S66 FSA: Investment Advisers Act of 1940

Which investment adviser employee is defined as an "access person"? A Portfolio manager B Accounts payable supervisor C Human resources supervisor D Marketing manager

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 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.

An updating amendment to Form ADV must be filed by an investment adviser with the SEC: A within 90 days of the firm's fiscal year end B within 90 days the calendar year end C upon withdrawing from an existing registration D upon applying for an initial registration

The best answer is A. An annual amendment of Form ADV must be filed electronically with the SEC no later than 90 days after the firm's fiscal year end. Note that the updating ADV amendment must be filed with NASAA under the same time frame for State-registered advisers. Do not confuse this with the NASAA requirement that all registrations expire December 31st of each year, unless renewed (and that all important annual renewal fee is paid!).

The States in which an investment adviser is registered would: A be found in Form ADV Part 1 B be found in Form ADV Part 2 C be found in both Form ADV Part 1 and Form ADV Part 2 D not be found in either Form ADV Part 1 or Form ADV Part 2

The best answer is A. 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. The ADV Part 2 is broken down into 2 parts. Part 2A is the "Brochure" that must be delivered to customers. It describes the investment adviser's policies, fees, education, types of investments, types of clients, method of analysis used, conflicts of interest, etc. Part 2B is the "Brochure Supplement" which details the educational and work background of the key personnel who make investment decisions or manage accounts.

An adviser that charges a performance fee to clients MUST disclose that such a fee arrangement: A gives the adviser the incentive to be more aggressive with the customer's asset management than if a fixed fee were charged B negates the fiduciary duty that the adviser has to the customer C better aligns the customer's interests with those of the investment adviser D is only permitted if the customer signs a liability waiver in the advisory contract

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.

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!

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.

Delivery of the brochure under the "Brochure Rule" is NOT required for: I impersonal advisory services requiring payment of less than $500 annuallyII prepaid advisory fees requiring payment in advance of $1,000 or moreIII advisory contracts with investment companiesIV advisory contracts with pension plans A I and III B I and IV C II and III D II and IV

The best answer is A. Delivery of the "Brochure" to customers is not required for the sale of impersonal advisory services calling for no more than a $500 annual fee; or for the sale of advisory services to investment companies.

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? A 45 B 90 C 120 D 180 Review

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 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.

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").

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.

Question:The Investment Advisers Act of 1940 requires that records be maintained for how many years? A 5 Years B 7 Years C 10 Years D 15 Years

The best answer is A. 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.)

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 permitted to identify the name of an existing customer in communications to potential new clients if which of the following consents? A Existing customer B FINRA C SEC D State Administrator

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

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!

Under the Investment Advisers Act of 1940, which of the following person(s) is (are) exempt from registration with the SEC? I An investment adviser whose only clients are insurance companiesII An investment adviser whose only clients are investment companiesIII An investment adviser whose only clients are pension plans A I only B I and II C II and III D I, II and III

The best answer is A. Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration. The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an investment adviser, therefore such advisers are not required to register with the SEC. This exemption does not extend to persons who give advice to investment companies or pension plans (note that under State law, the adviser to pension plans would be exempt from State registration if it had no office in the State; and the investment adviser to investment companies would be excluded from State registration since it is a federal covered adviser).

An investment adviser 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.

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.

If an investment adviser maintains an account that will hold customer securities positions at a broker-dealer, but the broker-dealer does not know the identity of the individual customers: I this is known as an omnibus account II this is known as a prime brokerage account III trade confirmations and statements are sent by the broker-dealer to the IA's customers IV trade confirmations and statements are sent by the IA to its customers A I and III B I and IV C II and III D II and IV

The best answer is B. 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.

An investment adviser wishes to participate in the gains of the accounts that he administers. Under the Investment Advisers Act of 1940, the investment adviser: A can only enter into advisory contracts with accredited investors as promulgated under Regulation D of the Securities Act of 1933 B can only enter into advisory contracts with individuals that place at least $1,100,000 under management C can only enter into advisory contracts with QIBs as defined under Rule 144A as promulgated under the Securities Act of 1933 D is prohibited from entering into advisory contracts that permit participation in profit and loss

The best answer is B. Under the Investment Advisers Act of 1940, investment advisers cannot share in the gain or loss of an account under management unless the customers are limited to individual investors with at least $1,100,000 invested with that adviser or a net worth of at least $2,200,000 ("high net worth individuals"). Regulation D Private Placements have minimum net worth standards of $1,000,000 for individuals to be an "accredited investor." Rule 144A defines a QIB - Qualified Institutional Buyer - as an institution with at least $100,000,000 of assets to invest. These have no bearing on the Investment Advisers Act of 1940 exception.

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.

Under the Investment Advisers Act of 1940, which of the following persons managing assets of at least $100,000,000 MUST be registered with the SEC? I A person who gives advice solely about listed securitiesII A person who gives advice solely about municipal securitiesIII A person who gives advice solely about U.S. Government securities A I only B I and II C II and III D I, II, III

The best answer is B. Excluded from the definition of an investment adviser is any person who renders advice solely about securities guaranteed by the U.S. Government - thus, no registration is required. Note, however, that this exclusion does not apply to persons who render advice about municipal securities; nor does it apply to persons who render advice about listed stocks. Finally, remember that only advisers with $100,000,000 of assets or more under management are required to register with the SEC; those advisers with less than $100,000,000 of assets under management only register with the State; and not with the SEC.

Which statement is TRUE about the education of investment adviser key employees who establish investment strategy or manage client accounts? A Education standards are established by the SEC B Education and work background are disclosed on Form ADV Part 2B C Higher education standards are required for advisers that will take custody of client funds than for those that do not D Minimum education standards are established for advisers that will exercise discretion over customer accounts

The best answer is B. Form ADV Part 2B requires the disclosure of the education and work background of the key personnel affiliated with the investment adviser who set investment strategy, make investment selections or who will be managing customer assets. However, there are no minimum standards for education or work background established by the SEC.

Form PF is required to be filed with the SEC by: A state-registered advisers B private fund advisers C exempt reporting advisers D non-exempt reporting advisers

The best answer is B. Form PF is used to register "Private Fund" advisers with the SEC. These are advisers to hedge funds that have at least $150 million of assets under management.

All of the following must be disclosed by an investment adviser to a customer under the Investment Advisers Act of 1940 EXCEPT an investment adviser who: A takes custody of client funds is having trouble paying its bills B does not take custody of client funds is 6 months late paying the rent on the office space C takes custody of client funds is expelled by FINRA D does not take custody of client funds was convicted of embezzlement 7 years ago

The best answer is B. If an investment adviser takes custody of client funds; has discretionary accounts; or takes prepaid advisory fees of $1,200 or more, 6 months or more in advance of rendering services, then the adviser must disclose an impaired financial condition to the customer. If the adviser does not have access to client monies, then this disclosure is not required. However, all advisers (whether or not they have access to client monies) are obligated to disclose to customers any convictions for law violations and disciplinary actions taken by the SEC, FINRA, etc.

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 A I and III B I, II, IV C II, III, IV D I, 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.

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 adviserII 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 transactionsIII Each client must be sent a monthly account statement detailing activity in the account for that periodIV To effect an agency cross transaction, written consent from the client must be obtained A I and III B I, II, IV C II, III, IV D I, 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 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 with no additional disclosures IV Using a paid testimonial which discloses that a payment was made to the maker A I and III B I and IV C II and III D II 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.

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.

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.

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 monthly B quarterly C semi-annually D annually

The best answer is B. 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.

In order to promote its services, an investment adviser that normally charges a $100 initial consultation fee wishes to publish an advertisement offering "an initial consultation and a free evaluation of the tax status of the customer's portfolio for $150." Which statement is TRUE? A Prior to publishing the advertisement in the news media, a copy must be filed with the State Administrator B The advertisement can be published if the word "free" is removed from the statement C The advertisement can be published if the terms of the offer are made to the adviser's existing customers as well as to new customers D The advertisement can only be published if the date when the offer becomes void is prominently displayed

The best answer is B. The problem here is that the tax analysis is not free - the adviser is charging an extra $50 for that analysis. If the word "free" is taken out of the advertisement, then it no longer is untruthful.

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.

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); or it 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.

The use of a third party solicitor by an Investment Adviser: I is permitted if there is a written agreement between the solicitor and investment adviser II is not permitted if the solicitor is subject to statutory disqualification as defined under the Investment Advisers Act of 1940 III requires that the solicitor be registered with the investment adviser as that firm's representative in that State IV requires that the solicitor be registered as either an investment adviser or an investment adviser representative in that State A I and II only B III and IV only C I, II, and IV D I, II, III, IV

The best answer is C. A solicitor for an investment adviser does not have to be an employee of that advisory firm. For example, an investment adviser could retain an independent CPA to refer clients that could benefit from the adviser's services. To do so, there must be a written agreement between the solicitor (the CPA in this case) and the investment adviser. The adviser is prohibited from retaining a person as a solicitor if that person is subject to "statutory disqualification" under the Investment Adviser's Act of 1940 - which basically means that this person is likely to be a risk to investors. An individual is subject to such disqualification if he or she is under suspension or has been expelled by another regulator; if he or she has been enjoined in a court of law from being in the securities business; or if he or she has been convicted of a misdemeanor or felony involving securities or monies within the past 10 years. 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).

Investment advisers that have a broker-dealer entity are permitted to accept which of the following compensation items? I Commissions on trades effected for clientsII Annual fees based on a percentage of assets under managementIII Monthly fees based on performance in the accountIV Annual fees based on a fixed dollar amount A I and IV B I, II, III C I, II, IV D II, 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.

Under the Investment Advisers Act of 1940, which of the following are defined as "investment advisers"? I A firm that prepares research reports about the NYSE marketII A firm that solely prepares research reports about the municipal securities marketIII A firm that prepares asset allocation reports covering securities, real estate, commodity and insurance investmentsIV A firm that prepares reports on the outlook for the U.S. economy A I and IV only B II and III only C I, II, III D I, II, III, IV

The best answer is C. 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.

An investment adviser is called by a customer who wishes to sell a security; and then the adviser solicits another customer to buy that same security. Which of the following statements are TRUE? I This is a "principal transaction" II This is an "agency cross transaction" III This transaction is permitted only if the customer is informed of the circumstances and consents to the transaction IV This transaction is prohibited A I and III B I and IV C II and III D II and IV

The best answer is C. An "agency cross transaction" occurs when an investment adviser recommends that a client buy a security from another client who is selling the same security. If an investment adviser effects an agency cross transaction with the customers, it must: recommend the transaction to only 1 side of the cross (i.e., only one of the customers could have been solicited); act in the best interest of both clients and obtain the best price; obtain written consent from the customer that discloses that the adviser will be acting as broker for both the buyer and seller; that a commission will be received from both parties by the adviser; and that a potential conflict exists. Also, the adviser must send to each client, at least annually, a written disclosure statement, identifying the total number of agency cross transactions and total commissions received from these transactions during the past year.

An investment adviser representative's friend provides him with a list of 10 prospective clients. The representative agrees to pay his friend a referral fee for each person on the list that opens an account with the adviser. Which statement is TRUE? A The arrangement is permitted without restriction B The arrangement is permitted only if it is in writing between the investment adviser and the friend C The arrangement is permitted only if it is in writing between the investment adviser and the friend and the arrangement is disclosed in writing to any customer opening an account D The arrangement is prohibited

The best answer is C. An investment adviser that pays a referral fee to another individual for finding new clients comes under SEC Rule 206(4)-3 covering solicitors. An investment adviser can only pay a solicitor if there is a written agreement between the adviser and the solicitor. The investment adviser must give the customer its brochure and the solicitor's brochure, in which the referral fee arrangement must be disclosed.

A registered representative with a broker-dealer makes recommendations of securities to a customer, and charges a commission on each trade. Which statement is TRUE? A This person must register with the State as an investment adviser representative B This person must register with the State as an investment adviser C This person is excluded from the definition of an investment adviser D This person is defined as an investment adviser, but is exempt from registration

The best answer is C. Broker-dealers and their registered representatives are excluded from the definition of an investment adviser as long as they do not charge separately for advisory services. Thus, a broker-dealer can charge a commission on each recommended trade and not be defined as an investment adviser that must register in the State (note however, that it must still register as a broker-dealer in that State).

All of the following are specifically EXCLUDED from the definition of an investment adviser under the Investment Advisers Act of 1940 EXCEPT: A lawyers B accountants C financial planners D engineers

The best answer is C. Financial planners are not excluded from the definition of an "investment adviser" - the whole intent of IA-770 and IA-1092 was to make sure that these guys register with the SEC! Lawyers, accountants, teachers, and engineers who give incidental advice to their regular practice; and who do not charge separately for this advice are excluded.

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 Review

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.

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 1II an audited balance sheet must be filed with the SEC along with Form ADV Part 2III promptlyIV within 90 days A I and III B I and IV C II and III D II 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.

Under the Investment Advisers Act of 1940, if an investment adviser wishes to renew an advisory contract which will allow it to start taking prepaid advisory fees of $1,200 or more, 6 months in advance of rendering services, which statement is TRUE? A A revised "Brochure" must be sent to each of the adviser's customers B The adviser's customers must be given a "Brochure" at least 48 hours prior to contract renewal; and then decide during that time frame whether or not they wish to accept the terms of the new contract. C The investment adviser must file a Form ADV Part 2A and balance sheet with the SEC promptly D The investment adviser is prohibited from changing the terms of the advisory contract.

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. However, if, for the first time, the adviser will accept $1,200 or more of prepaid fees 6 months or more in advance of services rendered, this is a material change that requires the adviser to file an ADV Part 2A with an audited balance sheet promptly.

An investment adviser who renders advice solely to investment companies is: I subject to State registrationII exempt from State registrationIII subject to Federal registrationIV exempt from Federal registration A I and III B I and IV C II and III D II and IV

The best answer is C. Investment advisers to investment companies are "federal covered advisers" that are required to register with the SEC only. There is no requirement for registration of these advisers at the State level. 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 actions by an investment adviser are prohibited under the Investment Advisers Act of 1940? I Making a cash payment to a solicitor that is undisclosed to the customer for signing that customer as an advisory clientII Using an advertisement that includes a testimonial from a famous personality without disclosure of paymentIII Entering into an oral advisory contract with the customerIV Accepting a prepaid advisory fee from a client A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. Prepaid advisory fees are permitted, though the contract must explain how much of the fee will be refunded if the contract is canceled prematurely. Making a cash payment to a solicitor for signing a customer to a contract is permitted only if the payment is disclosed to the customer; and if the customer receives a solicitor's "Brochure" as well as the adviser's "Brochure;" and the customer must sign an acknowledgment that both were received. Oral advisory contracts are not permitted under the Investment Advisers Act of 1940 - they must be in writing (Note, however that the "Brochure Rule," under the Investment Advisers Act of 1940, requires delivery of the "Brochure" at, or prior to, entering into either a verbal or written contract, which is contradictory - but this is the rule!). 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.

Private Fund Advisers: A are not required to register with the SEC B must register with the SEC once assets under management reach $100 million C must register with the SEC once assets under management reach $150 million D must register with the SEC once assets under management reach $200 million

The best answer is C. 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.

A securities analyst of a major brokerage firm is having dinner with his best friend, a portfolio manager of a large mutual fund. The analyst, after a few drinks, tells the portfolio manager that he is about to issue an extremely favorable research report on PDQ Corp. that will place a "Buy Now" recommendation on the stock. The portfolio manager has been under pressure to produce better returns for his mutual fund this year, as the market has generally declined. The portfolio manager buys a large block of PDQ stock that he allocates pro-rata across his own account and the account of the mutual fund that he manages. The next day, the research report is issued and the stock goes up by 15%. Which statement is TRUE regarding this situation? A Because the information was not received directly from the issuer, the mutual fund manager was permitted to buy the stock in advance of the release of the research report B Since the analyst created the report using publicly available sources of information, the mutual fund manager can buy the stock in advance of the release of the research report C The mutual fund manager's action is a violation of the "trading ahead of research" prohibitions D The mutual fund manager's action is a conflict of interest because he bought the stock for his personal account as well as for the mutual fund's account

The best answer is C. Since the research report has not been released, the portfolio manager that got the "buy" recommendation before it was released to the public and then who went out and bought that stock, has violated the "trading ahead of research" prohibition.

Under SEC Release IA-1092, which of the following are specifically included under the definition of an "investment adviser"? I Pension consultantsII Advisers to entertainersIII Advisers to athletesIV Advisers to issuers A I only B II and III only C I, II, III D I, II, III, IV

The best answer is C. Specifically included in the definition of an investment adviser that must register with the SEC under IA-1092 are pension consultants and advisers to entertainers and athletes. Advisers to issuers are not specifically included - but they would be required to register with the SEC if they met the 3-prong test.

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 securitiesII solely to insurance companiesIII solely to investment companiesIV to customers within one State, where the investment adviser is a resident of that State A II and III B III and IV C I, II, IV D I, 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.

Which of the following actions taken by an investment adviser would require consent of the adviser's existing customers? I The investment adviser and its accounts are acquired by a larger, more prestigious firmII The investment adviser acquires a small firm and its accounts to enhance its geographic coverageIII The investment adviser wishes to retire and transfer its accounts to another investment adviser A III only B I and II C I and III D I, II, III

The best answer is C. 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 (Choice I). On the other hand, if an investment adviser acquires another advisory firm (Choice II), it is the acquired firm's clients that must give consent. The acquiring firm's clients are not affected by such an action. In Choice III, the adviser is retiring and transferring his or her accounts to another firm - again, in this case, the clients must consent to the transfer.

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 Adviser Act of 1940, which statement is TRUE regarding an investment adviser who wishes to show past performance? A The adviser can be deliberately selective as to the client performance that is shown as long as the clients consent to this; and the adviser mentions the market conditions during the time period shown B The adviser can use the names of specific clients when showing past performance as long as the clients benefited from the adviser's services C The adviser can show past performance as long as the adviser is not deliberately selective; and the adviser mentions the market conditions during the time period shown D The investment adviser is prohibited from showing past performance.

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, market conditions during that period must be disclosed (e.g., "This was a period when the market was generally rising."); and the disclaimer that past performance does not predict future results must be displayed. Specific customer names cannot be used in advertising unless the customer consents. There is no requirement to show a minimum 10 year performance history when showing past performance in investment adviser advertising.

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 A I and II only B III and IV only C I, III, and IV D I, 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).

Violations of the Investment Advisers Act of 1940 are punishable by which of the following? A Fines of up to $10,000 only B Fines of up to $15,000 only C Fines of up to $10,000; and up to 5 years in jail D Fines of up to $15,000; and up to 5 years in jail

The best answer is C. Violations of the Investment Advisers Act of 1940 are punishable by fines of up to $10,000; and up to 5 years in jail. (Note that this differs from Uniform State Law, which imposes fines of $5,000 and jail for up to 3 years for violations.)

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 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 SEC Release IA-1092, which of the following are considered to be compensation to an investment adviser? I Prepaid advisory fees that will be refunded in part if the contract is canceledII Hourly advisory feesIII Fixed advisory feesIV Commissions received on transactions that result from the implementation of a financial plan created for "free" by the adviser A II and III only B I and III only C II and IV only D I, II, III, IV

The best answer is D. "Compensation" to an investment adviser can basically be received in any form - it includes fixed fees, hourly fees, fees based upon assets under management, prepaid fees; and any compensation received from anyone else in connection with that investment advice.

Which "soft dollar" remuneration arrangement between an investment adviser and a broker-dealer is prohibited? A The broker-dealer providing free asset allocation software to the adviser in return for the adviser directing trades to that broker-dealer B The broker-dealer providing free research reports to the adviser in return for the adviser directing trades to that broker-dealer C The broker-dealer providing free market timing software to the adviser in return for the adviser directing trades to that broker-dealer D The broker-dealer providing the services of an on-site research analyst to the adviser in return for the adviser directing trades to that broker-dealer

The best answer is D. "Soft dollar" arrangements between a broker-dealer and either a mutual fund or an investment adviser work as follows: In return for the mutual fund or investment adviser directing its trades to that broker-dealer at full commission rates, the broker-dealer provides "free" services to the mutual fund or investment adviser such as asset allocation software, free research, and market timing software. The SEC permits this as long as the "free services" provided benefit all of the fund's shareholders, or the investment adviser's customers, equally. The SEC feels that these "soft dollar" payments allow smaller research firms to remain in existence, since they can market their services to mutual funds in return for commissions paid by the fund (and ultimately paid by that fund's shareholders). However, these arrangements cannot be used to pay for salaries, hotel and rental car costs, personal travel or entertainment.

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.

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.

Which of the following are included in the Form ADV filed to register as an investment adviser with the SEC? I Compensation to be receivedII Conflict of interest disclosureIII Whether the adviser has discretionIV The firm's business history A I and II only B III and IV only C I, II, III only D I, II, III, IV

The best answer is D. Consider this to be a learning question. The ADV includes the adviser compensation; disclosure of adviser conflicts of interest; whether the adviser has discretionary authority and the firm's business history (among a myriad of other information).

Delivery of the brochure under the "Brochure Rule" is required for which of the following? I Impersonal advisory services requiring payment of less than $500 annuallyII Prepaid advisory fees requiring payment in advance of $1,000 or moreIII Advisory contracts with investment companiesIV Advisory contracts with pension plans A I and III B I and IV C II and III D II and IV

The best answer is D. Delivery of the "Brochure" to customers is not required for the sale of impersonal advisory services calling for no more than a $500 annual fee; or for the sale of advisory services to investment companies. Prepaid advisory fees requiring payment in excess of $500; or advisory contracts with anyone other than investment companies, requires the delivery of a brochure.

An investment adviser charges a fee for an overall financial plan. Which of the following facts must be disclosed to the customer? I The adviser will receive a commission on recommended U.S. Government securities transactionsII The adviser will receive a commission on recommended equity securities transactionsIII The adviser will receive a commission on recommended life insurance transactionsIV The adviser will receive a commission on recommended real estate transactions A II only B I and II C III and IV D I, II, III, IV

The best answer is D. If an investment adviser is being paid by someone other than the customer in a recommended transaction, this is a conflict of interest that must be disclosed to the customer. It makes no difference if the payment is coming from recommending a security, insurance or real estate investment to that customer.

If an investment adviser wishes to use a paid solicitor, under the Investment Advisers Act of 1940, all of the following statements are true EXCEPT the: A solicitor must provide the customer with a copy of the investment adviser's brochure B solicitor cannot be subject to statutory disqualification under the Securities Acts C 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 D solicitor must register with the SEC as an investment adviser

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

Under SEC Release IA-1092, which of the following would be required to register with the SEC as investment advisers? I A Certified Financial Planner who only provides general financial planning for a fee; but who does not take commissions on recommended transactionsII An attorney who manages the business affairs of athletes for a feeIII An accountant who manages the business affairs of entertainers for a feeIV An economist who gives advice to pension plans for a fee on the outlook for the securities markets A II and III only B I and IV only C II, III, IV D I, II, III, IV

The best answer is D. Investment adviser Release IA-1092 specifically includes advisers to entertainers and athletes, and advisers to pension plans, as investment advisers that must register with the SEC. In addition, the SEC in this release, states that a financial planner that provides general financial planning for a fee comes under the definition and must register with the SEC. It makes no difference whether or not the financial planner takes commissions on recommended trades - if this person gives general "non-specific" advice for a fee, he or she is still considered to be an "investment adviser" that must register.

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.

Under the Investment Advisers Act of 1940, an investment adviser is prohibited from borrowing money from which of the following? A Broker-dealer B Investment adviser affiliate C Insurance company D Small manufacturing company

The best answer is D. Investment advisers cannot borrow money from "customers" - which are defined, in this instance, as anyone who is not in the business of lending money. Broker-dealers lend money where securities are collateral under the provisions of Regulation T of the Federal Reserve Board. Insurance companies lend monies under the provisions of Regulation G of the Federal Reserve Board. An investment adviser borrowing from an affiliate is basically borrowing from itself, so this is permitted. An investment adviser borrowing from a small manufacturing company is borrowing from a business that is not permitted under Federal and State law to lend monies - this is the same as borrowing from a "customer."

An investment adviser that wishes to pay a solicitor a fee for bringing in new client money: I must be registered under the Act II must have a written agreement with the solicitor III cannot pay a fee to a solicitor that is subject to statutory disqualification under the Securities Exchange Act of 1934 or that is subject to an order, judgment, or decree under the Uniform Securities Act IV must obtain a written acknowledgement from the customer that he or she received both the investment adviser's and the solicitor's disclosure documents A I and II B III and IV C II, III, IV D I, II, III, IV

The best answer is D. Investment advisers may hire solicitors to find them new business and can pay for the solicitation. To do so, the investment adviser must be registered (either with the SEC as a Federal Covered adviser or with the State); the adviser must have a written agreement with the solicitor; the adviser cannot pay the solicitor if the solicitor has violated the Securities Laws; and any client brought in by the solicitor must get a copy of both the investment adviser's brochure and the solicitor's brochure (this must be acknowledged in writing by the client).

A Registered Investment Adviser uses past performance in an advertisement. The results shown must be based on: A Gross investment income before any deductions B Investment income after the deduction of expenses C Investment income after the deduction of management fees D Investment income after the deduction of management fees and expenses

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."

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 personal emails must be retained by investment advisers B business-related emails that are solicitations must be retained by investment advisers C all business-related emails must be retained by investment advisers 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, 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 firmII A list of the shareholders of the advisory firmIII The States in which the advisory firm is registered A I only B I and II C III only D I, 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.

Which of the following is NOT a form of compensation to an investment adviser? A Soft dollar arrangements B Commissions C Wrap fees D Bid-ask spreads

The best answer is D. The bid-ask spread is earned by the market marker in a security; it is not earned by the adviser. Forms of compensation to an adviser are commissions earned on portfolio trades performed; management fees earned; wrap fees earned; and so-called "soft dollar" arrangements, for example where investment research is given free to the investment adviser by a brokerage firm in return for the adviser directing its portfolio trades to that broker.

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 journalII Customer trade confirmationsIII Customer account statementsIV Purchase and sales blotter A I and III B I and IV C II and III D I, 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 ledger Securities received and delivered ledger Purchase 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 trades Customer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account

An investment adviser that solely follows and recommends listed securities is: A exempt from State registration B exempt from Federal registration C subject to State registration only D subject to either State or Federal registration

The best answer is D. There is no exemption from registration for an investment adviser that follows only listed securities, at either the State or Federal level. The adviser must be registered in the State if it manages assets of less than $100,000,000; and if the adviser manages assets of $100,000,000 or more, it must register with the SEC.

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 adviserII any conflicts of interest that the investment adviser may haveIII information on advisory fees charged A I only B I and II C II and III D I, 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.

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."

An Investment Adviser Representative (IAR) is also a commissioned agent at a brokerage firm. The IAR has a young client who has a $250,000 account. The client has been trading the account aggressively himself and has been successful in the strategy. The customer now wants the IAR to take over the management of the account, with the IAR to be compensated on a performance basis. The IAR should tell this young client that the account: A cannot be traded on a performance basis B can be traded on a performance basis C can be traded based only on a per trade commission charge D must be closed Review

The best answer is A. Performance fees are only allowed for wealthy clients (at least $1,100,000 invested; or a minimum $2,200,000 net worth) under the Investment Advisers Act of 1940 - so this client does not qualify. The account cannot be traded on a performance basis - a commission or fixed fee arrangement must be established.

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 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.

Investment advisory contracts must conform with all of the following requirements EXCEPT: A the contract must be in writing B the fee cannot be based upon capital gains C the contract cannot provide for assignment to a third party without customer approval D the fee cannot be based upon the value of assets under managemen

The best answer is D. It is standard practice for advisory contracts to set fees based upon an annual percentage of all assets under management. Such fees cannot be based on capital gains in the account; the contract must be in writing; and the contract cannot be assigned to a third party without customer approval.

Under the Investment Advisers Act of 1940, copies of all advertising, notices and circulars must be retained: I if distributed to at least 1 person II if distributed to at least 10 people III for a minimum of 3 years IV for a minimum of 5 years A I and III B I and IV C II and III D II and IV

The best answer is D. 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.

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 are required for registration as an investment adviser under the Investment Advisers Act of 1940? I Payment of a filing feeII Filing of a Form ADV Part 1III Filing of a Form ADV Part 2 A II only B I and II C II and III D I, II, III

The best answer is D. To register as an investment adviser with the SEC, a Form ADV Part 1 and Part 2 must be filed, along with a non-refundable filing fee.