Unit 1 Checkpoint Exam
An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of state:
An offer to sell or to buy is not made in the state when the publisher circulates or there is circulated on their behalf in the state any bona fide newspaper or other publication of general, regular, and paid circulation which is not published in the state, or which is published in the state but has had more than two-thirds of its circulation outside the state during the past twelve months
Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) bank that charged a fee for providing investment advice. B) A broker-dealer that managed clients' portfolios for a fee. C) The publisher of an investment advisory newsletter that plans issues based on market events. D) An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities.
A. A blanket exclusion from the definition of investment adviser applies to most banks. Broker-dealers are excluded only if the advice is within the scope of their brokerage business and they receive no special compensation, such as an additional fee, for that advice. Publishers must have general, regular circulation to be excluded under the Advisers Act. Publishing based on market events would not qualify. Advice relating to types of securities is specific enough to qualify as investment advice, even if mention of particular securities is avoided.
Define Accredited Investor
An accredited investor can take different forms; an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.
According to the Securities Exchange Act of 1934, a report of beneficial ownership must be filed with the SEC by interested persons when their ownership of a security registered on a national exchange exceeds what level?
An interested person is any person (including two or more persons acting together) who owns more than 5% of the outstanding equity securities of a registered issuer. Such persons are required to file reports of beneficial ownership on Schedule 13D with the issuer, the exchanges (if a listed security), and the SEC within ten days of exceeding the 5% level
A broker-dealer is registered in State W, but its principal, and only place of business, is in State L. Which of the following statements regarding the ability of the Administrator to perform an onsite examination is CORRECT? A) The Administrators of both State L and State W may perform unannounced onsite examinations during normal business hours. B)Because the broker-dealer does not have a place of business in State W, it is impossible for the Administrator of that state to perform an onsite examination. C) Because the broker-dealer's principal office is located in State L, only that state's Administrator has the jurisdiction to perform an onsite examination. D) Neither Administrator would be able to perform an onsite examination without giving 15 days written notice to the broker-dealer.
As long as a broker-dealer is registered in a state, the Administrator of that state has the jurisdiction to perform an onsite unannounced (surprise) examination (audit). In those cases where there is no place of business in the state, as in this question, the examination takes place at the principal office where the Administrator will view records pertaining to clients residing in State W
An individual with a place of business in State A manages client assets on behalf of a covered investment adviser. This individual wishes to expand his client base by working one day per week out of the firm's office in State B. Which of the following actions must this individual take to practice within that particular state? A) Becoming licensed as a broker-dealer B) Register as an investment adviser representative in StateB C) Complying with the notice filing requirements of the state D) Passing an oral or written examination
B. Individuals managing client assets while employed by federal covered investment advisers, must register as investment adviser representatives if they maintain a place of business in the state. Working on a regular schedule in the firm's office in State B, even if only once per week, constitutes maintaining a place of business in the state. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state. It is the investment adviser who may be required to notice file with the Administrator.
With respect to the record keeping rules under the USA, which of the following statements is NOT correct? A) Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of five years. B) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. C) Broker-dealers must maintain records of trade blotters for a minimum of three years. D) Broker-dealers must maintain records of electronic communications for a minimum of three years
B. Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. Emails are treated as any other communication: three years for broker-dealers and five years for investment advise
As defined in the Investment Advisers Act of 1940, the term "person associated with an investment adviser" would include all of the following EXCEPT A) an individual employed by an investment adviser to solicit new advisory clients, compensated at a rate of $500 for each new account. B) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications C) a senior officer of an investment adviser responsible for marketing the adviser's services as opposed to making investment advisory decisions. D) a silent partner in an advisory firm organized as a general partnership
B. The term "person associated with an investment adviser" means any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser, except that persons associated with an investment adviser whose functions are clerical or ministerial shall not be included in the meaning of the term. Graphic design would be considered a clerical function.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser must register with the SEC if it has A) its only place of business is outside of the U.S., deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the U.S. B) limited its clients to insurance companies only C) $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management D) would be required to register in 15 or more states
C. An adviser with $110 million or more in assets under management, regardless of the asset class, must register with the SEC. Advisers whose only clients are insurance companies are exempt from registration with the SEC. There is an exemption for foreign advisers who have fewer than 15 clients in the U.S., and their AUM in the U.S. is less than $25 million. When an investment adviser is required to register in 15 or more states, it is eligible, but not required to register with the SEC.
All of the following statements relating to the USA's provisions dealing with the registration of securities are correct EXCEPT: A) any registrant may use qualification, even if it has filed a concurrent registration with the SEC. B) a corporation registering a new issue with the SEC and wishing to sell in the state may register by coordination. C) notice filings cannot be required of federal covered investment company securities as they are exempt from the registration requirements of the USA. D) the NSMIA preempted the state registration of certain securities known as federal covered securities.
C. The NSMIA did take the registration powers away from the states for certain securities, defined in the law as federal covered securities. However, the states still have the right to require notice filings in order to, among other things, determine the appropriate fee to charge the registrant. Coordination is the usual method when registering with the SEC and the state at the same time. While not the expected practice, any security may register using qualification, even if it has an SEC registration in process.
Under which of the following circumstances may an Administrator revoke a state registered investment adviser's registration?
If an adviser committed a felony or participated in unethical business practices, its registration will be revoked, not canceled. An adviser's registration may be canceled if the adviser is found to be mentally incompetent, cannot be located, or is no longer in business. The difference between canceling and revoking a registration is subtle; cancellation is not punitive while revocation involves some sort of wrongdoing.
All of the following must be specified in the state registration statement of a security EXCEPT: A) the total amount of the security that will be offered in each state. B) a stop order from another state that affects the offering of the security within that state. C) the total amount of the security that will be offered in this state. D) all other states where the security is currently registered or will be registered.
It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes, the amount to be sold in this state must be disclosed.
Under current law, who of the following would be required to register as an investment adviser in a state?
Persons having no place of business in a state are generally limited to directing fewer than 6 offers to retail (individual) residents of that state within any 12 month period before being required to register. Unless an exception applies, investment advisers who have less than $100 million in AUM must register on the state level. Once they reach $100 million of assets under management, they have the choice of state or SEC registration. Once $110 million is reached, the only choice is registration with the SEC. Once registered with the SEC, if the AUM falls below $90 million, the adviser can no longer remain SEC registered and must register on the state level. The exemption from registration for those who have no office in the state and only deal with issuers applies to broker-dealers, not to investment advisers.
Under the Investment Advisers Act of 1940, an investment adviser is required to
SEC rules require that a brochure containing summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. The summary itself may be sent with instructions as to how to receive the entire brochure if the client desires. If there are no material changes, a brochure does not have to be sent. Under federal law, the balance sheet is only required when the IA requires or charges a substantial prepayment of fees (it is only state registered advisers who must supply balances sheets when maintaining custody). Bonding requirements apply only to state registered investment advisers.
A broker-dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent a(n): A) Offer. B) Gift. C) Prohibited transaction. D) Sale
The USA states that "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered part of the subject of the purchase and to have been offered and sold for value."
Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are:
The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Since the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940.
Is oral discretionary authority permitted under the NASAA's Model Rule?
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, oral discretionary authority is permitted to be used for the initial transactions in a customer's account for the first 10 business days after the date of the first transaction.
Understand Rule 203 (b)-1 of the USA
Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed.
Which of the following statements are TRUE? i. When an investment adviser representative begins or terminates employment with an adviser registered under the USA, only the investment adviser must notify the Administrator. ii. When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. iii. When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. iv. When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission.
i & ii. When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required.
Section 15 of The Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: i. no contract may be terminated with more than 60 days notice in writing. ii. the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis. iii. unless a specific exemption applies, the fund may not engage in margin trading iv. the contract must be in writing.
i & iv. Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.
The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Securities issued by which of the following qualify for an exemption from registration under the Act? i) Life insurance companies authorized to conduct insurance sales in that state. ii) Railroads whose rates are subject to regulation by a state or federal agency.) iii) Commercial paper with no more than 9 months to maturity that is in one of the three highest ratings by a nationally recognized rating agency and in a minimum denomination of $25,000. iv) Bonds that are obligations of the People's Republic of North Korea
i and ii. Any life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads are under the jurisdiction of other state or federal regulators and their equipment trust certificates carry an exemption from state securities registration. The commercial paper would qualify if the denomination was $50,000 instead of $25,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations; at the time of this writing, North Korea does not qualify.
Among the powers granted to the Administrator under the Uniform Securities Act (USA) is the power to i .audit the books of a federal covered adviser with clients in his state if he suspects fraudulent business behavior ii. permit an investment adviser to charge performance-based fees on an account of a client with net worth of $750,000 and an account balance of $200,000 iii. require a federal covered adviser who has individual clients in his state, to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrator wishes iv. require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state
i., ii., iii. Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC. IARs associated with federal covered advisers are only required to register in a state in which they (the IAR) have a place of business.
With regard to the registration requirements of the Uniform Securities Act, which of the following statements are TRUE? i. Only the issuer itself can file a registration statement with the Administrator. ii. An application for registration must indicate the amount of securities to be issued in the state. iii. The Administrator may require registrants to file quarterly reports.
ii & iii. The USA requires that any application for registration include the amount of securities to be sold in that state. The Administrator has the power to request regular filings of reports, but no more frequently than quarterly. While the issuer is most commonly the registrant, application may also be made by selling stockholders and broker-dealers.
Federal covered securities, as defined under the Uniform Securities Act i. must be registered with the SEC before they can be offered in the state ii. must be registered in the state before they can be offered within the state iii. include shares of an investment company registered with the SEC under the Investment Company Act of 1940
iii. It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are not required to be separately registered in each state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings.