochures were received.

If the SEC suspends or revokes the registration of an investment adviser registered under the Investment Advisers Act of 1940: A. the action is binding and non-appealable B. the adviser can take the case to binding arbitration C. an appeal may be filed with the State Administrator within 60 days D. an appeal may be filed in Federal Court within 60 days

The best answer is D. If the SEC suspends or revokes an adviser's registration under the Investment Advisers Act of 1940, an appeal may be filed in Federal Court within 60 days.

An advertisement published by an investment adviser may contain a(n): A. chart that, by itself, gives buy and sell signals for different securities B. paid testimonial from a well-known celebrity that is a long-term customer of the firm without additional disclosures C. offer to furnish, free without charge, a list of the best performing recommendations made by the adviser in the past month D. telephone number to call to get a list of all recommendations made by the adviser over the past 2 years

The best answer is D. Investment adviser advertisements are regulated under the Investment Advisers Act of 1940. Testimonials are prohibited in these advertisements unless it is disclosed if the maker was paid and if the maker is a client of the adviser. The advertisement cannot purport that graphs, charts, computer programs, etc., can determine which securities to buy or sell, or when to buy or sell. If an offer is made of a list of prior recommendations, it must cover all (not just the best-performing) recommendations made over a minimum of the past 12 months.

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

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

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

The best answer is D. Performance charts must show investment results with all expenses deducted out.

An investment adviser includes a list of its "Top Ten" recommendations made over the last year in its advertising. Under the Investment Advisers Act of 1940, which statement is TRUE? A. This is permitted if the adviser gets the permission of the issuers to use their names B. This is permitted if the adviser files the advertisement in advance with the SEC C. This is permitted without restriction D. This is a violation of the Act and is fraudulent

The best answer is D. Prior recommendations cannot be shown in investment adviser advertising - doing so is a violation of the Investment Advisers Act of 1940 (but the advertisement can offer to provide a list of prior recommendations upon request, as long as such list shows ALL recommendations made over the last 12 months; the date of the recommendation; the price at that time; the current market price; accompanied by a statement to the effect that "the performance of prior recommendations is not a predictor of future performance").

Registration as an investment adviser allows one to say that: A. FINRA approves of the adviser B. the SEC endorses the adviser C. the State Administrator recommends the adviser D. the firm is a registered investment adviser

The best answer is D. Registration as an investment adviser does not allow one to say that FINRA, SEC, or the State Administrator endorses, recommends, certifies, or approves of the adviser. The investment adviser can only state that the firm is a "registered investment adviser."

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

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

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

The best answer is D. The "Brochure Rule" is not required for providers of so-called "impersonal advisory services" that require payment of $500 or less. Such services do not render advice based upon a specific client situation. If the advice is tailored to a customer's specific financial situation and needs (as is the case in Choice D), then such advice is not defined as "impersonal advisory services" and the "Brochure" must be delivered to the customer.

Under the Investment Advisers Act of 1940, which of the following are included in the Form ADV Part 1 filed with the SEC? I A list of the officers of the advisory firm II A list of the shareholders of the advisory firm III The States in which the advisory firm is registered AI only BI and II CIII only DI, II, III

The best answer is D. 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 in included.

All of the following are disclosed in Form ADV Part 2A EXCEPT: A. investment policies of the adviser B. type of investments made by the adviser C. investment practices of the adviser D. states in which the adviser is registered

The best answer is D. 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.

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

The best answer is D. 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 is NOT required to keep a record of each person to whom a communication is sent if the communication is sent to more than how many persons? A. 2 B. 5 C. 8 D. 10

The best answer is D. The Investment Advisers Act of 1940 requires that a record be kept of each client to whom a communication is sent. This is only required for communications sent to up to 10 clients. For communications sent to more than 10 persons, the adviser is not required to keep a record of the names and addresses of the persons to whom it was sent.

Under the Investment Advisers Act of 1940, an investment adviser's registration is renewed: A. monthly B. quarterly C. semi-annually D. annually

The best answer is D. The investment adviser's registration is renewed annually; and is accomplished by filing an electronic amendment to Form ADV Parts 1 and 2 within 90 days of the adviser's fiscal year end. To withdraw from registration, Form ADV-W is filed. Also note that the NASAA filing rule for State registered advisers is the same.

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

The best answer is D. The records required to be retained by an investment adviser that takes custody include:Cash receipts and disbursements ledger and general ledgerSecurities received and delivered ledgerPurchase and sales ledger (trade ledger)Securities record (a record of each aggregate security position held, broken down by each customer owning part of the position and the physical location of that position)Confirmation copies of all customer tradesCustomer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account Note that there is no requirement for beneficiary designations to be retained for customer accounts - in most cases, the beneficiary is named in the will when a customer dies.

Investment advisers are permitted to accept which of the following from broker-dealers in return for directing their portfolio trades to that broker-dealer? I Asset allocation software provided by the broker-dealer II Recommendations of securities made by that broker-dealer III Research reports provided by the broker-dealer AII only BIII only CII and III DI, II, III

The best answer is D. Under so-called "soft-dollar" arrangements, investment advisers can direct their portfolio trades (and hence their commission payments) to broker-dealers that give them products and services that help them manage their investments. Thus, the broker-dealers are "paying" for the trades directed to them by giving the advisers "soft dollars." The SEC is not too keen on this, but permits it as long as the services and products provided by the broker-dealer to the adviser directly benefit the investors whose money is being managed by the adviser - the soft dollar products and services cannot solely benefit the adviser. A broker-dealer providing asset allocation software, recommendations, and research reports to the adviser in return for order flow all directly benefit the adviser's clients and are permitted.

Under so-called "soft dollar" arrangements, investment advisers are permitted to accept all of the following from broker-dealers in return for directing their portfolio trades (and thus paying commissions) to that broker-dealer EXCEPT: A. research reports provided by the broker-dealer B. asset allocation software provided by the broker-dealer C. recommendations of securities made by that broker-dealer D. computer equipment provided by that broker-dealer

The best answer is D. Under so-called "soft-dollar" arrangements, investment advisers can direct their portfolio trades (and hence their commission payments) to broker-dealers that give them products and services that help them manage their investments. Thus, the broker-dealers are "paying" for the trades directed to them by giving the advisers "soft dollars." The SEC is not too keen on this, but permits it as long as the services and products provided by the broker-dealer to the adviser directly benefit the investors whose money is being managed by the adviser - the soft dollar products and services cannot solely benefit the adviser. A broker-dealer providing research reports, recommendations and asset allocation software to the adviser in return for order flow all directly benefit the adviser's clients and are permitted.

A Federal covered investment adviser will take prepaid advisory fees of $2,000 1-year in advance of rendering services. Which of the following MUST be included in the investment adviser brochure? I the balance sheet of the investment adviser II any conflicts of interest that the investment adviser may have III information on advisory fees charged AI only BI and II CII and III DI, II, III

The best answer is D. Under the Investment Advisers Act of 1940, the investment adviser brochure must be delivered to clients at, or prior to, entering into a contract to provide advisory services. It details, among other things, the fees charged and conflicts of interest. A copy of the investment adviser's balance sheet is included in the brochure if the adviser will take prepaid advisory fees of $1,200 or more, 6 months or more in advance of rendering services.

Under the Investment Advisers Act of 1940, if there are material changes, existing customers of investment advisers MUST be sent a revised "Brochure" at least: A. monthly B. quarterly C. semi-annually D. annually

The best answer is D. Existing customers must be sent an updated "Brochure" at least annually if there are material changes. As an alternative, the customer can be sent the "Summary of Material Changes" section of the current brochure along with the offer of the revised Brochure.

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

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

Under 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

The best answer is A. 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."

Under the Investment Advisers Act of 1940, after receiving an investment adviser application, the SEC must grant a registration to an investment adviser; or start a proceeding denying registration, within how many days? A45 B90 C120 D180

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

An investment adviser can hold all of its customer securities in a single brokerage account without identifying the individual customers to the brokerage dealer: A. in an omnibus account B. in a joint account - tenants in common C. in a prime brokerage account D. under no circumstances

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

Investment companies that are required to be registered with the SEC under the Investment Company Act of 1940 have at least: I 100 shareholders II 1,000 shareholders III $100,000 of net assets IV $1,000,000 of net assets AI and III BI and IV CII and III DII and IV

The best answer is A. Investment companies that must register with the SEC are those with at least 100 shareholders and at least $100,000 of net assets.

An insurance agent refers potential clients to an investment adviser and receives a referral fee from the adviser for each client that signs an advisory contract. Which statement is TRUE? A. The insurance agent must disclose the fact that he or she will receive a referral fee at the time of the referral B. The investment adviser must disclose the fact that the insurance agent received a referral fee after the customer signs the advisory contract C. The insurance agent is only required to disclose that he or she will receive the referral fee if the customer has purchased an insurance policy from that agent D. The investment adviser is not obligated to disclose that a referral fee was paid to the insurance agent

The best answer is A. Regarding the payment of referral fees, this is covered under the Investment Advisers Act of 1940. Rule 206(4)-3 prohibits an adviser from paying a fee to a solicitor (any person who solicits a client for, or refers a client to, an investment adviser) unless "a copy of the adviser's disclosure statement and a copy of the agreement between the adviser and the solicitor are provided to the prospective client at the time of the referral." Thus, the insurance agent must give this written disclosure to the client at the time that the referral is being made. In addition, the adviser must obtain a signed and dated acknowledgment, stating that the new client has received these disclosures from the solicitor.

The Investment Advisers Act of 1940 EXEMPTS from registration: A. persons who give advice solely to insurance companies B. persons who give advice solely to investment companies C. persons who give advice solely to depository institutions D. All of the above

The best answer is A. The Investment Advisers Act of 1940 exempts from registration advisers who solely render advice to insurance companies. 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. The Uniform Securities Act (State law) extends this exemption to most "professional investors" such as investment companies and banks. Note that the Investment Advisers Act of 1940 does not permit such an exemption for advisers who give advice to investment companies, banks, etc.

Who administers the Investment Advisers Act of 1940? A. SEC B. MSRB C. FINRA D. NASAA

The best answer is A. The Investment Advisers Act of 1940 is administered by the SEC. FINRA only regulates broker-dealers, not investment advisers. The MSRB (Municipal Securities Rulemaking Board) writes rules for the municipal market. NASAA is the North American Securities Administrators Association. Each State Administrator administers the Uniform Securities Act - the State "Blue Sky Laws" that require registration of broker-dealers, their agents, non-federal covered advisers, and investment adviser representatives, in each State where they deal with the public.

Under the Investment Advisers Act of 1940, a testimonial may be used in advertising: A. only if it is disclosed that the maker of the testimonial is paid B. only if it is disclosed that the firm solicited the testimonial from the maker C. only if the testimonial is unpaid D. under no circumstances

The best answer is A. The Investment Advisers Act of 1940 prohibits testimonials in investment adviser advertising unless it is disclosed that the maker was paid and if the maker is a client of the adviser.

An investment adviser representative obtains a list of all 263 members of the local Kiwanis Club and sends a coupon to 52 leads on the list, along with a letter, offering a 20% discount on services to new clients that are club members. Aside from retaining a copy of the letter, under the provisions of the Investment Advisers Act of 1940, the investment adviser MUST keep: A. a memorandum describing the list and the source of the list B. a record of the names and addresses of the persons to whom the offer was made C. the worksheets that estimate the net worth of leads and the standards used to determine which leads were to receive the offer D. a record of the names and addresses of all of the Kiwanis Club members on the list

The best answer is A. The Investment Advisers Act of 1940, under Rule 204-2 on Recordkeeping, requires that if an investment adviser sends any notice, circular or other advertisement to more than 10 persons, the adviser is not required to keep a record of the names and addresses of the persons to whom it was sent. But if the notice is distributed to persons named on any list, the adviser must "retain, along with a copy of such notice, a memorandum describing the list and the source thereof."

The Investment Company Act of 1940 requires that which of the following register with the SEC as an investment company? A. Management companies B. Investment advisers C. Investment managers D. Investment counsels

The best answer is A. The Investment Company Act of 1940 requires that investment companies (management companies, unit investment trusts and face amount certificate companies) register with the SEC.

Under SEC rules established by NSMIA, an individual that files a registration application will be denied if the applicant has: A. served 1 year or more in jail B. pleaded "no contest" to criminal charges C. been named in a civil lawsuit within the past year D. been fined $10,000 or more by a court of law for violations of securities statutes

The best answer is A. The National Securities Markets Improvement Act includes a provision that keeps individuals that have served 1 year or more in jail and that have a criminal record from being registered as advisers with the SEC.

All of the following are defined as investment advisers who have been compensated under SEC Release IA-1092 EXCEPT a(n): A. estate planner receives a fee for setting up an investment trust for a client B. financial planner who receives a fee for providing a master financial plan without rendering specific investment advice C. insurance agent who receives a commission for selling life insurance that was part of an overall financial plan for which there was no charge to the client D. investment newsletter that charges a subscription fee for reports issued on specific securities

The best answer is A. The SEC views subscription investment newsletters as "investment advisers" that must register with the SEC. It does not view these as "general circulation" media, such as financial magazines, that are excluded from the definition. The insurance agent that prepares a no-fee plan, but who takes commissions on recommended insurance purchases arising from that plan, is "compensated" by those commissions and comes under the definition of an "investment adviser." Creators of master financial plans that do not render specific investment advice also come under the SEC's interpretation of an "investment adviser." An estate planner who charges a fee for setting up a trust is not charging for "investment advice" and does not come under the definition of an "investment adviser."

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

The best answer is A. Under the Investment Advisers Act of 1940, "private fund advisers" with less than $150 million of assets under management are exempt from registering with the SEC. A "private fund" is defined as one that would require registration with the SEC as an investment company, but it is not required to do so because either:it does not publicly offer its securities and has 100 or fewer beneficial owners of its securities (this is the typical structure for a hedge fund); orit does not publicly offer its securities and only limits its owners to qualified purchasers. To be a "qualified purchaser" is tougher than being an accredited investor under Regulation D. A qualified purchaser is an individual or trust with at least $5 million of assets available for investment; or an investment manager or company with at least $25 million of assets available for investment. In contrast, an accredited investor under the Regulation D Private Placement rule is an individual with $200,000 of annual income; a married couple with $300,000 of annual income; and individual with a net worth of $1,000,000; or an investment manager with at least $5,000,000 of assets available for investment.

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

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

Which of the following individuals will be denied federal registration as an investment adviser? A. A person who was convicted of misappropriation of funds 12 years ago B. A person who has been imprisoned for 3 months for "DUI" - driving under the influence C. A person who, 11 years ago, was imprisoned for 18 months for counterfeiting D. None of the above

The best answer is C. The National Securities Markets Improvement Act of 1996 specifically requires the denial of SEC registration as an investment adviser to any person who has a criminal record and who has been imprisoned for 1 year or more.

If a 13d filing is required, notice must be filed with the Securities and Exchange Commission within: A1 business day B10 business days C15 business days D20 business days

The best answer is B. If a person accumulates a 5% or greater equity holding in a publicly held company, a 13d filing must be made within 10 business days. A copy is sent to the SEC; the exchange where the security trades; and the Board of Directors of the company.

Under the Investment Advisers Act of 1940, after receiving an investment adviser application, the SEC must grant a registration to an investment adviser; or start a proceeding denying registration, within how many days? A5 B20 C30 D45

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

A registered investment adviser, while researching a company, decides that this investment is so compelling that he buys shares for his personal account; as well as recommends them to his customers. Which statement is TRUE? A. This action is prohibited B. The personal holding must be disclosed to customers who are recommended this security C. The personal holding must only be disclosed to customers if it exceeds 5% of the issuer's stock D. The investment adviser's personal holdings are proprietary information and are not disclosed to customers

The best answer is B. If an investment adviser will buy a recommended security for his own account; as well as for the account of customers; this is a conflict of interest that must be disclosed to the customers under IA-1092. The problem here is that the buy orders placed for customers may increase the market value of the position, increasing the wealth of the adviser who personally took that position at the same time.

If the Securities and Exchange Commission sets the effective date for a new issue in registration, which of the following statements are TRUE? I All proper documents have been filed with the SEC II Additional documents must be filed with the SEC III The SEC approves of the new issue IV The issue may be offered to the public AI and III BI and IV CII and III DII and IV

The best answer is B. If the SEC sets the "effective date" for an issue in registration, this means that all proper documents have been filed with the SEC. The SEC does not approve (nor does it disapprove) of any new issue in registration. Once the proper documents relating to a new issue offering are filed, the issue may be offered to the public.

Which statement is TRUE regarding the public availability of issuer filings made with the SEC? A. Issuer filings with the SEC are not made available to the public B. Issuer filings with the SEC are made available to the public immediately upon receipt C. Issuer filings with the SEC are made available to the public only if the issuer approves D. Issuer filings with the SEC are made available only to SEC registrants

The best answer is B. Issuer filings (10K, 10Q, 8K reports) filed with the SEC are made public immediately. The SEC has a website from which these can be accessed; and has a reading room in Washington, D.C. where these reports are made available to the public when the filing is received from the issuer.

All of the following terms apply to mutual fund shares EXCEPT: A. continuously issued B. tradeable C. redeemable D. non-negotiable

The best answer is B. Mutual fund shares do not trade; they are non-negotiable. The shares are redeemed by the fund at Net Asset Value. The fund continuously issues and redeems its shares.

Under the Investment Advisers Act of 1940, which of the following statements is FALSE about the acceptance of prepaid advisory fees by an investment adviser? A. The fees must be detailed in writing in the advisory contract B. The fees cannot amount to more than 6 months' payment in advance C. Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" D. A refund of prepaid fees must be given if the contract is cancelled prematurely

The best answer is B. Prepaid advisory fees are permitted, as long as they are detailed in the advisory contract; and there is a refund of such fees if the contract is canceled prematurely. There is no restriction on the amount of prepaid fees that can be accepted - but remember that under the Statement of Policy on unethical practices, adviser fees must be similar to those charged by other advisers for comparable services. If an adviser accepts $1,200 or more of prepaid fees, for 6 months or more of service in advance, then a balance sheet must be included in the "Brochure" given to customers (the "Brochure" is Part 2A of Form ADV). Acceptance of prepaid fees is not the same as taking custody of customer funds or securities.

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

The best answer is B. Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing.

If an investment adviser wishes to charge a performance fee that allows it to share a percentage of capital gains in a customer account, then under the Investment Advisers Act of 1940: A. such an arrangement is prohibited because of the inherent conflict of interest between the investor and the adviser B. the adviser must disclose to the customer that such an arrangement can give the adviser an incentive to increase the portfolio's risk exposure C. the adviser must disclose that if a fixed fee were charged, the customer would be paying a lower fee, but the adviser would have to make this up by increasing its charges D. such an arrangement is permitted as long as all fees are disclosed to customers

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

Under the Investment Advisers Act of 1940, which statement is TRUE about the requirements for a family office exclusion from registration? A. The family office can provide advice to multiple families B. The family office must be wholly owned by family clients C. The family office can advertise itself as an investment adviser D. The family office must have less than $100 million of assets under management

The best answer is B. 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 enters into a contract with a customer that states that: "The customer shall hold the investment adviser, its officers, and its employees, harmless if the adviser, its officers or employees act in bad faith, are grossly negligent, or violate any State or Federal statute." This contract provision is: A. binding if the customer signs the contract B. void under both Federal and State law C. acceptable under State law; but void under Federal law D. void under State law; but acceptable under Federal law

The best answer is B. This is an "exculpatory" clause - and these are not enforceable in a court of law. The adviser will always be liable for gross negligence, acting in bad faith or for violating any State or Federal law. Writing in a contract that the adviser is not liable for these is meaningless.

A person who is in the business of giving advice about which of the following is defined as an "investment adviser" under SEC Release IA-770? I Stocks II Corporate bonds III Commodities IV Real Estate AI only BI and II CIII and IV DI, II, III, IV

The best answer is B. To be defined as an investment adviser that must register with the SEC, one must be giving advice about securities. Stocks and bonds are securities. Commodities and real estate are not securities. If one gives advice about commodities or real estate, that person is NOT an investment adviser.

A private fund adviser: A. must file Form PF with the SEC B. must file Form ADV with the SEC C. must file both Form PF and Form ADV with the SEC D. is neither required to file Form PF nor Form ADV with the SEC

The best answer is C. A private fund adviser (such as a hedge fund adviser) with at least $150 million of AUM (assets under management) is required to register with the SEC. This is accomplished by filing Form PF - as in Private Fund adviser. In addition, private fund advisers must file Form ADV Parts 1 and 2 with the SEC and update these annually. These are all public documents.

A young couple has $300,000 that they have used to aggressively trade growth stocks. They place their account with a Registered Investment Adviser and direct the adviser to continue the strategy. After 2 years, the value of the account is down to $100,000 and the couple complains to the adviser about the investment performance. The investment adviser should: A. refund the annual management fee to the customers to partially make up the loss B. refund the $200,000 loss in the account to the customers to fully make up the loss C. do nothing, since he acted in accordance with the directions of the customers D. submit the complaint to binding arbitration

The best answer is C. Based on the information given, it appears that the investment adviser acted in accordance with the customers' wishes. The investment adviser acted properly and should do nothing.

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

The best answer is C. Charting of the price movements of stock is not "investment advice." An investment adviser, under the Investment Advisers Act of 1940, is "a person who receives compensation for advising others about securities, or about the advisability of investing in securities." Under the SEC's interpretations, a person who prepares a "list" of securities is making an implicit recommendation of these securities and is giving advice; a person who prepares asset allocation plans is also giving advice (if one of the assets included is securities). Furthermore, a person who recommends investment advisers is also one who gives advice! A person who prepares and distributes charts of stock price movements is not giving advice. Note, however, that if this information is used by the preparer to determine which securities to buy or sell, it would be considered to be "investment advice."

All of the following are generally considered to be investment advisers under Federal law EXCEPT: A. financial planners B. advisers to pension plans C. market newsletters D. investment newsletters

The best answer is C. 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.

All of the following are considered to be compensation to an investment adviser EXCEPT: A. commissions earned on recommended trades that are effected through a broker-dealer affiliate of the investment adviser B. markups earned on recommended trades that are effected through a broker-dealer affiliate of the investment adviser C. tax preparation fees that are paid to an advisory firm that is also a certified public accountant D. commissions earned on life insurance sales through an insurance company that is an affiliate of the investment adviser, that result from the implementation of an overall financial plan prepared by the investment adviser

The best answer is C. Investment adviser compensation does not only include advisory fees paid to the adviser by the customer; it includes any related compensation that the investment adviser earns. Thus, commissions and markups earned by that adviser or an affiliate from executing recommended transactions are part of compensation; as would be commissions earned by the adviser or an affiliate on recommended insurance purchases. Tax preparation fees are not related to the giving of advice - so these are not compensation to the adviser for advisory services rendered.

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

The best answer is C. 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 $2,200,000 or has at least $1,100,000 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.

Which of the following is an acceptable hedge clause found in an investment advisory contract? A. "While the Adviser agrees to use its best efforts in the management of the portfolio, the Adviser shall not be responsible for errors in judgment or losses on investments made in good faith." B. "We will extend our best efforts in the supervision of the portfolio, but we assume no responsibility for action taken or omitted in good faith." C. "The Adviser shall not be responsible for losses caused by conditions or events beyond its control such as war, strikes, natural disasters, communications disruptions, etc." D. "The adviser shall not be liable for any loss or depreciation in the value of the account unless it shall have failed to act in good faith or with reasonable care."

The best answer is C. Investment advisers have attempted to use contractual language that seeks to limit or entirely avoid civil liability - these are known as "hedge clauses." Generally speaking, such hedge clauses are prohibited. Under both Federal and Uniform State Law, an investment adviser that is a fiduciary may be subject to civil liability - even if he or she acted in good faith and with reasonable care!!! Advisers are held to an affirmative duty of utmost good faith and full and fair disclosure when dealing with clients - so it could be the case that the adviser acted in "good faith" but was not acting strongly enough in "good faith" - and so is subject to civil liability (yes, many questions on this exam are written by state securities attorneys). The only acceptable hedge clause is one that limits liability only in situations outside the adviser's control - such as war, terrorism, new government restrictions, natural disasters, etc.

An investment adviser that has filed a Form ADV with the SEC may say that he or she is: A. approved by the Securities and Exchange Commission B. certified by the Securities and Exchange Commission C. registered with the Securities and Exchange Commission D. endorsed by the Securities and Exchange Commission

The best answer is C. It cannot be stated that "registration" means that either the SEC or the State Administrator approves of the adviser, or endorses, recommends, or certifies the adviser. It can be stated that the adviser is "registered."

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

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

Under the Investment Advisers Act of 1940, a person would have to register as an investment adviser if she gave investment advice for a fee about which of the following? A. Commodities B. Futures C. Options D. Real estate

The best answer is C. Under the Investment Advisers Act of 1940, an investment adviser is defined as a "person who receives compensation for advising others about securities, or about the advisability of investing in securities." Since options are defined as a "security," and this person is charging a fee for the advice, she is defined as an investment adviser. If a person gives advice about securities, but does not charge a fee, then this person is not an investment adviser. If a person gives advice about investing in something other than a security for a fee (like, in this case futures, commodities, or real estate), this person is not defined as an investment adviser.

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 allocation reports covering securities, real estate, commodity and insurance investments D. reports on the outlook for the U.S. economy

The best answer is D. 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.

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 AI and III BI and IV CII and III DII and IV

The best answer is C. 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.

13G reports are filed with all of the following EXCEPT: A. Securities and Exchange Commission B. Company that is the subject of the report C. Exchange where company trades D. Financial Industry Regulatory Authority

The best answer is D. 13G reports are filed by "passive" investors that purchase 5% or more of a company's stock without the intention to exercise control (a 13d report is filed if the purchaser intends to exercise control). The 13G report is filed within 45 calendar days of year-end. A copy of the form is filed with the SEC; the exchange where the company trades; and the issuing corporation.

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 AI only BII and III only CIII only DI, II, III

The best answer is D. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These advisers are known as "federal covered" advisers. An investment adviser to an investment company (regardless of the dollar amount) need only register with the SEC and is exempt from registration in the State. One of main intents of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation.

Which of the following are "federal covered" advisers? I An investment adviser with $400,000,000 of assets under management II An investment adviser to an investment company with $400,000,000 of assets under management III An investment adviser to an investment company with $40,000,000 of assets under management AI only BI and II CII and III DI, II, III

The best answer is D. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These advisers are known as "federal covered" advisers. The smaller advisers are only required to be registered at the State level. Thus, the adviser with $40,000,000 of assets under management need only register with the SEC; and is exempt from registration in the State. The adviser to the investment companies (regardless of the dollar amount) need only register with the SEC; and is exempt from registration in the State.

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

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

All of the following are defined as "access persons" under SEC rules EXCEPT: A. President of the Investment Adviser B. Investment Adviser employee who makes recommendations to clients C. Investment Adviser employee who places client transactions with executing broker-dealers D. Investment Adviser employee who prepares marketing materials used to solicit new clients

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

Under SEC rules, an "access person" must report all personal securities positions: A. quarterly within 30 calendar days of quarter end B. quarterly within 45 calendar days of quarter end C. annually within 30 calendar days of the date of the statement used to prepare the report D. annually within 45 calendar days of the date of the statement used to prepare the report

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

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

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

An investment adviser makes an offer to send, by mail, a "free" analysis covering his top 50 stock picks in an advertisement. In order for an individual to get the report, the adviser could require that individual to: A. fill out a questionnaire detailing that individual's financial resources B. pay a shipping and handling fee of $38 to get the report sent out C. provide the names and addresses of 3 other persons who would be interested in the adviser's reports D. telephone the adviser and listen to a brief sales pitch before taking the mailing information

The best answer is D. Free means just that - free. Charging a high shipping fee for the "free" report means that it is not free, so this is prohibited. The offer of a free service cannot be made conditional, so requiring the customer to complete a detailed financial questionnaire crosses the line; as does asking for 3 customer references in order to get the "free" report. Making the individual call the adviser to get the "free" report is OK; and making the customer listen to a brief sales pitch to get the report is OK as well.

If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC; and if the broker-dealer does not charge separately for advice; then which statement is TRUE? A. Both the individual and the broker-dealer must register with the SEC as an investment adviser representative (IAR) and an investment adviser (IA), respectively B. The individual must register with the SEC as an IAR; the broker-dealer is not required to register with the SEC as an IA C. The individual need not register with the SEC as an IAR; the broker-dealer is required to register with the SEC as an IA D. Neither the individual nor the broker-dealer need register with the SEC as an IAR and an IA, respectively

The best answer is D. If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives."

All of the following are considered to be "compensation" to an investment adviser who charges "no fee" to customers EXCEPT: A. commissions paid to the investment adviser on recommended securities transactions B. commissions paid to the investment adviser on recommended insurance purchases C. payments received from issuers for recommending their securities D. capital gains on securities recommended to customers that have also been purchased for the adviser's personal account

The best answer is D. If an adviser claims to charge "no fee"; but then receives payment (from anyone, including issuers!) based upon transactions recommended to customers, then the adviser really is being paid for rendering such services and is being "compensated" under the IA-770 compensation test. If an adviser has a capital gain on a security position held personally, this is not compensation to the adviser. Rather, this is an investment, where the adviser is "at risk." If the adviser recommends the same investment to his customers, the existence of the personal position must be disclosed to those customers.

Under the Securities Act of 1933, liability for omissions or misstatements of material fact in a registration statement or prospectus rests with: A. the accountants for the issuer B. the officers of the issuer C. the lawyers for the issuer D. every person who signed the documents or who gave an opinion related to the documents

The best answer is D. Liability for omissions or misstatements of material fact in a registration statement or prospectus rests with every person who signed the documents or who gave an opinion related to the documents. Thus, officers of the issuer (who sign the registration statement) are liable; accountants who give certifying opinions on the issue are liable; and lawyers who render legal opinions on the issue are liable. The issuer itself can be held liable as well - since it received the funds from the securities offering that was made illegally; and these funds must be paid back to the investors.

Under IA-1092, a person is "in the business" of rendering investment advice if that person: A. advertises that it gives advice B. is compensated for giving advice about securities C. regularly gives advice about securities D. all of the above

The best answer is D. SEC Release IA-1092 states that if a person is "in the business" of giving advice about securities, then he or she must register with the SEC as an investment adviser. If one holds oneself out as an investment adviser (that is, advertises); this constitutes being "in the business." If one is compensated for giving advice about securities (unless this is an isolated event), this person is "in the business." If one gives advice about securities on a regular basis, one is "in the business" as well.

The SEC policy regarding emails maintains that: A. no records need be kept by investment advisers B. only business related emails are required to be recorded and maintained C. only personal emails are required to be recorded and maintained D. both personal and business related e-mails are required to be recorded and maintained

The best answer is D. SEC rules require that both personal and business emails must be retained by investment advisers as a required record. Their view is that it is too easy for someone to send a business email from a personal electronic device or vice-versa. All records must be retained for 5 years under the Act.

Under the Investment Advisers Act of 1940, the SEC policy regarding emails maintains that: I business related emails are required to be recorded and maintained II both business related and personal emails are required to be recorded and maintained III records must be retained for 3 years IV records must be retained for 5 years AI and III BI and IV CII and III DII and IV

The best answer is D. SEC rules require that both personal and business emails must be retained by investment advisers as a required record. Their view is that it is too easy for someone to send a business email from a personal electronic device or vice-versa. All records must be retained for 5 years under the Act.

Under the Securities Exchange Act of 1934, all of the following are defined as "securities information processors" EXCEPT: A. NYSE TRF B. NASDAQ TRF C. Pink Sheets D. MSRB

The best answer is D. Securities information processors (SIPs) collect and disseminate price quotes and transaction prices in non-exempt securities. Each exchange has a "TRF" - a Trade Reporting Facility - that is a registered SIP. The NYSE TRF reports trades of NYSE listed stocks, wherever the trade occurred. The NASDAQ TRF reports trades of NASDAQ-listed stocks, where the trade occurred. The Pink Sheets (now renamed the OTC Pink Open Market) is an SIP that distributes bid and ask quotes for over-the-counter stock issues. The MSRB is the Municipal Securities Rulemaking Board - which regulates municipal market participants.

Institutional investment managers MUST file a Form 13F with the SEC: I Monthly II Quarterly III Within 10 business days of the due date IV Within 45 calendar days of the due date AI and III BI and IV CII and III DII and IV

The best answer is D. The Form 13F (as in "Fund") is filed with the SEC by mutual funds that have at least $100,000,000 of assets under management. It discloses all of the fund's holdings and is filed within 45 calendar days of quarter-end.

Disclosure of which of the following is made in a Form ADV Part 2 that is filed with the SEC under the Investment Advisers Act of 1940? I Description of how fees are assessed II Method of analysis used III Educational background of applicant IV Balance sheet of applicant if the firm takes custody of client funds or accepts $1,200 or more of prepaid advisory fees AI and II only BIII and IV only CI, II and IV DI, II, III, IV

The best answer is D. 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.

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 AI and III BI and IV CII and III DII and IV

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

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

Under the Investment Advisers Act of 1940, required records must be retained for: A. 1 Year B. 2 Years C. 3 Years D. 5 Years

The best answer is D. The Investment Advisers Act of 1940 requires that records be maintained for 5 years. Note that NASAA has the same 5 year rule for State-registered advisers. (Also note that broker-dealer record retention rules are set under the Securities Exchange Act of 1934 and are generally 3 years, with the exception of customer account statements, which must be retained for 6 years.)

The "Brochure Rule" applies to: A. oral advisory contracts only B. written advisory contracts only C. discretionary advisory contracts only D. both oral and written advisory contracts

The best answer is D. 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.

Which of the following records of an investment adviser that takes custody of customer funds are required to be retained under the provisions of the Investment Advisers Act of 1940? I Cash receipts and disbursements journal II Customer trade confirmations III Customer account statements IV Purchase and sales blotter AI and III BI and IV CII and III DI, II, III, IV

The best answer is D. The records required to be retained by an investment adviser that takes custody include:Cash receipts and disbursements ledger and general ledgerSecurities received and delivered ledgerPurchase and sales ledger (trade ledger)Securities record (a record of each aggregate security position held, broken down by each customer owning part of the position and the physical location of that position)Confirmation copies of all customer tradesCustomer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account

If an access person at an investment adviser violates the firm's Code of Ethics involving privileged information, the consequence is most likely to be: A. revocation of that individual's IAR registration B. revocation of the firm's IA registration C. fines to the firm, but no revocation of the firm's registration D. internal reprimands, fines or firing of that individual

The best answer is D. This is from the SEC's discussion of its IA Code of Ethics rule, which is essentially the same as the NASAA rule. "Our understanding is that penalties for violations vary from one firm to another, and depend on the type of violation involved. Employees may be required to cancel trades, disgorge profits or sell positions at a loss, and may face internal reprimands, fines, or firing."

Under the Investment Advisers Act of 1940, to determine if a person is "in the business" of giving investment advice, which of the following statements are TRUE? I The individual regularly gives advice on The advice is rendered about securities III The individual receives compensation for giving advice on securities AI only BI and III only CII and III only DI, II, III

The best answer is D. 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.

Under IA-1092, an investment adviser is defined as a person who: I makes advice about securities his principal activity II makes advice about securities his regular activity III is compensated directly for services rendered IV is compensated directly or indirectly for services rendered AI and III BI and IV CII and III DII and IV

The best answer is D. To be defined as an investment adviser under IA-1092, the rendering of advice must be a regular activity - it does not have to be the "principal" activity. To be defined as an adviser, this person must be compensated for rendering advice about securities - and compensation is very broadly defined as the receipt of anything of value - either directly or indirectly - for giving advice about investing in securities.

The independent auditor's annual report of verification of customer funds held in custody by an investment adviser, as required by the Investment Advisers Act of 1940, is filed with the SEC on: A. Form ADV Part I B. Form ADV Part 2 C. Form ADV-W D. Form ADV-E

The best answer is D. Under Rule 206(4)-2 covering advisers that take custody of client funds, such advisers must submit to an annual surprise audit by an independent public accountant that verifies the funds and securities held in custody for customers. After completing the examination, the auditor must sign and file Form ADV-E (as in "Exam") with the SEC within 120 days.

An investment adviser is permitted to accept all of the following from broker-dealers in return for directing its portfolio trades (and thus paying full commissions) to that broker-dealer EXCEPT: A. research reports provided by the broker-dealer B. Monte Carlo simulation software provided by the broker-dealer C. reimbursement for the cost of attending an investment seminar D. reimbursement for the cost of hiring an administrative assistant

The best answer is D. Under so-called "soft-dollar" arrangements, investment advisers can direct their portfolio trades (and hence their commission payments) to broker-dealers that give them products and services that help them manage their investments. Thus, the broker-dealers are "paying" for the trades directed to them by giving the advisers "soft dollars." The SEC is not too keen on this, but permits it as long as the services and products provided by the broker-dealer to the adviser directly benefit the investors whose money is being managed by the adviser - the soft dollar products and services cannot solely benefit the adviser. A broker-dealer providing research reports to the adviser, providing Monte Carlo simulation software to the adviser, or paying for the adviser to attend an investment seminar (where the adviser would presumably be learning about how to be a better investment manager), in return for order flow, all directly benefit the adviser's clients and are permitted. Reimbursing the cost of an administrative assistant benefits the adviser; not the adviser's clients.

Under the Investment Advisers Act of 1940, the use of a testimonial in an advertisement by a federal covered adviser is: A. prohibited B. permitted only if the promoter is a client of the adviser C. permitted only if the promoter is not compensated D. permitted only if it is prominently disclosed whether the promoter was compensated and whether the promoter is a client of the adviser

The best answer is D. Under the Investment Advisers Act of 1940, a testimonial can only be used in an advertisement only if it is prominently disclosed if the maker was paid; and if the maker is a client of the adviser. Note, in contrast, that the NASAA rule for state registered advisers simply prohibits testimonials in advertising.

Which of the following is NOT an exempt security under the Securities Act of 1933? A. Shares in a federal credit union B. Municipal bonds C. Treasury bonds D. Shares in a bank holding company

The best answer is D. While bank issues are exempt securities under both Federal and State law, issues of bank holding companies are non-exempt and must be registered. Securities issued by federal credit unions; municipal bonds; and Treasury bonds; are all exempt issues.