Series 66 Chapter 6 (pls don't let the 6's be some satanic curse I need to pass this)

According to the Investment Company Act of 1940, a mutual fund is a type of [A]Face amount certificate company [B]Unit investment trust [C]Management company**** [D]Closed-end investment company

EXPLANATION According to the Investment Company Act of 1940, a mutual fund is operated by an investment company and is professionally managed.

All of the following sources of compensation must be disclosed by an IA to a client except: [A]As part of the promotion of a new issue, the issuer pays the IA with airline tickets to Hawaii [B]Market quotation systems paid for by a fund sponsor [C]Commissions from trades implementing investment advice [D]Monthly lease payments from an attorney who subleases part of the IAs office space***

EXPLANATION Any compensation from sources other than client advisory fees that may be a potential conflict of interest must be disclosed. Lease payments are not a form of compensation.

All of the following can be 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

EXPLANATION Financial Planners would be required to be registered. All other choices could qualify for an exclusion if the advice they give is incidental to the practice of their profession and they do not receive compensation.

Firms that maintain an inventory of OTC securities and stand ready and willing to buy and sell for or from their own accounts on a regular and continuous basis are known as: [A]Exchanges [B]ECN's [C]Market-makers [D]Floor brokers

EXPLANATION Firms that maintain an inventory of OTC securities and stand ready and willing to buy and sell for or from their own accounts on a regular and continuous basis are known as Market-makers.

Which of the following items ARE NOT REQUIRED disclosures by an "associated person" according to SEC Rule 17a-3? I. The associated person's religious affiliations and/or beliefs II. Records related to arrest or indictment for any felony or misdemeanor related to the securities industry. III. The education history and background of the associated person, including high school graduation records and any college education. IV. Records related to previous denial, suspension, expulsion, or revocation of membership by a securities regulator at the federal or state levels. [A]I and III only****[B]I and IV only[C]I, III, and IV only[D]I, II, III, and IV

EXPLANATION SEC Rules 17a-3 requires disclosure of a number of items by an associate person who is applying or filling out a questionnaire. Information requires is typically factual in nature, such as name, date of birth, address, affiliations, etc. As well, records of arrests or indictments related to the securities industry, as well as suspensions, denials, revocations, etc, must also be disclosed. Associated persons are not required to disclose certain personal information, such as religious beliefs and educational history/background.

The sale of securities within a state is considered an: [A]Exclusive transaction. [B]Inclusive transaction. [C]Interstate transaction. [D]Intrastate transaction.***

EXPLANATION Securities sold within a single state are referred to as "Intra-State" transactions. The prefix "intra" means within whereas "inter" means between.

An investment adviser representative (IAR) is engaged in options trading. The IAR decides that a fair charge for his services would be 7% per month of the assets under management. In order to do so, the IAR will disclose all fees and charges in both the advisory contract, signed by clients, and Form ADV. The IAR thinks that by the dual disclosure, he is acting appropriately. Is the IAR acting appropriately? [A]Yes. As long as clients are provided with the disclosure documents and they sign the documents, the IAR has acted appropriately. [B]No. Even with proper disclosure, the IAR is in violation of the Investment Advisers Act of 1940.**** [C]Yes. Disclosure was complete, so the IAR has acted appropriately.[D]No. Advisory fees cannot be charged monthly. They can only be charged quarterly or semi-annually.

EXPLANATION Even when disclosure has taken place, IARs cannot act inappropriately or in violation of the Investment Advisers Act of 1940. The fees charged for this IAR's services are excessive and beyond what is acceptable by the Act of 1940. Taking a real-world approach to this question, start with a $10,000 portfolio. After 6 months of managing the account, without gain or loss on securities, the advisory fees will have added up to over $3,500, which is over 35% for six months of asset management.

When a broker/dealer accepts an order for a trade from a customer, the order ticket must contain which of the following items? The customer's account number The time that the order was entered or cancelled The terms and conditions of the handling of the order [A]I only [B]I and II only [C]II and III only [D]I, II, and III****

EXPLANATION The order tickets must include: The customer's account number The time at which the order was entered or cancelled The terms and conditions of the order

According to the Securities Act of 1933, a pooled investment fund will be classified as a federal covered security if it is [A]offered in all states in the United States. [B]managed by a federally registered investment adviser.[C]registered under the Investment Company Act of 1940 as an investment company.*** [D]a fund with a fixed portfolio of bonds.

EXPLANATION A mutual fund or "pooled investment fund" would be considered to be federally covered if it is registered as an investment company under the Investment Company Act of 1940. The Investment Company Act of 1940 is a Federal regulation recognized by the Securities Act of 1933.

According to the Investment Advisers Act of 1940, which of the following are true regarding persons who engage in the business of giving investment advice to clients? I. Federal registration is not required if the person is registered in the state where they live. II. Persons must be registered if they receive any economic benefit for providing investment advice directly or indirectly. III. Accountants and attorneys do not have to register if any investment advice they give is solely incidental to practice their professions. [A]I, II[B]I, III[C]II, III***[D]I, II, III

EXPLANATION According to the Investment Advisers Act of 1940, an individual who falls under the definition of an investment adviser must be registered either with the state or with the SEC depending upon the amount of money that they manage. There are some exclusions, but answer "I" is not one of them.

Willful violations of the Investment Advisers Act of 1940 are punishable by: I. a fine up to $10,000 II. imprisonment for up to 5 years III. a bar from associating with any investment adviser [A]I, II***[B]I, III[C]II, III[D]I, II, III

EXPLANATION According to the Investment Advisers Act of 1940, willful violations of the act can be punished by a fine of up to $10,000 and imprisonment for up to 5 years or both. The Act does not address the barring of an investment adviser.

According to the Investment Company Act of 1940, which of the following may purchase mutual fund shares at a discount from the public offering price: I. a plan company II. a qualified retirement plan III. an officer of the fund's investment adviser [A]I, II[B]I, III[C]II, III[D]I, II, III***

EXPLANATION According to the Investment Company Act of 1940, all three choices offered represent situations where the purchaser may qualify for a discount from the public offering price, either due to a quantity discount or prior written agreement. Plan Companies, Qualified Retirement Plans, and an Officer of the Funds Investment Adviser all qualify for discounts from the Public Offering Price according to the Investment Company Act of 1940 and SEC Rules.

All of the following are true with regard to custody of client funds under the Investment Advisors Act of 1940 EXCEPT? [A]The IA must maintain records for each account and the amount of each client's beneficial interest. [B]The IA must notify each client in writing of the location and manner in which funds and securities will be maintained. [C]The IA is required to be registered as an IA and also registered as a Broker-Dealer.*** [D]Client funds must be deposited in one or more bank accounts which contain only client funds.

EXPLANATION All choices except "C" are true with regard to custody of client funds. "C" is incorrect because an IA is NOT required to also be registered as a broker-dealer, and either types of firm may or may not be deemed to have custody.

Which of the following is accurate with regards to disclosures and availability of documentation under the Investment Advisers Act of 1940? [A]All advertising brochures used by registered Investment Advisers must be filed with the SEC. [B]The financial statements and records of a registered Investment Adviser must be available for inspection by the SEC.*** [C]Part I of Form ADV must be provided to all clients and perspective clients of a registered Investment Adviser. [D]Advertising is not allowed

EXPLANATION All financial statements and records of a registered investment adviser must be available for inspection by the SEC at any time. All other choices are untrue statements.

According to State and Federal Regulations, an investment adviser who has custody of a client's funds or securities must: [A]send the client an itemized statement of the funds and securities at least once every 3 months.**** [B]combine the funds of all clients to get the highest rate of return.[C]do a physical audit of the funds and securities at least annually.[D]combine the securities of all clients to get the lowest custodial fees.

EXPLANATION An IA with custody of a client's funds or securities must notify the Administrator of custody; notify the client of where and how funds and securities will be maintained; segregate the securities of all clients; deposit all funds in one or more bank accounts containing only client funds; send an itemized statement to the client at least every 3 months; and have an independent accountant verify custody by actual examination on a surprise basis. These regulations are specified in the NASAA regulations and also in the regulations of the 1940 Act.

Which of the following would be included in the duties of an IA as a fiduciary? [A]The manner in which all client accounts are managed must be identical [B]An IA must settle all disputes with clients using arbitration [C]An IA must render impartial and disinterested advice to all clients*** [D]All orders placed for clients must be individual, separate, and discrete

EXPLANATION As a fiduciary, an IA has a duty to put the best interests of its clients first. This does not mean treating all clients the same way or settling all disputes by arbitration. Sometimes it may be in the best interest of clients to combine orders to qualify for volume discounts.

An investment adviser (IA) would like to charge certain clients a fee to be based on a percentage of the increase in the value of the client's portfolio for the year. Which of the following clients can legally be charged such fee? [A]A client who has a net worth of just over $800,000 [B]A client who has a net worth of $500,000. [C]A client whose assets under management total more than $1,000,000*** [D]The pension plan of a small company with $475,000 under management

EXPLANATION As a general rule, an IA may not be compensated on the basis of capital gains ("performance" fees). Two exceptions to this rule are: 1) Clients with more than $1,000,000 (previously $750,000) in assets under management 2) Clients with a minimum net worth of $2 million (previously 1.5 million).

A mutual fund which includes common stock of domestic and foreign issuers is defined as which of the following? [A]A World-wide Mutual Fund [B]A Sector Mutual Fund [C]A Global Mutual Fund**** [D]A Specialized Mutual Fund

EXPLANATION By definition a mutual fund which includes common stock of domestic and foreign issues is defined as a Global Mutual Fund.

Under the Investment Advisers Act of 1940, which of the following provisions would be permitted in an investment contract? [A]Performance fees for clients with $2.1 million net worth or at least $1 million under management*** [B]Provisions which allow the investment advisor to change membership of the IA partnership without client notification [C]Compensation based on a share of capital appreciation [D]Provisions which allow the investment advisor to assign client accounts without notification

EXPLANATION Choice A is the only choice offered which would be an allowable provision in an investment advisory contract.

According to the Investment Company Act of 1940, which two of the following are prohibited unless the investment company files an application for an exemption with the SEC? I. a change in the investment policy of a diversified open-end fund II. a merger between two registered investment companies III. a purchase by the investment company of property from the fund's investment adviser IV. a loan from the fund to its principal underwriter [A]I, III[B]I, IV[C]II, III***[D]III, IV

EXPLANATION Choice II and III are prohibited by the Investment Company Act of 1940 unless an exemption from the SEC is obtained. Choice I is allowed if a majority of voting shareholders approve. Choice IV is not directly addressed in the Act.

Any person whose principal business is providing financial services other than investment advice, would not be regarded as "being in business" of giving investment advice if, as part of the services, the person does which of the following: I. discusses in general terms the advisability of investing in securities pertaining to a discussion of economics of the role of investments in securities in a client's overall financial plan II. on rare and isolated instances, discusses the advisability of investing or analyses concerning specific Blue Chip securities III. on rare and isolated instances discusses the advisability of investing in or issues reports or analyses concerning categories of securities, for example: bonds, mutual funds, common stocks IV. provides market timing services [A]I, II[B]III, IV[C]I, II, III***[D]I, II, III, IV

EXPLANATION Choices I, II and III would NOT be considered "in the business" since the information provided was either "general" or given on "rare and isolated instances." On the other hand, choice IV would give specific advice on market timing.

Under the Investment Advisers Act of 1940 which of the following persons would NOT have been considered to have received compensation for the giving of advice? I. An annual management fee based on assets under management II. A commission charge for the execution of securities transactions III. A fee charged to a family for the establishment of family trust funds IV. An hourly rate charged to client while meeting with the client and providing the client with investment advice [A]I & II[B]II & III***[C]I, II & IV [D]I, II, III, IV

EXPLANATION Choices II & III would not be considered forms by which compensation could be paid for providing investment advice. Charging a commission for securities transactions executed would be acting as an Agent. Charging a fee for establishment of trust funds for a family has nothing directly to do with giving advice about investing in securities and would not be considered compensation as an IA.

Under the Investment Advisers Act of 1940, who would not be defined to be "a person associated with" an investment advisory firm? [A]a partner of the firm [B]an account executive of the firm [C]the head word processor for the firm**** [D]the Vice President of Administration of the firm

EXPLANATION Clerical workers, such as word processors, are excluded from the definition.

Commercial paper is an exempt security under the Securities Act of 1933 if its maturity does not exceed: [A]30 days [B]90 days [C]180 days [D]270 days****

EXPLANATION Commercial paper generally has a maximum maturity of 9 months which is 270 days.

An investment adviser (IA) and an investment adviser representative (IAR) must use the utmost good faith in conducting business with clients and must fully disclose all material facts. Which of the following best defines this statement? [A]This defines an IAs fiduciary duties to a client*** [B]This is the prudent investor rule [C]This is the suitability rule [D]This is the preferred practice rule

EXPLANATION IAs and IARs act in a fiduciary capacity in their dealings with clients pursuant to the Investment Advisers Act of 1940. This means that they must act solely in the best interests of the client and must make full disclosure of all material facts.

An investment adviser handles a securities portfolio for a client. While traveling, the client gives the investment adviser authority to write checks on his personal checking account. It is assumed that the adviser will use authority only to pay quarterly fees to the bank which is the custodian of the client's securities. Under the Investment Advisers Act of 1940, which of the following is true? [A]If the adviser used his authority only to pay the custodial fees, it is allowed. [B]The adviser is not subject to additional requirements because the arrangement is entered into for the client's convenience. [C]The adviser will not have custody of the client's funds unless the bank custodian is an affiliated person of the adviser. [D]The adviser is deemed to have custody of client funds under this arrangement and must comply with additional requirements.***

EXPLANATION If a client is going to be out of town and gives the Investment Adviser authorization to write checks out of the client's personal checking account only to pay quarterly banking fees, it would be considered custody of client's funds. Under this arrangement the investment adviser must comply with additional requirements.

All of the following events would result in an advisory contract being considered to have been transferred except: [A]A majority partner in the advisory firm dies [B]A minority partner in an advisory firm sells his interest to another individual*** [C]A controlling block of stock in the investment adviser is sold to another individual [D]The contract is pledged as collateral for a loan

EXPLANATION If a minority partner in an advisory firm sells his interest to another individual, it would not be considered a transfer of an advisory contract. If the contract is pledged as collateral for a loan, that would be considered "hypothecation" and therefore an assignment.

A Federally Registered Investment Advisor will be paid a fee based on performance. This service [A]can only be offered to existing clients. [B]can only be offered to new clients. [C]can only be offered to Qualified Clients.*** [D]cannot be offered to any clients.

EXPLANATION In order for an Investment Advisor to charge a performance based fee to a client, the client would have to be a Qualified Client. This would be a natural person or company that has at least $1,000,000 (previously $750,000) under management or has a net worth of more than $2.1 million (previously $2 million), excluding the value of the client's residence.

All of the following concerning the anti-fraud provisions of the Investment Advisers Act of 1940 are true except: [A]Unlike other general anti-fraud provisions in federal securities laws which apply to conduct "in the offer or sale of any security", they do not refer to dealings in securities, but instead are stated in terms of the effect or potential effect of prohibited conduct on a client. [B]An investment adviser who sells non-securities investments to clients must disclose all its interests in the sale to them of such non-securities investments. [C]An adviser who is also on a board of directors and provides investment advisory services outside the scope of his employment with the board of directors must disclose the advisory activities are independent of employment with the board of directors. [D]An investment adviser may, under certain circumstances, effect transactions in which it has a personal interest in a manner which could result in preferring its own interest to that of advisory clients.***

EXPLANATION Investment Advisers can never effect transactions where their own interests may be put ahead of a client's interest

According to Federal Securities Law, once a registration statement has been filed with the SEC and has become effective it means that: [A]The security has been approved by the SEC [B]The security has been disapproved by the SEC [C]The security can be sold to the public*** [D]The security has been verified by the SEC as a sound investment

EXPLANATION Once a security has been filed with the SEC and has become effective the security may be offered for sale to the public by means of a final prospectus. The SEC does NOT approve or disapprove of securities under any circumstances.

According to the Investment Adviser's Act of 1940, the "Brochure Rule" states: [A]that it is required that Part I of Form ADV must be given to all clients and potential clients of a registered IA [B]that it is required that a registered IA provide written disclosure statements to both prospective and current clients*** [C]that all advertising brochures of a registered IA must be filed with the SEC [D]that brochures must be delivered to prospective clients only

EXPLANATION Part II of Form ADV may be provided to satisfy the "brochure rule" requirement.

According to the Investment Advisers Act of 1940, which of the following statements are true regarding the acceptance of prepaid advisory fees by an investment advisor? I. The fees must be disclosed in writing in the advisory contract. II. The fees cannot exceed more than 6 months' payment in advance. III. Prepaid fees in excess of $1200 six months in advanced require that the advisor's balance sheet be disclosed to the client. IV. Acceptance of a prepaid fee would be deemed "custody" of client funds. [A]I and III only***[B]II and IV only[C]I, II, III[D]I, II, III, IV

EXPLANATION Prepaid advisory fees in excess of $1200, six months in advanced require the advisor to disclose their Balance Sheet. All fees must be disclosed in writing in the advisory contract. Fees could be prepaid for more than six months if disclosure requirements are met. Prepayment of an advisory fee would not be considered "custody" of client funds.

Under the Securities Exchange Act of 1934, institutional investment managers who have investment discretion over accounts valued at over $100 million must file reports [A]Monthly [B]Quarterly*** [C]Semi-Annually [D]Annually

EXPLANATION Quarterly reports must be filed by institutional investment managers who exercise investment discretion over more than $100 million worth of securities.

The required records of an Investment Adviser may be stored in electronic format if: [A]the IA makes proper disclosure to clients as to how the records are stored [B]the IA organizes the records so as immediate access to them is available*** [C]the IA makes and stores a separate paper copy of the records [D]the IA discloses the format to all of the appropriate regulatory authorities

EXPLANATION Records may be kept in electronic format as long as there is a means to access (read) them; there's a way to make copies of the records, as needed; and a duplicate copy is stored in a separate location.

All of the following would be considered "private funds" under Federal Securities Regulations, EXCEPT: [A]Hedge Funds [B]Private Equity Funds [C]Regulated Mutual Funds*** [D]Venture Capital Funds

EXPLANATION Regulated Mutual Funds are a form of open-end investment company that is NOT considered a private fund. Private funds are excluded from the definition of investment company under the Investment Company Act of 1940 and therefore are not required to go through full registration or reporting with the SEC. Examples would include Hedge Funds, Private Equity Funds, and Venture Capital Funds.

If an investment adviser representative (IAR) is also a licensed insurance agent and recommends that a client sells his/her mutual fund shares to buy life insurance, all of the following disclosures should be made EXCEPT: [A]That the sale of mutual funds will be a taxable event [B]That the IAR will receive a commission on the insurance sale [C]That the investment advice will not be any less objective [D]That the recommendation to buy life insurance is not connected to the services of the advisory firm****

EXPLANATION Remember that when an IAR sells both securities and non-securities related products, they continue to be regulated by the IA rules even when selling the non-securities products therefore the best answer is "D" since that advice would be connected to the advisory services.

A research analyst has a personal position in ABC stock. The analyst is about to recommend a downgrade in ABC stock from "buy" to "hold." The analyst wants to sell his/her personal position before the announcement of the downgrade. Such a sale would: [A]Be allowed as long as the analyst doesn't make a profit [B]Be allowed as long as the analyst has not publicly announced the downgrade. [C]Not be allowed because the analyst is not allowed to place his or her own interests ahead of those of clients.*** [D]Not be allowed because the analyst has not received approval for such a trade from his or her portfolio manager

EXPLANATION SEC Release 1A-1092 under the Investment Advisers Act of 1940 requires all investment advisers (including research analysts) to disclose any personal interest the adviser has with regard to recommendations made to clients. As well, analysts are not allowed to trade ahead of upcoming announcements because the information has not yet become public and trading ahead of such announcements would be placing the analyst's interest ahead of client interests.

Under the Investment Company Act of 1940, which of the following would the shareholders in a mutual fund not have a right to? [A]receive notice from the investment adviser of the changes in the fund's portfolio as they occur*** [B]elect the fund's Board of Directors [C]approve any major change in the fund's investment policy [D]approve the contract of the investment adviser with the fund

EXPLANATION Shareholders would NOT be advised of changes in the funds portfolio as they OCCUR. That would impossible for the fund to disseminate on an ongoing basis.

Under the Investment Advisers Act of 1940, if a person gets a cash fee for soliciting advisory business, what requirements must be met? I. Written disclosure must be made to the clients. II. The Solicitor must be affiliated with the company. III. The solicitor must not currently be subject to regulatory suspensions or limitations. IV. The solicitor must be a fully-registered Federal Covered Adviser. [A]I and II only[B]I, II, and III only[C]I and III only***[D]I, II, III, and IV

EXPLANATION Solicitors are required to make disclosures to clients and are not permitted to be under any regulatory suspensions or limitations while soliciting advisory business. Under the Investment Advisers Act of 1940, solicitors are not required to be affiliated with the adviser or be fully-registered as an IA. State regulations apply to solicitation, and generally require registration of those soliciting as Investment Adviser Representatives at the State Level under the Uniform Securities Act.

An investment adviser is selling a Wrap Account where the assets are held in custody of the advisory firm. The Wrap Fee Brochure must include: I. information on investment advisory fees II. information on participation or interest in client transactions III. balance sheet of the investment adviser [A]I only[B]III only[C]I and III[D]I, II, III***

EXPLANATION The Brochure which describes the Wrap Account must include information on the investment advisory fees, participation or interest in client transactions, and the adviser's balance sheet .

The Brochure Rules and Form ADV Part 2A require an IA to disclose to prospective and existing clients all of the following information about the IA, except: [A]business practices [B]investment strategies [C]conflicts of interest [D]profitability***

EXPLANATION The IA's business practices, investment strategies, and any conflicts of interest must be disclosed in the brochure that must be delivered to prospective and existing clients. The profitability of the IA need not be disclosed.

According to SEC Release IA-1092, what information must IAs disclose to clients? I. IAs must disclose that they take positions consistent with those recommended to clients II. IAs must disclose that they take positions inconsistent with those recommended to clients III. IAs must disclose any potential conflicts of interest IV. IAs must inform clients that by making full disclosure, it absolves them from adhering to certain provisions of the Investment Advisers Act of 1940 [A]I and II only[B]I and III only[C]I, II, and III only[D]I, II, III and IV

EXPLANATION The Investment Advisers Act, including SEC Release IA-1092, specifies that IAs must make full disclosure including potential conflicts of interest as well as how they personally invest, whether it is consistent or inconsistent with the positions that are recommended to clients. SEC Release IA-1092 also states that disclosure does not relieve an Investment Adviser from abiding by all other provisions of the 1940 Act.

Generally, the Investment Company Act of 1940 requires that: [A]not more than 40% of a mutual fund's Board of Directors be from inside the company. [B]not more than 60% of a mutual fund's Board of Directors be considered interested persons under the Act.*** [C]members of a mutual fund's Board of Directors must own shares of the fund. [D]an investment company may not invest in more than 100 different companies.

EXPLANATION The Investment Company Act of 1940 requires that at least 40% of the Board of Directors must be non-affiliated persons. That means that no more than 60% may be affiliates of the company.

According to the Securities Exchange Act of 1934, all of the following would be considered "securities information processors" except: [A]NASDAQ [B]Consolidated Quotations Service [C]Bloomberg Service [D]MSRB***

EXPLANATION The MSRB (Municipal Securities Rulemaking Board) is a regulatory agency, does not disseminate securities quotations, and would not be considered a securities information processor. However, choices 'A', 'B', and 'C' do disseminate quotes on a continuous basis.

The maximum amount of investors allowed in "private funds" of all types is limited to which of the following numbers by the SEC? [A]Up to 99 [B]No more than 100 [C]Up to 499*** [D]No more than 500

EXPLANATION The SEC sets the limits at no more than 100 investors for one category of private fund and no more than 499 for another, making the maximum number of investors regardless of type of private fund 499.

Which of the following acts deals most closely with IPOs and disclosure? [A]The Securities Act of 1933** [B]The Securities Exchange Act of 1934 [C]The Investment Advisor's Act fo 1940 [D]The investment Company Act of 1940

EXPLANATION The Securities Act of 1933 deals mostly with New Issues of securities (IPOs) along with Full and Fair Disclosure. The 1933 Act is sometimes referred to as the "Paper Act" and requires registration and other paperwork. The 1933 Act deals with the Primary Market.

In which of the following scenarios is an investment advisory firm REQUIRED to register with the SEC as a Federal Covered Adviser? [A]The firm has clients in 13 states. [B]The firm only provides advice related to federal covered securities. [C]The firm manages over $150 million in assets within one state only.*** [D]In order to open an account at the firm, new clients must be accredited investors.

EXPLANATION The only item listed that would require the firm to register at the federal level would be managing $150 million in assets. An investment manager with over $100 million in assets under management has the option of registering with the states or with the SEC at the federal level. An investment manager with over $110 million in assets under management is required to register with the SEC at the federal level.The previous thresholds for these numbers were $25 million and $30 million. We recommend being familiar with all to ensure the capability of answering old questions in the real exam database.Having clients in multiple states, recommendations related to federal covered securities, and requiring new clients to be accredited are not, by themselves, grounds for the requirement of registration at the federal level.

Which of the following best defines an investment company according to the Investment Company Act of 1940? An investment company is: [A]a business organized for the mutual support and protection of its shareholder members. [B]an issuer of securities engaged primarily in the business of investing and reinvesting or trading in securities.*** [C]an organization formed with the primary purpose of underwriting new issues of securities. [D]a financial firm with the primary purpose of matching investors who wish to buy or sell securities in an orderly market.

EXPLANATION The primary business of an investment company is investing and reinvesting in a portfolio of securities.

A solicitor is paid a cash fee for attempting to sell advisory services for a Federal Covered Investment Advisor. Since the solicitor is not directly affiliated with the IA the solicitor is required to provide a separate written disclosure document that must include which of the following? The name of the solicitor and investment advisor The name of the broker-dealer where the IA executes its trades The compensation arrangements between the solicitor and the IA The complete business background and qualifications of the solicitor [A]I & III**** [B]I & IV [C]I, II & III [D]I, II, III, IV

EXPLANATION The solicitor's written disclosure must disclose the name of solicitor and advisor, the services that will be provided, and the nature of the relationship between the solicitor and advisor. It also must include the compensation arrangements, including any additional charge that the client may be assessed. The solicitor's written disclosure does not have to include the name of the broker-dealer where the IA will execute trades or the complete business background of the solicitor.

According to the Investment Advisers Act of 1940, the anti-fraud provisions: [A]are substantially different from the anti-fraud provisions relating to advisory activities in regard to the Securities Act of 1933.[B]prohibit any type of deceptive acts and manipulative business practices.**** [C]can be enforced only through civil law suits filed by advisory clients. [D]apply only when a client's losses exceed $50,000.

EXPLANATION Under the Investment Advisers Act of 1940 anti-fraud provisions, investment advisers are prohibited from using any type of deceptive practice, whether related to a securities transaction or not.