Series 66- Laws, Regs, Guidelines #2
Which of the following situations would require registration as an investment adviser? I. A broker-dealer provided investment research services to a customer and charged a fee for the service. II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III. An agent of a broker-dealer prepares a complete financial plan for a customer for a nominal charge. The plan recommends specific securities transactions, which the customer orders. The agent earns commissions on the securities transactions. IV. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A)I and III. B)I, II, III and IV. C)I, III and IV. D)I only.
Answer: A Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.
An investment advisory contract is considered assigned if an adviser formed as a: A)corporation with 2 officers and adds 5 officers. B)partnership with 2 partners and adds 5 partners. C)corporation with 5 officers and adds 2 officers. D)partnership with 5 partners and adds 2 partners.
Answer: B If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required.
Under the Uniform Securities Act, which of the following are NOT considered investment advisers or investment adviser representatives in this state? I. An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. II. United Trust Company of America. III. An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management. IV. An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state. A)II and IV. B)I and II. C)I, II, III and IV. D)IV only.
Answer: A An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an investment adviser representative. An individual who sells advisory services for AAA Advisers, Inc., is an investment adviser representative. A trust company is not an investment adviser under the USA. An investment adviser with no office in the state, that does business exclusively with other investment advisers located in that state, is also excluded as an investment adviser under the USA.
A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered if: I. the minimum denomination is $50,000. II. the maximum maturity is 270 days. III.it is rated in 1 of the 3 highest rating categories by a recognized rating agency. IV.it is in book entry form. A)I, II and III. B)I and III. C)II, III and IV. D)I and II.
Answer: A Commercial paper may qualify as an exempt security if the minimum denomination is $50,000, it has a maturity of not more than 270 days, and it is rated in 1 of the 3 highest rating categories by a nationally recognized rating agency.
Doug runs a sole proprietorship IA and is also a registered agent with Pelf Securities, Inc., a registered broker-dealer. Doug charges his clients an hourly fee for advice, and when they wish to purchase recommended securities, they may do so through Pelf Securities if they have an account there. In those circumstances, Doug earns a commission on the securities transaction in addition to the hourly fee he earned while making that recommendation. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A)this would be permitted if the compensation was disclosed to the client B)this would constitute a prohibited practice C)this would be acceptable if it was disclosed to the client and the IA fee was based on a percentage of assets under management rather than an hourly basis D)the trade could only be placed through Pelf Securities if they were the market maker in the recommended security
Answer: A Investment advisers may charge fees on an hourly basis, as a percentage of assets under management, or even as a flat annual fee. In addition, if licensed as agents of a broker-dealer, they may also earn commissions on transactions routed through that BD. However, disclosure to the client is required, and it must be made clear to the advisory client that transactions may be executed at whatever broker-dealer the client chooses.
Al is an investment adviser representative for a federal covered investment adviser. Al has discretionary authority over most of his accounts and determines that shares of the RAN Corporation are a suitable investment for seven of them. He enters a buy order for 1,000 shares of the RAN and receives three trade confirmations, all at slightly different prices. When allocating these shares to his clients, how should Al determine the price per share? A)Allocate the shares using the average price of all the shares combined. B)Allocate the lowest priced shares to the customers who have had accounts with the firm the longest period of time. C)Allocate the highest priced shares to the customers with the highest net worth. D)Allocate the lowest priced shares to the customers with the largest accounts.
Answer: A It frequently happens that an IAR will submit an order for a large quantity of a specific security that is to be allocated among several clients. If the order is filled at different prices, the only fair treatment is to distribute the shares on an average price basis.
Which of the following circumstances would require an investment adviser to notify all clients of the firm? A)The investment adviser hires another partner for the firm. B)A partner of the firm was disciplined by the firm. C)The investment adviser acquires the accounts of another firm. D)The investment adviser opens a branch office in another state.
Answer: A The investment adviser must disclose to the client any change in the members of a partnership. The adviser must notify only those clients whose accounts were obtained. The adviser does not need to notify existing clients of the new accounts. Internal disciplinary actions generally do not have to be reported to clients.
Joan, who has a PhD in economics, has been employed as an agent by Gibraltar Securities for the past 15 years. Missing academic life, she resigns from the broker-dealer and accepts a position as an economics professor at a state university. Which, if any party, is required to notify the state securities Administrator of this change? A)Both Joan and the firm. B)Only the securities firm. C)Only Joan. D)No party, because Joan's termination is voluntary and not for cause.
Answer: A The license of an agent expires when she ceases to be employed by the broker-dealer or issuer for whom she was previously licensed. Both the agent and the former broker-dealer are required to notify the Administrator promptly.
Broker-dealers are not required to keep: A)copies of client's tax returns. B)customer account records. C)financial records. D)blotters.
Answer: A There is no requirement for broker-dealers or their agents to maintain copies of client's tax returns. A firm's blotter is its record of original entry for all money and securities transactions.
When an investment adviser prepares a BCP, is should be based upon I. the size of the firm II. the firm's annual net income III. the number of locations of the firm IV.the types of services provided A)I, III, and IV B)III and IV C)I, II, III, and IV D)I and III
Answer: A The amount of an investment adviser's net income is not relevant to a BCP
The purpose of SEC Release IA-1092 is to: I. unify the requirements of the Uniform Securities Act and the Investment Advisers Act of 1940. II.clarify the Securities Exchange Act of 1934. III. clarify the activities that would subject a person to regulation under the Investment Advisers Act of 1940. A)I only. B)III only. C)II only. D)I and II.
Answer: B The purpose of SEC Release IA-1092 is to clarify the definition of investment adviser in the Investment Advisers Act of 1940 and to clarify the types of activities that are subject to regulation.
When a security is registered with the Administrator, it means that A)the Administrator has approved of the issue B)the security may be legally sold in the state C)it is now exempt from the advertising filing requirements of the USA D)it is probably a federal covered security
Answer: B We can never misrepresent a security's registration. The Administrator, in registering a security, declares that the security is legal for sale in the state. Never use the word approved when referring to registration of a security or a securities professional. Only exempt securities and exempt transactions are exempt from the advertising filing requirements, and federal covered securities don't register with the Administrator; they notice file.
If Somerville Discount Securities has its principal office in New Jersey and recently registered a branch office in Minnesota, which of the following statements is TRUE? A)Each agent is automatically registered in both states. B)Each agent must be registered in the appropriate state before soliciting or taking orders. C)Agents working in the principal office that are licensed only in New Jersey may take unsolicited orders from Minnesota residents. D)Agents working in the branch office that are licensed only in Minnesota may take unsolicited orders from New Jersey residents.
Answer: B Agents must be registered in every state in which they do business. An agent is not automatically registered in a state just because his employer is registered in that state.
A broker-dealer is the lead underwriter in a new issue. During the period this new security issue is in registration, which of the following will usually be distributed? I. Subscription forms enabling clients to place a down payment on the issue. II. A red herring prospectus. III.The company's latest research report on that stock. IV. Indication of interest forms. A)III and IV. B)II and IV. C)II and III. D)I and II.
Answer: B During the period a new securities issue is in registration, the underwriters usually prepare and distribute the red herring prospectus along with forms to indicate interest in the issue. No firm orders or payment may be accepted prior to the date the issue is effective for sale.
The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, or investment adviser involved in any securities sale that violates the Uniform Securities Act is the: A)agreement to actionable offenses. B)consent to service of process. C)right of retribution. D)right of rescission.
Answer: B Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally.
A client of an investment adviser needs a bridge loan and approaches the IA to see if the firm is interested. Because the IA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers A)the loan would not be permitted under any circumstances B)the loan could only be made after the advisory contract was terminated C)the loan could be made if the client was an institutional investor D)the loan could be made if the IA was affiliated with a bank
Answer: B First of all, a "bridge" loan has nothing to do with a bridge. The client is not trying to cross over anything. The term is used to refer to a short-term loan to provide funds until permanent financing may be arranged. Now that we've got that out of the way, we can answer the question. Loans may never be made to clients unless the firm is in the business of lending money. Since this IA states that it is not their business model, the only way this loan could be made is if there was no adviser/client relationship.
State securities law generally limits agents to employment with a single broker-dealer unless: A)multiple employment is widespread and does not require specific Administrator approval. B)the Administrator, by rule or order, authorizes employment with more than one broker-dealer. C)permission is received from both broker-dealers regardless of Administrator approval. D)permission has been granted by the SEC.
Answer: B Unless the broker-dealers are under common control, the USA generally limits agents to single employment unless the Administrator, by rule or order, authorizes multiple affiliations.
Strategic Capital Asset Managers (SCAM) is preparing its Form ADV Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information EXCEPT A)the fact that any listed person has no formal education after high school B)compensation earned on dealings with clients C)disciplinary information about material events within the past 10 years D)the name, title, and telephone number of the individual supervising any listed person
Answer: B It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed.
Which of the following would NOT be considered an unethical practice for a registered investment adviser? A)Acting as a principal in a recommended transaction without consent of the client prior to completion of the trade B)Acting as a trustee for a client's trust C)Unfairly criticizing an estate plan prepared by the client's attorney D)Failing to notify the Administrator that the adviser is maintaining custody of client funds and securities
Answer: B Please notice the word not in the question. Although acting as a trustee for the client's trust is probably not a good business practice, it is not included in the list of unethical activities for an adviser.
Under the Investment Advisers Act of 1940, which of the following statements regarding an adviser's registration is TRUE? A)Registrations become effective in 30 days unless delayed by the SEC. B)Registrations expire on December 31 of each year. C)If the adviser ceases to act as an adviser or goes out of business, the SEC will cancel the registration. D)Withdrawal from registration is done on Form ADV-W and takes effect 45 days after filing.
Answer: C Under the Investment Advisers Act of 1940, registrations become effective 45 days after filing, unless delayed by the SEC, and remain effective until withdrawn by the adviser or canceled, suspended, or revoked by the SEC. The SEC will cancel a registration if the adviser is no longer in existence or in the business. Although the ADV-W is the form for withdrawal, it becomes effective upon acceptance by the IARD, provided however that the investment adviser's registration continues for a period of 60 days after acceptance solely for the purpose of commencing a proceeding regarding any violation of the Act.
Under the Uniform Securities Act, any securities registration statement must include: I. the amount of securities to be offered in that state. II. a list of the other states in which the security will be registered. III. a copy of the prospectus or offering circular. A)II and III. B)I and II. C)I, II and III. D)I and III.
Answer: C A registration statement must include all three items shown, plus any adverse finding by any court, any Administrator, or the SEC.
The state securities Administrator has the authority to: A)amend or alter the Uniform Securities Act. B)issue and enforce an injunction against a registered party. C)make, amend, or rescind rules,forms, and orders necessary to administer the USA. D)issue a ruling under its authority with no requirement to publish that ruling.
Answer: C A state securities Administrator may issue a ruling or order to comply with the blue-sky laws of the state and designate the use of certain forms, but does not have authority to amend or alter the Uniform Securities Act itself. All rules and forms of the Administrator must be published. Only the courts can issue injunctions.
An agent registered in one state may solicit business in another state provided: A)the agent was previously registered with a different firm in the other state. B)the agent applies for registration in the other state. C)both the agent and the firm are properly registered in the other state. D)the agent's firm is properly registered in the other state.
Answer: C An agent holding registration in one state may solicit and/or transact business in another state only if registered in that state and the employing broker-dealer is also registered in that state, unless an exemption is available.
An agent received negative confidential material information of a nonpublic nature about XYZ, an issuer whose stock trades publicly. A customer calls his agent to inquire about the advisability of purchasing XYZ. What action should the agent take? A)Recommend the stock and enter the order if it is a suitable investment. B)Discourage the customer from purchasing the stock based upon the information received. C) Notify the principal of the broker-dealer about the information. D)Encourage the customer to hold off for a market correction.
Answer: C An agent must notify the principal of the firm with the information and respond to the customer per the firm's instructions.
Under the Uniform Securities Act, an offer to sell would NOT include: I. stock acquired through a merger. II. the issuance of warrants or convertible securities. III. the issuance of stock rights to existing shareholders. A)I, II and III. B)II and III. C)I only. D)I and III.
Answer: C An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell.
A federal covered adviser has entered into a relationship with a solicitor. In order to be in compliance with the Investment Advisers Act of 1940: A)compensation must be limited to actual funds brought under management. B)cash referral fees may not be paid to solicitors. C)the relationship must be disclosed through the delivery of a separate solicitor's brochure along with the adviser's brochure. D)the solicitor must be registered as an investment adviser representative.
Answer: C In all cases, other than regarding impersonal advisory services, delivery must be made of both the adviser's brochure and some type of document describing the role of the solicitor. While some states do require solicitors to be registered as adviser representatives, that is not a requirement of the federal law. Solicitors may be compensated in a number of different manners, one of which is cash referral fees.
Under federal law, the statute of limitations for civil liability is: A)two years after discovery or three years after the action, whichever is sooner. B)one year after discovery of the action. C)one year after discovery or three years after the action, whichever is sooner. D)two years after the action.
Answer: C In the federal regulations, the statute of limitations for a civil action is the sooner of one year after discovery or three years after the action. Under the USA, it is the sooner of two years after discovery or three years after the action.
An investment adviser is required to disclose to a client the amount of compensation received from which of the following third parties? I.Compensation on the client's transactions executed through a broker-dealer. II. Compensation received from an issuer of a security recommended to the client. III. Compensation received from any nonsecurities products recommended to the client. A)I and II. B)I only. C)II only. D)I, II and III.
Answer: D Investment advisers must disclose the amount of compensation received or to be received from any third party in connection with recommendations made to a client. This includes compensation from any broker-dealer, compensation from any issuer, and compensation from any nonsecurities entities.
An investment adviser is registered in States A and B with their principal office in State B. The Administrator of State A can request to see: A)internal communications regarding the company's participation in a local charitable event. B)proof that the IA meets State A's financial and recordkeeping requirements. C)sales records relating to clients who are residents of State B. D)advertisements run in State A.
Answer: D The Administrator of State A can request that advertisements placed in his state be filed because that is business relating to his state. As long as the IA meets the "home" state's financial and recordkeeping requirements, that is good everywhere.
As defined in the Investment Advisers Act of 1940, all of the following would be considered investment advisers EXCEPT A)a tax attorney who manages investment portfolios for 50 clients. B)a civil engineer making investment decisions for $5 million held in escrow while a bridge for which she is the project manager is being constructed. C)a portfolio manager who limits advice to municipal securities exclusively. D)a professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors.
Answer: D The plumber would not be considered an investment adviser because two of the three "prongs" are missing - advice is not being given as part of a regular business and there is no compensation. While an exclusion from the definition applies to advisers limiting advice to U.S. government securities, no such exclusion operates for advisers limiting advice to municipal securities. Similarly, there is an exclusion for attorneys providing investment advice on an incidental basis, but 50 clients is not incidental. Engineers are excluded from the definition provided their advice is incidental to their profession, but making investment decisions on the money in escrow is clearly not incidental.
The terms "offer", "offer to sell", "sale", and "sell" include which of the following? A)A stock dividend for which the stockholders give nothing of value. B)Any bona fide pledge or loan. C)An act incidental to a class vote by stockholders pursuant to the applicable corporate statute on a merger. D)Preemptive rights.
Answer: D The preemptive right frequently given to common stockholders allowing them to purchase shares of a forthcoming issue is considered to be an offer of that upcoming issue. The terms "sale" or "sell" include every contract of sale, contract to sell, or any disposition of a security for value. A gift of a security is not considered a sale. The terms "offer" and "offer to sell" represent any effort to dispose of a security for value. This does not include bona fide loans, stock dividends, or dispositions pursuant to corporate statutes.
Willful violations under the Investment Advisers Act of 1940 may result in which of the following punishment(s)? I. $10,000 fine. II. A prison term of up to 10 years. III. Being barred from association with any investment adviser. A)II and III. B)I only. C)I, II and III. D)I and III.
Answer: D Violations of the Investment Advisers Act or SEC rules carry penalties of up to $10,000 in fines and prison terms of up to five years. The SEC also has the power to suspend the violator for up to 12 months or bar individuals from the industry. This is in addition to any disciplinary actions that may be imposed by SROs, state Administrators, or civil actions brought by clients or regulatory authorities.
If information filed with the Administrator by a broker-dealer as part of its registration changes in a material way, the registrant must: A)amend the registration statement within 60 days of the material change. B)update the information on the registration on the next annual renewal date. C)submit an entirely new registration form within 30 days of the material change in information. D)amend or update the information promptly regardless of the renewal date.
Answer: D When material information changes, the registrant must promptly amend or update the information regardless of the renewal date. The requirement to amend a registration applies to investment advisers, broker-dealers, and securities. However, the Uniform Securities Act does not define the term "promptly".
Under the Uniform Securities Act, which of the following could be a cause for denial of a registration? A)Lack of a degree from an accredited degree granting institution. B)Conviction of a misdemeanor 7 years ago. C)Conviction of a securities-related violation 12 years ago for which the prison sentence ended last month. D)A revocation order by another state's Administrator.
Answer: D When one's registration has been revoked by another state's Administrator, any other Administrator will deny registration in their state. The securities-related violation occurred more than 10 years ago, and the misdemeanor is only a problem if it is securities or money related.
An investment adviser is preparing an advertisement. Which of the following would be acceptable? I. An endorsement on radio or TV from a celebrity who is a client of the firm. II. Identifying his best investment recommendations for the past 6 months. III. Offering to provide his investment recommendations for the past 12 months. IV. Promoting his system of charts and formulas while mentioning their limitations and difficulties. A)II and III. B)I and IV. C)I and II. D)III and IV.
Answer:D Any mention of investment recommendations in any adviser advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. No outside endorsements are ever allowable on the exam.