Ch. 4 State and Federal Regulations Government IAs and IARs

Question 1

Any person that meets the investment adviser definition is required to register with either ____ or ____

Answer 1

The SEC or one or more states

Question 2

All registered investment advisers (are or are not) required to provide clients with a disclosure document (brochure) to describe their overall business as well as actual or potential conflicts of interest

Answer 2

ARE required to provide clients with a brochure to describe overall business and any actual or potential conflicts of interest

Question 3

Advisers with different types of clients (may or may not) create and file different brochures that are tailored to each specific client.

Answer 3

MAY create and file different brochures that are tailored to each specific client

Question 4

To meet the definition of an investment adviser, a person must satisfy all three parts of the A-B-C test by:

Answer 4

1. Providing Advice about securities
2. Offering this service as a regular part of doing Business
3. Receiving Compensation for these services

Question 5

An adviser that’s ineligible for federal registration must be registered at ____

Answer 5

the state level

Question 6

Limited discretion?

Answer 6

Allows an adviser to enter orders to buy or sell securities, but not to remove money or securities from the account.

Question 7

Full discretion?

Answer 7

Gives an adviser all of the abilities acquired through limited discretion, with the addition of check-writing privileges and authority to remove other assets from the account.

Question 8

Fletcher is in the airport and about to leave on an extended vacation with his family, but cannot stop thinking about the current state of the market and his investments. Before boarding, Fletcher calls Julie, his investment adviser representative, and tells her that she has his permission to take care of things in his account while he’s gone. Although Fletcher has not signed a power of attorney, may Julie execute trades for Fletcher?

Answer 8

Yes. This example illustrates the oral discretion provision that’s permitted for investment advisers and their representatives. Julie has discretionary authority over Fletcher’s account for 10 business days. In order to retain discretionary control after the 10 days, Fletcher must provide a signed power of attorney.

Question 9

The oral discretion provision (does or doesn’t) apply to broker-dealers and their agents.

Answer 9

DOES NOT apply to broker-dealers and their agents, who must obtain written authorization

Question 10

Custody?

Answer 10

having legal responsibility for, or control over, another person’s assets

Question 11

An investment adviser is headquartered in Oklahoma, which has a minimum financial requirement of $35,000. The adviser is in the process of opening a new office in Texas, which has a minimum financial requirement of $50,000. To open the Texas office, will the adviser be required to satisfy the $50,000 Texas requirement?

Answer 11

No. Since the adviser is headquartered in Oklahoma, it’s required to satisfy only the $35,000 minimum financial requirement for Oklahoma. The adviser is not required to satisfy the $50,000 requirement that’s set by the state of Texas.

Question 12

Jim is an accountant who charges clients $125 per year to complete and file their tax returns. Occasionally, Jim suggests to his clients that they make use of their employer-sponsored retirement plans and recommends certain mutual fund families. Does Jim meet the IA definition?

Answer 12

No. Since Jim’s advice is incidental to his accounting profession and he doesn’t receive specific compensation for giving that advice, he’s excluded from the definition of an investment adviser.

Question 13

A broker-dealer and its agents regularly recommend securities through their research reports that are distributed to clients. If and when a client’s trade is executed, the firm collects a commission for the service provided. Is the broker-dealer considered an investment adviser?

Answer 13

No. The broker-dealer is not considered an investment adviser since it’s not receiving a fee for providing advice. Distributing research reports to customers is an incidental practice for a broker-dealer. The commission received is for executing transactions, not for advice.

Question 14

An investment adviser is registered in North Dakota and provides advice to numerous institutional clients in Montana, but doesn’t have a place of business in that state. Is the firm exempt from registering as an investment adviser in Montana?

Answer 14

Yes. As long as the advisory firm has no place of business in Montana, it may continue advising its institutional clients. However, if the firm opens an office in Montana to serve its clients better, it’s no longer exempt from registering as an investment adviser in Montana—even if it continues to serve only institutional clients.

Question 15

A firm is registered as an investment adviser in North Dakota and has no office in Montana. Most of the adviser’s clients are in North Dakota. However, due to job relocations, four non-institutional clients now live in Montana. Is the firm required to register as an investment adviser in Montana?

Answer 15

No. Under the USA, since the adviser has no place of business in Montana and directs communications to no more than five non-institutional clients, it’s exempt from registration in Montana.

Question 16

If a broker-dealer has no office in a state, but intends to do business with non-institutional (retail) clients in that state, it (must or does not need to) be registered there regardless of the number of clients.

Answer 16

does not need to

Question 17

Sally is a non-producing branch manager who has no clients, but is responsible for supervising a group of salespeople who actively solicit clients for the financial services firm. Does Sally meet the IAR definition?

Answer 17

Yes. Although Sally doesn’t have clients, she supervises employees who are performing the functions of IA representatives. Therefore, she must also become registered as an IA representative.

Question 18

An investment adviser (may or may not) employ an investment adviser representative unless the representative is properly registered.

Answer 18

MAY NOT

Question 19

Sally is an IAR with offices in NY and PA. She has eight retail clients in CT and three in VT. Where must she register?

Answer 19

New York, Pennsylvania, and Connecticut.

Question 20

Bob is an IAR with an office in OH. He has three retail clients in MD and 10 institutional clients in NJ. Where must he register?

Answer 20

Ohio only

Question 21

Barbara is an IAR who works at Greenage’s headquarters in NY where she advises three banks. She also has three retail clients in MD. Where must she register?

Answer 21

New York only

Question 22

According to the INVESTMENT ADVISOR ACT, solicitors (are or are not) required to register as investment advisers as long as they’re simply referring clients.

Answer 22

ARE NOT

Question 23

ABC’s of Investment Adviser?

Answer 23

1. Provides Advice about securities
2. As a regular part of its Business
3. Receives Compensation for these services

Question 24

federal covered advisers are required to register only with ____

Answer 24

the SEC (federal level)

Question 25

investment adviser representatives are required only to be registered at ____ level

Answer 25

STATE

Question 26

Dave is an IAR who works out of the California office. All of his clients are Hollywood celebrities or professional athletes. Where must he register?

Answer 26

California only

Question 27

Simone is an IAR with an office in Nevada. She has 25 clients who live and own ski lodges in Colorado and has 10 clients who are barley famers in Wyoming. Where must she register?

Answer 27

Since Simone is an IAR and works out of the Nevada office, she’s required to register in Nevada. The fact that Simone also has 25 clients who are business owners in Colorado and 10 clients who are farmers in Wyoming doesn’t create a registration issue. As long as Simone doesn’t have a place of business in either state, she’s not required to register in Colorado or Wyoming.

Question 28

Alvin is an IAR who lives in Arizona and splits time between TIA’s Arizona and New Mexico offices. He has clients in both states as well as two mutual fund clients in Texas. He also has 14 high-net-worth clients in Montana. Where must he register?

Answer 28

Since Alvin is an IAR who works out of the Arizona and New Mexico offices (has a place of business in both states), he’s required to register in both states. Although Alvin also has two institutional clients in Texas and 14 high-net-worth clients in Montana, he’s not required to register in either state since he has no office in Texas or Montana.

Question 29

Theodore Investment Advisers (TIA)

(A federal covered adviser headquartered in California). Where must it register?

Answer 29

TIA is a federal covered adviser and is, therefore, not required to register at the state level. However, notice filing is required in any state in which TIA and its investment adviser representatives have an office or in any state in which they have no office, but have six or more non-institutional clients.

Question 30

Fulcrum fee?

Answer 30

One type of performance-based fee is referred to as a fulcrum fee. This is a fee that has two parts—a base fee plus a performance-based fee that increases or decreases relative to the performance of the client’s portfolio as compared to a specific benchmark over a specific period

Question 31

To register with a state, an investment adviser is required to file Form:

a. BD
b. 13D
c. ADV
d. ADV-W

Answer 31

(C) Investment advisers that are not excluded or exempt from registration are required to register in a state by filing an application called Form ADV. Form ADV is a disclosure document that’s divided into two parts. There are also various schedules and additional forms that may be required to be filed.

Question 32

An investment adviser that’s headquartered in Arizona maintains its minimum financial requirement of $45,000. The adviser is expanding into New Mexico by opening an office to service its clients. New Mexico has a minimum financial requirement of $55,000. In order to open the office in New Mexico, the adviser must maintain a minimum financial requirement of:

a. $35,000
b. $45,000
c. $55,000
d. There’s no financial requirement in New Mexico because the firm is headquartered in Arizona

Answer 32

(B) Since the adviser is headquartered in Arizona, it’s required to satisfy only the minimum financial requirement of $45,000 for Arizona. New Mexico’s minimum financial requirement apply to advisers whose home state is New Mexico.

Question 33

Under the Uniform Securities Act, which of the following choices are investment advisers? (Choose all that apply.)

a. A trust company selling investment advice to its clients
b. A person publishing a market letter concerning oil and gas securities
c. A broker-dealer that charges a small fee to analyze a client’s portfolio
d. The publisher of The Wall Street Journal
e. A person that’s registered as an investment adviser with the SEC

Answer 33

(C) Any person in the business of providing advice about securities for compensation is an investment adviser (IA) unless specifically excluded from the definition. Choice (a) is not an IA because trust companies are excluded from the definition, as are banks and savings institutions. Both choice (b) and choice (d) fall under the publisher exclusion, where the key is that the advice may not be tailored to specific clients. Choice (e) is excluded as a federal covered adviser, which is an IA that’s registered with the SEC. Normally, broker-dealers are also excluded from the definition of an investment adviser as long as they don’t receive special compensation for their advice. The broker-dealer in choice (c) doesn’t qualify for the exclusion since it’s charging a separate fee for investment advice.

Question 34

Label the following as an investment adviser (IA), an investment adviser representative (IAR), or neither (N), according to the Uniform Securities Act.

a. _____ A firm that provides mutual fund asset allocation services to individual investors for a fee
b. _____ Jack, who works for an advisory firm and makes asset allocation decisions
c. _____ Miriam, who sells asset allocation services to clients, but doesn’t make asset allocation decisions
d. _____ Bert, who works in a firm’s accounts receivable department
e. _____ Katrina, a partner in a law firm, who specializes in handling estates and who sometimes makes recommendations to executors to buy or sell securities in an estate
f. _____ Marshall Publishing, which for a fee, distributes a newsletter to a select group of high-net-worth clients and provides securities-related advice that’s tailored to the specific objectives of these clients
g. _____ A financial services firm that sells financial plans to the public

Answer 34

(IA, IAR, IAR, N, N, IA, IA) An investment adviser representative (IAR) is any partner, officer, or other individual associated with an investment adviser who (1) makes recommendations or gives advice regarding securities, (2) manages accounts or portfolios of clients, (3) determines which recommendations or advice should be given, (4) solicits, offers, or negotiates the sale of investment advisory services, or (5) supervises employees who perform any of these functions. Jack fits part three of this definition, while Miriam fits part four. In choice (a), the firm itself is the investment adviser, since it’s the person that’s in the business of providing advice about securities for a fee. Bert is not an IAR, since his job is solely clerical or ministerial. Katrina is not an IAR, since the law firm she represents is excluded from the definition of an investment adviser (the professional exclusion). Marshall Publishing meets the IA definition since the newsletter is providing personal and tailored advice to clients. A firm that provides financial plans for a fee is considered an investment adviser.

Question 35

Under the Uniform Securities Act, which of the following persons engaged in the business of advising others regarding securities investments is NOT excluded from the definition of an investment adviser?

a. A bank, savings institution, or trust company
b. A licensed broker-dealer whose advice is incidental to its business
c. A person whose advice relates only to exempt securities
d. None of the above

Answer 35

(C) Persons that are banks, savings institutions, or trust companies are not considered investment advisers and, therefore, don’t need to register as investment advisers. Broker-dealers whose investment advisory services are incidental to their normal course of business and that receive no special compensation for the advice are exempt from registration as investment advisers. The Uniform Securities Act doesn’t provide an exemption for persons whose advice relates only to exempt securities.

Question 36

An investment adviser has its principal office in North Dakota where the majority of its clients reside. However, three of the firm’s clients live across the state line in Montana where it doesn’t maintain an office. Under the Uniform Securities Act, where is the firm required to register?

a. It must register in North Dakota.
b. It must register in Montana.
c. It must register in Montana and North Dakota.
a. It must register in all 50 states.

Answer 36

(A) According to the Uniform Securities Act, an investment adviser that’s already registered in one state is not required to register in another state as long as it doesn’t maintain a place of business there and has no more than five retail clients within the state during a 12-month period. This is referred to as the de minimis exemption for investment advisers.

Question 37

Under the USA, which of the following persons is exempt from registering in California?

a. An investment adviser representative who has an office in Washington and 13 retail client accounts in California
b. An investment adviser that’s located in Nevada and manages the assets of two California-based insurance companies
c. An investment adviser representative who has a place of business in California where she services four retail clients
d. An investment adviser that’s headquartered in Florida and has 12 high-net-worth clients who reside in California

Answer 37

(B) According to the USA, an investment adviser and investment adviser representative are exempt from registration in a state if they have no place of business in a state or have no more than five retail clients within the state during a 12-month period. The IA described in choice (b) has only institutional clients in California and apparently no place of business there. As for choice (d), high-net-worth clients are considered retail clients and, therefore, if the number of high-net-worth clients exceeds five, the adviser and/or representative are required to register in the state.

Question 38

According to the Uniform Securities Act, a state Administrator may require an investment adviser to keep records for how long?

a. Three years
b. Five years
c. Seven years
d. 10 years

Answer 38

(B) Investment advisers are required to maintain all required records for five years, unless the state Administrator establishes a different period.

Question 39

Angela is an investment adviser representative with an advisory firm in Oregon. She recently decided to open her own advisory firm in Oregon where all of her clients reside. Her registration as an investment adviser representative in Oregon has been effective for the last five years. What regulatory requirements does Angela need to fulfill in order to start her business?

a. Angela has no requirements to meet since she’s already registered as an investment adviser representative in the state in which she plans to do business.
b. Angela has no requirements to meet since her registration in the state where she plans to do business has been in effect for five years.
c. Angela must register as an investment adviser with the Oregon state Administrator.
d. Angela has until the end of the year to register as an investment adviser in Oregon.

Answer 39

(C) Angela needs to register as an investment adviser with the state of Oregon. Once she does, she will be registered automatically as an IAR as well, since she’s a principal of her firm. Her current registration as an IAR becomes inactive once she leaves her previous firm. A previous registration is not sufficient for a person who wants to establish her own investment advisory firm.

Question 40

A financial services company charges its clients an annual fee of 2% based on their account balances and a performance-based fee of plus or minus .20% to manage their money. If the client is required to maintain a minimum balance of $100,000, this is a violation of the Investment Advisers Act because IAs:

a. May not require minimum account balances
b. May not charge performance-based fees if a client invests less than $2 million
c. Are prohibited from sharing in the profits of a client’s account
d. May not charge performance-based fees if the client invests less than $1 million

Answer 40

(D) The Advisers Act prohibits performance-based fees for individual clients that have less than $1 million under management or a net worth of less than $2.1 million.

Question 41

Larry is an investment adviser representative of an investment advisory firm. Larry’s office is located in New York, but he has clients throughout the Tri-State area, which includes parts of New York, Connecticut, and New Jersey. Larry is currently registered as an investment adviser representative in New York, but is considering opening a satellite office in New Jersey to better service his clients. If Larry opens this office, which of the following steps will he be required to take?

a. Register as an IAR in both Connecticut and New Jersey
b. Register as an IAR in New Jersey
c. Do nothing, since he’s already registered as an IAR in New York
d. Do nothing until his registration expires in New York

Answer 41

(B) Investment adviser representatives who work for federal covered advisers need to register only in states in which they maintain a place of business, regardless of the number of clients in the state. However, if an IAR maintains a place of business in more than one state and has clients in each of these states, he must register in each state. In the scenario presented in this question, Larry needs to register in New Jersey if he opens an office there, but not in Connecticut, since he has no place of business there.