Unit 1 Securities Bank Questions
Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of A) $35,000 B) $10,000 C) $50,000 D) $5,000
A) $35,000 Explanation: The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond because it doesn't meet the net worth requirement, it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.
A pension consultant who advises corporate retirement plans with assets of $135 million must register with which of the following? A) Both the state and the SEC B)The state C)Either the state or the SEC D)SEC
B) The State Explanation: Under the Dodd-Frank Bill, until a pension fund manager has at least $200 million in AUM, registration with the states is required. Once the $200 million level is reached, SEC registration becomes an option.
According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing? Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed? A) 45 B) 60 C) 30 D) 90
A) 45 The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application.
Under the Uniform Securities Act, which of the following persons has to register as an investment adviser? A) A broker-dealer who gives advice for which he charges a specific fee B) An agent of a broker-dealer who gives investment advice within the course of his duties with the firm for which a fee is charged C) An attorney who writes a legal opinion for a municipal bond indenture D) A broker-dealer who gives investment advice that is incidental to the course of its business and for which no special compensation is received
A) A broker-dealer who gives advice for which he charges a specific fee Explanation: Broker-dealers need not register as investment advisers unless they charge a separate fee for providing investment advice. If the advice is strictly incidental and without a separate charge, the BD is not an investment advisor. Attorneys are not investment advisers provided their investment advice is incidental to their practice. Giving a legal opinion on a municipal security indenture is not investment advice. Agents giving advice for which a fee is charged must register as investment adviser representatives and their BDs as investment advisers.
There are waivers from the Series 65 exam requirement for certain professional designations. Among those qualifying for the waiver are individuals who are A) CFP®s. B) MBAs. C) CLUs. D) CPAs.
A) CFP®s. Explanation: CFP®—CERTIFIED FINANCIAL PLANNER™ (granted by the CFP Board of Standards); CIC—Chartered Investment Counselor (granted by the Investment Adviser Association); ChFC®—Chartered Financial Consultant® (granted by the American College of Financial Services); PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants); and CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Institute).
The Uniform Securities Act provides an exemption from registration as an investment adviser for which of the following persons who have no place of business in the state? 1) Advisers who deal exclusively with broker-dealers 2) Advisers who deal exclusively with insurance companies 3) Advisers who deal exclusively with registered investment companies 4) Advisers who have no more than 5 clients in that state in a 12-month period A) I, II, III, and IV B) I, II, and III C) I only D) I and III
A) I,II, III, and IV Explanation: Investment advisers who have no place of business in the state are exempt from registration, provided their clients are broker-dealers, other advisers, insurance companies, banking institutions, or government agencies. Also exempt are those advisers who have 5 or fewer clients in a 12-month period. All of these exemptions are lost when the adviser has a place of business in the state. Finally, those investment advisers to registered investment companies must register with the SEC and are federal covered advisers. In that case, they are exempt under state law regardless of the locations of their offices.
Under IA-1092, an investment adviser 1) makes advice his principal activity 2) makes advice his regular activity 3) is compensated directly for advice 4) is compensated directly or indirectly for advice A) II and IV B) II and III C) I and IV D) I and III
A) II and IV Explanation: Under the SEC's release, the rendering of advice does not have to be a person's principal activity. Rather, it must be a regular activity, and compensation may be received directly or indirectly.
State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act? A) Investment adviser representatives B) Broker-dealers receiving special compensation C) Bank subsidiary offering investment advice D) Economists whose advice is strictly incidental to their professional activity
A) Investment Adviser Representatives Explanation: The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.
Registration with the SEC as an investment adviser would be required for a person who A) limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE) B) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940 C) acts as the investment adviser to an investment company registered under the Investment Advisers Act of 1940 D) limits the advice offered strictly to securities issued or guaranteed by the U.S. government
B) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940 Explanation: If a person acts under contract to an investment company registered under the Investment Company Act of 1940 (investment companies do not register under the Advisers Act; only advisers do) is required to register with the SEC. Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.
Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of A) $500 for the next 3 months of advisory service. B) $1,000 for the next year's advisory service. C) $1,000 for the next 3 months of advisory service. D) $500 for the next 6 months of advisory service.
B) $1,000 for the next year's advisory service. Explanation: State-registered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $500, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $500 or more, it is more than $500 and it must be for at least 6 months of service to count.
Which of the following statements are TRUE? 1) The Uniform Securities Act is not the actual law of any state or territory of the United States. 2) The National Securities Markets Improvement Act of 1996 requires states and the federal government to have identical registration requirements. 3) The state securities Administrator has responsibility for the enforcement and administration of a state's securities law. A) I and II B) I and III C) I, II, and III D) II and III
B) 1 and III Explanation: The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The NSMIA's purpose is to eliminate dual registration, not to require identical laws.
The USA provides either an exclusion from the definition or an exemption from registration as an investment adviser for certain persons. Which of the following would be required to register? A) A bank trust officer with less than $250 million in assets under management B) A CFP® who provides a full range of financial planning to clients on a fee-only basis C) A teacher who teaches a course in the local high school on consumer economics D) An engineer employed by an oil company selling limited partnership interests to public investors who provides estimates of recoverable reserves
B) A CFP who provides a full range of financial planning to clients on a fee-only basis Unless excluded or exempted, anyone charging a fee for investment advice must register. Banks and their employees are excluded. Engineers and teachers fall under the late exclusion as long as the advice is incidental to their profession and no special compensation is received.
Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser? A) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities B) A lawyer who specializes in consulting on investing in securities C) A syndicated columnist who gives weekly reports and recommendations on investments D) The trust officer of a commercial bank who manages investment accounts for clients
B) A lawyer who specializes in consulting on investing in securities Explanation: Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty.
If a federal covered adviser's fiscal year ends on November 30, 2017, it must file its annual updating amendment to its Form ADV no later than A) December 31, 2017 B) February 28, 2018 C) March 30, 2018 D) January 18, 2018
B) February 28, 2018 Explanation The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.
A federal covered investment adviser is one who has: 1) $110 million or more in assets under management 2) manages an investment company registered under the Investment Company Act of 1940 3) limits his advice to securities listed on the NYSE 4) is affiliated with a federally chartered bank A) I and III B) I and II C) I, II, III and IV D) II and III
B) I and II Explanation: Federal registration is generally required of any investment adviser managing at least $110 million in assets. The NSMIA provides that any investment adviser under contract to a registered investment company under the Investment Company Act of 1940 is required to register with the SEC as a federal covered adviser. Providing advice on federal covered securities listed on the NYSE does not make the adviser a federal covered adviser. Determining if one is a federal covered investment adviser is not based on affiliations; it is generally a function of AUM or managing an investment company.
Under the Investment Advisers Act of 1940, persons who provide a variety of services, including investment advisory services, are considered to have received compensation for their advice when they receive: 1) any economic benefit 2) a fee paid directly for the investment advice portion of their services 3) a commission on the sale of real estate when the agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists A) I and III B) I, II, and III C) II and III D) I and II
B) I, II, III Explanation: The question is not asking "who is an investment adviser?" It is focusing on the compensation prong. Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. An example of that holds for the real estate agent—she doesn't give advice unless you list your home with her.
An agent and a broker-dealer maintain wrap fee accounts for several of their customers. Which of the following registrations is required? A) Neither the broker-dealer nor the agent is required to have any license other than their regular securities license. B) The firm must register as an investment adviser. C) The agent must be registered as an investment adviser. D) Only the registered principal would need to be registered in the state(s) in which they do business.
B) The firm must register as an investment adviser Explanation: Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser. Therefore, the firm must be registered with either the state or the SEC. Any agents handling these accounts would be registered as investment adviser representatives. Wrapped Fee: A wrap fee program generally involves an investment account where you are charged a single, bundled, or "wrap" fee for investment advice, brokerage services, administrative expenses, and other fees and expenses.
Under the Uniform Securities Act, a state-registered investment adviser whose only office was in State N would NOT have to register in State O if its only clients were A) complex trusts B) trust companies C) individual accredited investors D) 6 or fewer retail clients
B) Trust Companies Under the Uniform Securities Act, a state-registered investment adviser whose only office was in State N would NOT have to register in State O if its only clients were
Which of the following does NOT meet the compensation test for defining investment advisers under SEC Release 1A-1092? A) Subscription payments received by a publisher of a newsletter providing impersonal securities-related advice B) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do C) A real estate agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists D) An insurance agent sells a life insurance policy and receives a commission on that policy. During the sale of the insurance policy, the agent provides some securities investment advice
B) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do Explanation: Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. The commission on the insurance policy is considered indirect compensation covering the investment advice given by the insurance agent. The same logic holds for the real estate agent—she doesn't give advice unless you list your home with her. Nothing in the neighbor's advice involves compensation.
All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 EXCEPT A) an adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities B) investment advisers with $110 million or more in assets under management C) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million D) investment advisers whose only clients are insurance companies
B) investment advisers with $110 million or more in assets under management Explanation: Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act. Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the U.S. reaches $150 million.
All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT A) the adviser's registration expires on December 31 each year B) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process C) the initial application must include a consent to service of process along with Form ADV and the appropriate fees D) if the investment adviser is not an individual, any officer or partner active in the advisory business is automatically registered as an investment adviser representative
B) the annual renewal process involves payment of the appropriate fees and refining of the consent to service of process Explanation: The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with Form ADV and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice are automatically registered as IARs.
Fast Execution Services (FES), a registered broker-dealer, provides investment advice as an incidental part of its commission business. Madeleine, an agent registered with FES, charges for investment advice as a freelance investment adviser outside the scope of her employment at the firm. Which of the following statements are true? 1) FES must register as an investment adviser. 2) Madeleine must register as an investment adviser. 3) Madeleine need not register as an investment adviser. 4) FES need not register as an investment adviser. A) II and IV B) III and IV C) I and II D) I and III
Broker-dealers who offer advice as an incidental part of their commission business are not required to register as investment advisers. Because Madeleine provides investment advice outside the scope of her employment at the broker-dealer, she must be registered as an investment adviser. Why not an IAR? Because Madeleine is operating this as her own freelance business, she is, in essence, a sole proprietor investment adviser.
Which of the following statements is CORRECT? A) Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. B) Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. C) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. D) A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment.
C) Explanation: It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require that they be more than $500 for 6 or more months in advance.
Which of the following persons does NOT meet the definition of providing investment advice as a business outlined in SEC Release IA-1092? A) A financial planner who provides specific investment advice as part of his fee- based services and also makes specific securities recommendations to his clients in his capacity as an agent for a broker-dealer B) Attorney who advertises the availability of investment advice C) A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky D) Accountant who charges clients an additional fee for providing investment advice
C) A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky Explanation: The management consultant's advice to clients is more like personal opinion than investment advice as a business. In the other 3 choices, investment advice is offered as part of the individual's regular business. Lawyers, accountants, teachers, and engineers (LATE) are not generally considered investment advisers provided the advice is incidental to their regular profession.
Judy is in the business of giving general investment advice, suggesting appropriate asset allocation percentages, but not recommending specific securities. George's business model is giving investment advice and recommending specific securities. Assuming that both receive compensation, who must register as an investment adviser under the Uniform Securities Act? A) Neither B) Only Judy C) Both D) Only George
C) Both Explanation: Two of the 3 critical elements in the definition of investment adviser are whether the person provides advice regarding securities and receives compensation for doing so. (The third element is "being in the business" and the question states that both are). Even without recommending specific securities, the fact that Judy suggests asset allocation percentages constitutes investment advice. Both Judy and George provide advice regarding securities for compensation and must register, unless specific exemptions apply.
An investment adviser who has custody of customer funds and securities discovers that her net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must I) notify the Administrator by close of business after the day of discovery II) file a report of its financial condition no later than close of business the day after notification III) include in the report of financial condition a statement as to the number of client accounts IV) cease doing business
C) I, II, III Explanation: As a condition of the right to continue business, the adviser must notify the Administrator by close of business after the day of discovery. No later than close of business the day after notification, the adviser must file a report of its financial condition, which must include statements regarding the number of client accounts.
Which of the following statements is (are) TRUE regarding the registration of investment advisers? I) If they are required to be registered with the state, they must also be registered with the SEC. II) If they are registered with the SEC, state registration is not required. III) Whether a person is registered with the state or with the SEC depends on the type and scope of the person's advisory business. A) II only B) I only C) II and III D) I and II
C) II and III Explanation: Registration with the state only or with the SEC only depends on the type and scope of the person's advisory business.
Under the Uniform Securities Act, persons providing investment advice do not have to register as investment advisers if they have no place of business in the state and they I) limit their clientele to individuals who meet the accredited investor standards II) deal only with institutional investors III) have 5 or fewer noninstitutional clients in the state during any 12-month period IV) deal only with other registered investment advisers A) II only B) III and IV only C) II, III, and IV D) I, II, III, and IV
C) II, III, IV Explanation: (Exemptions) If a person offering advice on securities has no place of business in a state and deals only with institutional investors or other investment advisers, registration is not required. Also, if a person has no place of business in a state and has 5 or fewer noninstitutional clients in the state during any rolling 12-month period, they are not deemed to be investment advisers in that state under the USA. Please note that choice I specifies individuals who are accredited investors. Although institutional accredited investors would qualify the adviser for the exemption, individuals do not.
Under both state and federal law, the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser is properly referred to as A) the office of supervisory jurisdiction (OSJ) B) the home office C) the principal office and place of business D) the registered office
C) The Principal Office and Place of Business Explanation: This is the way it is defined in the act. It is generally the home office, but you must chose the answer that best meets the terminology referred to in the question. Office of supervisory jurisdiction (OSJ) is a FINRA term and is not applicable on this exam.
Under the Uniform Securities Act, which of the following statements is TRUE regarding registration of an investment adviser if the application has not been amended? A) Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application. B) Unless specified earlier, registration becomes effective no later than 90 days after the application is filed. C) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. D) Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed.
C) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. Explanation: While the Administrator may specify an earlier date, absent any denial orders or pending proceedings, registrations become effective at noon on the 30th calendar day after the date of filing. The application is considered to be filed on the date received in the offices of the Administrator, not the date of mailing by the applicant.
Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE? A) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. B)Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. C) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration. D) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration.
D) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration Explanation: Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received.
Form PF must be filed by A) SEC-exempt reporting advisers B) state-registered private fund managers, regardless of the amount of assets under management C) SEC-registered advisers with no more than $150 million in private fund assets under management D) SEC-registered advisers with at least $150 million in private fund assets under management
D) SEC-registered advisers with at least $150 million in private fund assets under management Explanation: Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.
