Business Practices

Question 1

What are the parameters for Investment Advisers charging performance based fee on an account?

Answer 1

The Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,000,000 invested or a net worth of $2,000,000)

Question 2

In order for an investment adviser to be compensated with a performance fee, all of the following must be disclosed:

Answer 2

• arrangement may create an incentive for the adviser to make riskier investments
• The IA will is compensated on both unrealized and realized capital gains
• basis for valuing illiquid investments
• periods used to measure performance and their significance
• nature of any index used as a comparison of investment performance
• significance of the index,
• why the adviser believes the index is appropriate

Question 3

4 Types of compensation for investment advisers:

Answer 3

I. Wrap fees
II. Soft dollars
III. 12b-1 fees paid by a mutual fund to the adviser based on annual net assets
IV. Commissions paid to an affiliated broker-dealer on trades recommended by the adviser

Question 4

Investment advisory contracts must contain:

Answer 4

• Description of services provided;
• Term of contract;
• Formula for computing fees;
• Prepaid fees returned in early termination
• Assignment of the contract is not permitted w/o customer approval
• If there is discretionary authority to the adviser
• fee for managing equity securities may be higher than debt securities

Question 5

What is the rule for on notifying clients of a change in ownership (for investment adviser firms)?

Answer 5

The rule on notifying clients of a change of ownership of an investment adviser only applies to investment advisers organized as partnerships.

Question 6

What is the brochure delivery rule for investment advisers?

Answer 6

1. Brochure must be delivered 48 hours prior to entering into either a verbal or written contract
2. if the brochure is delivered at the time that the contract is signed, the customer has 5 business days to terminate the agreement without penalty

Question 7

Under NASAA rules, within 120 days of fiscal year end, each customer must be sent:

Answer 7

An updated brochure and brochure settlement

Question 8

What defines an investment adviser taking custody?

Answer 8

• Adviser is holding customer funds or has the ability to access customer funds
• if an adviser is permitted to directly deduct fees from client accounts
• a FULL power of attorney over an account which allows the adviser to withdraw funds

Question 9

The threshold where a State-registered adviser is considered to have taken custody of client funds if it charges prepaid advisory fees, is:

Answer 9

$500, 6 months or more in advance of rendering services

Question 10

If an adviser takes custody of a customer’s funds or securities, the customer must be:

Answer 10

1. Informed in writing of the safekeeping location at the time that custody is taken
2. Provided with QUARTERLY account statements

Question 11

What type of investment advisers are required to be audited on a surprise basis?

Answer 11

Only advisers that take custody of customer assets

Question 12

When must audit results of an investment adviser be submitted to the administrator?

Answer 12

Within 120 days after completion of the audit

Question 13

How long does an advisor have to return a business check made out to the advisor in error in order to not be considered to have taken custody? (The advisor does not have custody in this account)

Answer 13

3 business days to put it in the MAIL

Question 14

If an investment adviser advertises that a performance chart, in and of itself, can be used to measure performance, or to decide which investments to make, it MUST be accompanied with:

Answer 14

a statement that there are limitations and difficulties in using performance charts alone to judge results

Question 15

Under NASAA rules, a customer must sign and return the margin agreement

Answer 15

PROMPTLY AFTER the INITIAL transaction in the account

Question 16

Chinese Walls must be maintained between Investment Banking and:

Answer 16

Trading, Sales, and Research

Question 17

Chinese Walls must be maintained between Trading and:

Answer 17

Sales and Research

Question 18

If a customer wishes to purchase a non-exempt NEW security, then the customer must receive a:

Answer 18

In connection with the sale of any non-exempt new issue to a customer, the final prospectus must be delivered to the customer, at, or prior to, confirmation of sale. There are no exceptions!

Question 19

True or False: Broker-dealers and their employees are prohibited from buying IPO shares at the offering price in the underwriting.

Answer 19

True. This is called free riding and withholding.

Question 20

True or False: Broker dealers can purchase IPO shares in the secondary market.

Answer 20

True

Question 21

A research report on an issuer CANNOT be published by the underwriter of that issuer’s securities for the time period encompassing:

Answer 21

1. 10 days following the effective date for an IPO

2. 5 days following the effective date for a secondary offering

Question 22

What is the typical allocation procedure for handling trades executed in a single block?

Answer 22

Allocate the securities equally among clients at a uniform price on a pro-rata basis. This is the typical disclosure made to clients.

Question 23

Under Regulation SP, customers must be given a privacy notice at what time?

Answer 23

Prior to the first transaction