Ch. 5

Question 1

Identify the acronym: NRSRO

Answer 1

Nationally Recognized Statistical Ratings Organization

Question 2

T/F: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the US.

Answer 2

T

Question 3

The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than _______ clients.

Answer 3

10

Question 4

For how long does the registration of an advisor that is registered with the SEC remain in effect?

Answer 4

Until it has been withdrawn, cancelled, or revoked by the SEC

Question 5

Define the term custody.

Answer 5

The legal responsibility for, or control over, another persons assets

Question 6

What is the federal law that governs investment advisers?

Answer 6

The Investment Advisers Act of 1940

Question 7

Under the IA Act of 1940, are banks and bank holding companies excluded from the IA definition?

Answer 7

Yes

Question 8

The program where a single fee is charged in lieu of commissions and advisory fees is generally called a ______ program.

Answer 8

Wrap

Question 9

When assigning an IA contract to another IA, ______ ________ must be obtained from the client prior to assignment.

Answer 9

When assigning an IA contract to another IA, written consent must be obtained from the client prior to assignment.

Question 10

An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?

Answer 10

No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment

Question 11

Define “assignment” as it relates to IA contracts.

Answer 11

The transfer of ownership of a clients account from one advisory firm to another. Client consent is required.

Question 12

Is an IAR who is employed by a federal covered adviser required to register in the state?

Answer 12

Yes. IARs of federal covered advisers must register in any state in which they have a place of business.

Question 13

Identify the acronym: RIA

Answer 13

Registered Investment Adviser

Question 14

T/F: An IA that has full discretion over a clients account at a separate BD is considered to have custody.

Answer 14

T

Question 15

Regardless of assets under management, IAs must register with the SEC if any client is a ______________.

Answer 15

Registered investment company.

Question 16

If an IA has $20 million under management and advises an investment company, with whom must it register?

Answer 16

Any IA that advises an investment company must register with the SEC (regardless of its AUM)

Question 17

T/F: The wrap fee brochure must disclose that it may cost less to purchase the IAs services separately.

Answer 17

T

Question 18

Does a solicitor for an IA provide securities recommendations?

Answer 18

No. Solicitors only solicit new clients; they do not recommend or approve transactions

Question 19

May a solicitor receive compensation from an IA?

Answer 19

Yes, if the IA is registered, a written agreement exists, and a court has not limited the solicitors activities.

Question 20

Define testimonial.

Answer 20

An advertisement in which an individual recommends the IAs services based on personal experiences with the firm.

Question 21

When an IA has custody, with whom are the assets held?

Answer 21

Assets are held by a qualified custodian. Clients must be notified of custodians name, address, and manner of holding.

Question 22

T/F: IAs are permitted to charge different fees to different clients for the same service.

Answer 22

T; provided proper disclosure is made, charging clients different fees is permitted

Question 23

When is a pension consultant required to register as an investment adviser?

Answer 23

When it is being paid to provide securities related investment advice.

Question 24

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $_____ under management.

Answer 24

$1,100,000

Question 25

For an IA to act as both an adviser and BD, what must be disclosed to clients before trades are effected?

Answer 25

The fact that the IA may be collecting both advisory fees and commissions

Question 26

May investment advisers advertising refer to testimonials?

Answer 26

Yes. Provided the testimonial is not misleading and certain disclosures are made.

Question 27

T/F: Bank holding companies are excluded from the IA definition under the USA.

Answer 27

F

Question 28

T/F: A person soliciting for an IA must annually provide a disclosure regarding the IAs performance.

Answer 28

F; however, at the time of contact, the solicitor must provide clients with a solicitor disclosure document

Question 29

Is an organization that provides ratings of securities and is nationally known considered an IA Under the USA?

Answer 29

No

Question 30

If a firm provides advice solely based on US government securities, is it required to register as an IA with the SEC?

Answer 30

No. US government securities advisers are excluded from the IA definition under the IA Act of 1940.

Question 31

An IA is created as a sole proprietorship is then converted to a partnership. This is considered client contract ________.

Answer 31

Assignment

Question 32

Before an IA may assign a clients contract to another advisory firm, it must obtain the ______ _________.

Answer 32

Clients consent

Question 33

If ABC Advisers has $112 million under management, it must register with ________.

Answer 33

The SEC

Question 34

An investment adviser with more than $_________ under management must register with the SEC.

Answer 34

$110 million

Question 35

An adviser is registered with the SEC under the Investment Advisers Act of 1940. What is the firm considered?

Answer 35

A federal covered advisor.

Question 36

T/F: If an advisers only clients are insurance companies, it is exempt from the SEC registration.

Answer 36

T

Question 37

The rule governing the disclosure requirement of an IA to its clients is referred to as the ________ Rule.

Answer 37

Brochure

Question 38

An IA is established as a partnership and two of its fiber partners retire. Is this considered an assignment?

Answer 38

No, since it is only a minority change of partners. A majority must retire for it to be considered an assignment.

Question 39

If an advisor exercises full discretionary control over a clients account, does this constitute custody?

Answer 39

Yes. Full discretionary control (having the ability to remove funds from the clients account) is considered custody.

Question 40

If an IA is in possession of checks drawn by its client and made payable to third parties, how may custody be avoided?

Answer 40

By ensuring that it forwards the check within three business days

Question 41

Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $__________.

Answer 41

$2,200,000

Question 42

T/F: Bank holding companies are not considered IAs under the USA.

Answer 42

F; they are excluded from the definition under the IA Act of 1940, not under the USA.

Question 43

T/F: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts.

Answer 43

F; a brochure is not required for investment company contracts or impersonal advisory services priced below $500

Question 44

What is required of an IA if the firm goes through a majority change in ownership?

Answer 44

The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided

Question 45

According to the USA, all investment advisory contracts must be in _______ form.

Answer 45

Written

Question 46

T/F: A pension consultant that advises a plan regarding the accountant it should hire must register as an IA.

Answer 46

F; IA registration is not required if a consultant provides incidental advice that is not securities related.

Question 47

T/F: A pension consultant being paid to create an asset allocation program for a plan must register as an IA.

Answer 47

T; the consultant must register as an IA since it is providing securities related advice for compensation

Question 48

Is an IA permitted to use testimonials in its promotional material?

Answer 48

Yes. Provided the testimonial is not misleading and certain disclosures are made.

Question 49

Define the local exemption from SEC registration for an IA.

Answer 49

The IAs clients reside in the state in which it’s office is located and it’s advice is not related to exchange listed securities.

Question 50

An IA has custody of it inadvertently receives client securities and hasn’t returned them within ______ business days.

Answer 50

3

Question 51

Define impersonal advisory services.

Answer 51

Services costing less than $500 per year that are not tailored to meet the investment objectives of a specific client

Question 52

What just a federal covered adviser do if it’s assets under management fall below $90 million?

Answer 52

Withdraw its federal registration and register with a state administrator(s)

Question 53

Will a client always pay lower fees in a wrap account?

Answer 53

No. Depending on the frequency of the clients trading, he may ultimately pay more than if the fees are paid separately

Question 54

T/F: Bank holding companies are not considered IAs under the IA Act of 1940.

Answer 54

T

Question 55

The IA Act of 1940 considered an communications that is directed to more than _____ person(s) to be advertising.

Answer 55

One

Question 56

A client had just learned that his account will now be handled by another IAR. Is this considered an assignment?

Answer 56

No. Control of the account has not changed simply based on an IAR leaving the firm.

Question 57

T/F: An IA may offer discounted fees to clients if proper disclosure is made in its brochure and Form ADV.

Answer 57

T

Question 58

T/F: According to the USA, investment advisers may generally charge performance based fees.

Answer 58

F; unless the administrator seems the client qualified, performance based fees are prohibited.

Question 59

What is required of an IA to assign an advisory contract to another adviser?

Answer 59

Written permission of the client.

Question 60

A newly hired investment adviser representative wants to put the initials “IAR” on her business card. Is this allowed?

Answer 60

No. However, she may spell out “Investment Adviser Representative”

Question 61

If an IA maintains custody of client funds, are unannounced audits required?

Answer 61

Yes. IAs must arrange for unannounced audits on an annual basis.

Question 62

An IA manages more that $110 million in assets and has only insurance companies as clients. Is SEC registration required?

Answer 62

No. An SEC exemption is provided to IAs whose only clients are insurance companies

Question 63

Is registration with the SEC required of an adviser that manages $87 million of assets?

Answer 63

No. An established FCA must register with the Adminstrator if the AUM falls below $90 million

Question 64

T/F: Notification to existing clients is required for a minority change in ownership of an IA.

Answer 64

T; however, if a majority change occurs, client consent is required since this would be considered an assignment

Question 65

If an IA maintains custody of a clients funds or securities, how often must account statements be provided to clients?

Answer 65

Statements must be sent quarterly

Question 66

If a pension consultant advises a plan regarding the law firm it should hire, must the consultant register as an IA?

Answer 66

No. IA registration is not required since the consultant is providing incidental advice that is not securities related

Question 67

Due to SEC Release 1092, what other candidates are included in the expanded IA definition?

Answer 67

Sports and entertainment reps, pension consultants and financial planners

Question 68

T/F: Am IA maintaining custody of client assets need not notify the administrator.

Answer 68

F; the administrator must be notified in writing using Form ADV

Question 69

If employed by a federal covered IA, is an IAR required to register in all states in which she is conducting business?

Answer 69

No. If the IAR has no place of business in the state, no registration is required

Question 70

Define assignment.

Answer 70

The transfer of an advisory contract by the adviser or any change in the overall management of the advisory firm.

Question 71

Define investment supervisory services.

Answer 71

The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client

Question 72

Is an exculpatory provision in an advisory contract permitted?

Answer 72

No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited

Question 73

Define solicitor.

Answer 73

Any person who, directly or indirectly, solicits any client for, or refers any client to, an IA.

Question 74

An IA inadvertently revives client funds/securities and doesn’t return them within three business days. Is this custody?

Answer 74

Yes

Question 75

When an adviser files Form ADV with the SEC, when does registration become effective?

Answer 75

Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings.