Chapter 3

Question 1

Acting as principal for their own account (sell or purchase security from client)

Answer 1

Proper written disclosure to client required prior to completion of transaction
Client must give consent but consent does not have to be in writing

Question 2

Investment advisory contracts must state in writing

Answer 2

Advisor cannot be compensated based on capital gains or appreciation (performance fees)
Can compensate based on total value of averaged over period (AUM)

Question 3

Performance fee allowed

Answer 3

USA does not allow

Inv Advisory Act `1940; allows for Qualified clients only (net worth of $2.1M or $1M in AUM)

Question 4

Assignment

Answer 4

Require consent of client
If IA partnership” no assignment for minority interst
IA partnerhsip and majority dies, assignment yes consent
Changing from sole prop to partnership is assignment

Question 5

Advisory contract changed

Answer 5

IA must have client sign revised contract

Question 6

Administrator cannot do

Answer 6

(can do almosth anything)

Cannot directly arrest, enjoin, or indict indviduals or confidscate property

Question 7

Criminal penalties

Answer 7

<= $5,000 or imprisoned <= 3 years or both. five year statue of limitiaon

Question 8

Civil liab

Answer 8

No suing more than earlier of 3 years contract sale or two years after discovery of facts
Buyer may sue to recover consideration paid for security plus interest as well as costs and reasonable attorney fees- cost
Generally no punitive damange including treble damages are awared
Any person may avoid civil liablity by offering to refund purchase price plus interest
Survives death

Question 9

Rules administrator

Answer 9

Need to be amended only when they are changed

Question 10

Ability to appear orders by Administrators

Answer 10

May be appealed in court within 60 days after order issued

Question 11

Proving exemption or exeption

Answer 11

On person claiming to proof

Question 12

If disciplinary proceeding

Answer 12

Administrator required to provide appropriate prior notice, opportunity for a hearing, written finding of fact and conclusions
(if potential violation do not need to provide)

Question 13

Administrato may not suspend

Answer 13

based solely on lack of experience (can’t do anything retroactively)

Question 14

Unit Investment Trust

Answer 14

must file advertising and sales literature

Question 15

Record retention

Answer 15

Determined by state administrator or Fed law (5 years for IA’s)- Fed trump state
if IA registered with SEC- adminstrator has no control

Question 16

Bd store electronic records

Answer 16

Records cannot be altered, readily ccessbile,m copied, duplicate stored separate location

Question 17

Administrator authority requiring filing of advertising of Federal Covered Security by issuer

Answer 17

No authority

Question 18

Blotter

Answer 18

Record of daily activities of each branch of BD

Retain for 6 years

Question 19

Selling away

Answer 19

Under NASAA Model Rule on Agents, an Agent shall not effect securities transactions not recorded on the regular books or records of the broker-dealer which the agent represents (selling away), unless the transactions are authorized in writing by the broker-dealer prior to the execution of the transaction.

Question 20

Limitation administrator advertisings

Answer 20

Under the Uniform Securities Act, the Administrator may, by rule or order, require the filing of any prospectus, pamphlet, circular, form letter, advertisement, or other communication addressed or intended for distribution to prospective investors, including clients or prospective clients of an investment advisor, UNLESS THE SECURITY OR TRANSACTION IS EXEMPTED.

Question 21

administrator revoke exemption

Answer 21

According to the Uniform Securities Act, the administrator may issue an order revoking an exemption without prior notice to the persons affected. An Administrator may at ANY time issue a revocation, with or without prior notice. Make sure that you do not confuse this with Disciplinary Proceedings against a licensed person - that is when prior notice is needed!!

Question 22

Administrator revoke IA registration

Answer 22

The administrator may revoke an IA’s registration but must provide appropriate notice, opportunity for a hearing, and written facts and conclusions by law.

Question 23

Advisor act as principal for own account

Answer 23

It is unlawful for any adviser to act as principal for their own account (to knowingly sell to or purchase any security from a client) without proper disclosure to the client. Proper disclosure is constituted by delivery of written disclosure to the client prior to the completion of the transactions and consent from the client, but this consent need not be in writing.

Question 24

Record retention for IA’s

Answer 24

Federal law 5 years

Question 25

Institutional investors

Answer 25

Institutional investors include banks, insurance and investment companies, and, as long as they have assets not less than $1 million, employee benefit plans. Although each of these is included in the term accredited investor, that term, as used in federal law (the term is not found in the USA), also includes certain individuals, and they would never be considered institutional investors under the USA.

Question 26

Omitted in fee disclosure document

Answer 26

1. Commission
2. Markup/ Markdown
3. Advisory fees

Question 27

updated inclusion in FA

Answer 27

SEC Release IA-1092 added financial planners, pension consultants, and sports and entertainment representatives to the list of potential IAs.