Chapter 4: Laws, Regulations and Guidelines Flashcards

Question

What are 3 key factors in determining if meet definition of Investment Advisor

Answer 1

1) Do they provide investment advice by helping someone to decide where and how to invest their portfolio of assets 2) Are they in the business of providing advise as part of organization objectives/mandate 3) Do they receive compensation, either directly or indirectly, hard or allowable soft dollars (research reports, custodial service, special software or any service that helps client as opposed to furniture, overhead, vacations, cell phones...)

Answer 2

Consent to Service of Process

Answer 3

- Initial application via Investment Advisor Registry Depository (IARD) with SEC - Initial application via Investment Advisor Registry Depository (IARD) with State Administrators - Annual updating amendment - Other than annual amendment to registration

Answer 4

Part 1 is for regulators (SEC and State) and requires key organizational data to be reported upon initial and renewal registration Part 2 is for advisors to document brochures and supplements with: - 2A including disclosure brochure and an appendix covering wrap fees, while - 2B provides disclosure on all advisory personnel/IARs who provide client advice which includes educational and industry background, to be reported at initial registration and updated whenever any change in disciplinary info or personnel change; ADV Part 2 available annually to new and existing clients ADV Part 3 is the Form CRS relationship summary disclosing how the firm and its employees are compensated, fees charged and any conflicts of interest from type of account or investment vehicles chosen

Answer 5

- Compliance with rules related to safeguarding assets - Form ADV reflect advisor has custody - Assets maintained in segregated accounts -Are required records maintained - Itemized statement of account balance and activity given to client min every 3 mo - Surprise audit of client assets conducted at least annually by independent accountant - Any evidence of excessive or unauthorized trading, self dealing, preferential treatment or unsuitable recommendations or disclosures

Answer 6

Solicitors are Individuals or small firms that solicit business on behalf of Investment Advisor They do not need to be registered with SEC or many states as long as advisor is and conditions are in place: - Agreement between IA and solicitor spells out activities and comp - Client is given advisors disclosure brochure and separate solicitor agreement Advisor receives signed acknowledgement form from client noting receipt of both disclosures

Answer 7

For investment advisors not required to register with state but just with SEC, such as - +100M AUM (over $110M must register) - Advisor to Registered Investment Company - Mid size ($25-100M AUM) to bus dev company - Pension consultants to plans +$200M - Required to register in 15+ states - Internet IAs -Affiliates if in same business location as SEC registered - Advisors located in US Virgin Islands or outside US they can file notice with states they have a place of business (for fee), as dictated under NSMIA

Answer 8

Use form ADV-W 6o day review period before effective so SEC can ensure no regulatory action for misleading or fraudulent reporting, felony or securities related misdemeanor in past 10 yrs, court order, violation of securities law, subject of SEC barring or suspending

Answer 9

IAs that under Dodd-Franklin with min of $100M AUM (or still above $90M if dropped below $100m from previous yr) that are exempt from registration but subject to filing certain reports and info with SEC as well as with some States

Answer 10

Account where all transaction costs are included in a fee based on assets under mgmt (AUM); Works better for actively traded portfolios where higher trading fees vs passively traded accounts with minimum trades and fees

Answer 11

1) Introduction: Date, distinction of firm as BD, IA or both 2) Relationship and Services: listing of all brokerage and investment advisory services offered and any material limitations, addressing monitoring, investment authority, limited offerings and account minimum/other requirements 3) Fees, Costs, Conflicts and Standard of Conduct: detailing how fees are determined, any conflicts / legal obligations (as noted under Reg BI) 4) Disciplinary History: Directing client to online search tool on advisors/firms plus any criminal, civil securities related charges 5) Additional information: Location of more information on firm, services or individual and to request additional information

Answer 12

Regulation Best Interest is SEC adopted guidance which outlines disclosure requirements and allowed parameters for - dual registrants: firms which both execute trades as BD and provide advice as IA (employing both agents and IARs) -dually licensed financial professionals: employee who is both an agent of BD and IAR of an affiliated investment advisor (ie..Series 6&65) BDs and federal covered IAs serving retail investors must provide prospects and customers Form CRS relationship summary - ADV Part 3, to disclose how firm and employees are compensated, fees charges and any conflicts of interest that may arise based on type of account and investment vehicle

Answer 13

Adults vulnerable to financial exploitation such as individuals age 65+, and anyone coverd by state statutes (ie...mentally incompetent, illiterate)

Answer 14

North American Securities Administrators Association - is org of US state and Canada provincial securities Administrators that keep the regulators on top of key issues and aligned when writing rules for their jurisdictions such as Rule 102(a) (4) -1 covering Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisors

Answer 15

While IA, IA and FCR are all considered fiduciaries under rule, Federal Covered Advisors are covered only to extent conduct is fraudulent (allowing State Admins to sue FCR) as states have no other power over them, since NOT investment advisors under state law (but are under Federal law)

Answer 16

A qualified client includes certain institutional clients and individuals with either $2M of net worth (excluding primary residence) or at least $1M of assets under adviser management. For these clients in addition to AUM or hourly based comp, can also provide performance based compensation based on min 1 yr capital gains or asset appreciation against a specified benchmark - known as Fulcrum Fee - that are increased for over-performance and reduced for under-performance Details and potential conflicts of interest must be detailed in disclosure agreement

Answer 17

The adviser trades client securities with a related broker-dealer, which is allowed if the potential conflict of interest is disclosed and the clients written consent is given before the deal is completed

Answer 18

- Acting as Principal: trading with related broker dealer - Agency Cross Transactions: when advisor runs trade thru related broker dealer - Additional Brokerage Comp: Soft dollar benefits that assist IA with client, NOT furniture, vacations, cell phones, salaries/overhead - 12b-1 fees: commission to IA for selling and retaining investment co - mutual fund securities - Personal Investment Holdings: IA owns same stock, expecially if thinly traded - Trade Allocations (allocating specific cost basis to select clients on bunched trades or IPO allocations - cherry picking)

Answer 19

No advisory services can be provided, coordinated or solicited to government official or PAC in exchange for contract to provide advisory services to government entity or for votes in areas where the firm or IAR/Agent is not eligible to vote. For BDs who write muni securities, they are called Municipal Finance Professionals and can contribute up to $250 per elected official where eligible to vote for them, without triggering penalty of disallowing firm to do business with issuer for 2 yrs. For covered associates, if eligible to vote for official can contribute up to $350 to campaign of the issuer candidate or $150 for candidate if covered associate is not entitled to vote

Answer 20

Guarantees can not used, especially to imply IARs will cover losses ever, and can only be used when speaking about repayment of P&I on US Treasuries (but still must disclose interest rate and purchasing power risk) or any corp bonds or debt instruments where 3rd party promises to pay in case of default

Answer 21

Money held for customer or if advisor has access to funds or can directly deduct fees from funds must ensure the funds are - maintained in separate accounts with regular account statements of funds or use qualified custodians (Banks, Registered Custodial BDs) - Administrator is notified and required net worth, auditing and record keeping requirements are met - Registration information with state/fed is updated - Written authorization from customer If want to avoid custody requirements, any money received should be forwarded to independent 3rd party or returned to sender within 3 business days and records are kept of actions

Answer 22

Any individual able to easily see detailed portfolio activity and what portfolio managers are doing, requiring adherence to a written code of ethics

Answer 23

Identify - develop org capabilities to manage security risk to assets and systems Protect - implement safeguards for critical infrastructure Detect - develop and implement activities fo capture occurrences of security events Respond - take appropriate action when a detected event occurs Recover - establish and maintain plans for resilience and restoring services

Answer 24

BDs are in business of making transactions in securities for the account of others or for their own account They must register and file with Form BD, providing similar firm overview of operations and details of associated persons via form U4 outlining any criminal or investment related illegal activity or charges

Answer 25

Set by the SEC subject to limitations of Securities Exchange Act of 1934 which could over-ride the level established by state Administrators if not in alignment and are enforced by FINRA

Answer 26

Churning is excessive size and frequency of trading; If agent discusses ahead of time with client who agrees to all the trades this is still churning and can also be construed as unsuitable or in appropriate if does not fit client trade profile

Answer 27

Broker-Dealer/Agents must have name of security - company and quantity in written format from customer to initiate trade, or have written discretionary consent to avoid un-authorized transactions, whereas IA /IAR with written consent for account discretion can make individual trades without specific instructions For BD, written consent and instructions must be signed and on file before actions can be taken relative to asset, action and quantity. Time and price are not major considerations such that "market not held" order is held until BD can get best price

Answer 28

Money laundering is process of taking illegal profits and transacting them thru legitimate means to avoid detection or proof of criminal activity. 3 phases are 1) Placement - funds placed into financial system or smuggled out of country 2) Layering - passing funds through multiple, complex (offshore shell company) transactions to disassociate dirty money 3) Integration - funds are processed thru the legitimate financial system undetected Bank Secrecy Act - US Treasury requires and financial institution - BDs/IAs to report Suspicious Activity Reports (SARs) to Financial Crimes Enforcement Network (FinCEN)

Answer 29

Currency Transaction Report must be filed with FinCEN; or report min $5k if BD knows, suspects of has reason to suspect activity is illegal

Answer 30

A transaction that falls within one of four classes: - funds derived from illegal activity or is conducted to hide assets from illegal activity - is designed to evade requirements of Bank Secrecy Act - appears to serve no business or lawful purpose - involves use of BD to facilitate criminal activity

Answer 31

Corporate officers, members of board of directors and anyone who owns 10% or more of common stock; Are restricted under SEA of 1933 from: - selling any shares held less than 1 yr - trading without first filing Form 144 for proposed sale no later than time of sale - sell max of 1% outstanding shares or most recent 4 week average trading volume over next 90 days

Answer 32

To address abusive sharing of customer information SEC created Reg S-P that requires financial institution to provide notice of privacy policies and procedure as well as non disclosure of nonpublic personal information to nonaffiliated 3rd parties unless consumer has not elected to opt out of the disclosure, where consumer is prospect and customer is consumer with ongoing relationship with firm

Answer 33

Identify relevant red flags for possible data breaches Detect red flags and risks Respond appropriately to red flags detected to prevent and mitigate identity theft Update ITPP and red flags periodically to reflect changes in identify risks

Answer 34

Fair and Accurate Credit Transactions Act which allows consumers access to see and monitor their credit reports annually, requires Credit Agencies to identify and report possible existence of identity theft using FTC defied red flags rule and to require financial institutions such as BDs to properly maintain and dispose of personal financial information

Answer 35

suspension orders to deny, suspend, or revoke only happen after what the question lists. These are AKA "stop orders."

Answer 36

SIPC SIPC is securities insurance protection corp, protecting brokerage customers against missing assets due to broker-dealer failure. The Securities Exchange Act of 1934 created the SEC (securities exchange commission) and requires SROs (self regulating orgs) such as FINRA and NYSE to register.

Answer 37

False advisers can only do this for qualified clients, including individuals with at least $1M under the adviser's management.

Answer 38

A certificate granting the owner a share of winnings from a racehorse there has to be an expectation of profits to make it an investment contract. the other certificate is basically a rental contract.

Answer 39

notice filings NSMIA allows for exclusive SEC registration, but federal covered advisers and issuers of some federal covered securities are still required to notice file with the state securities Administrators.

Answer 40

Securities Act of 1933 offers of any new securities are registered under the Securities Act of 1933.

Answer 41

the broker-dealer is exempt from State B's registration requirements broker-dealers who are not located in State B can execute transactions with the issuers of the securities involved without registration.

Answer 42

no later than the due date for confirmation of the transaction when the customer gives an indication of interest, the preliminary prospectus is sent.

Answer 43

subpoenas only a court can issue an injunction.

Answer 44

a portfolio manager with assets under management of $89 million the sub-adviser (or adviser) to a registered investment company is a federal covered adviser. (know list of Federal Covered Advisors)

Answer 45

Trust Indenture Act of 1939 the Trust Indenture Act of 1939 is all about protecting bondholders. If a corporation wants to sell $5,000,000 or more worth of bonds that mature outside of one year, they have to do it under a contract or indenture with a trustee, who will enforce the terms of the indenture to the benefit of the bondholders.

Answer 46

Agent must be registered under similar rules as Broker-Dealer and is NOT in effect during any period the agent is not employed - associated with the broker dealer; Both BD and agent must notify Administrator, and if agent moving to new BD, Form U5 completed by prior BD and U4 on new firm, with agent filling out same and unable to practice until Administrator grants registration no later than noon of 30th day after filing

Answer 47

- Increase in Required minimum net worth/capital requirements as set by SEC (Administrator can require) - Client signed documents authorizing custody - Surety Bond up to $10k maintained per account

Answer 48

Application for successor firm my be filed, whether or not successor is yet in existence for the unexpired portion of the year without incurring additional filing fee

Answer 49

Individuals and orgs registering as both Broker Dealer and Investment Advisor; Administrator determines merit of firm operating as both and can block from operating as one or the other as needed

Answer 50

Agent Issuer Bank, Savings / Loan, Trust company

Answer 51

BDs with no place of business in the state, can operate without registering in the state if involved in following securities transactions within state with: - Issuers of securities - other broker dealers - banks, savings/loans, trust, insurance co. - investment companies as defined in ICA-1940 - pension or profit sharing - other financial institutions or institutional buyers OR no Non Institutional (human) customers residing in the state.

Answer 52

Individual other than BD who represents BD or issuer in offering or trading in the purchase or sale of securities. Registration is required if (1)individual and/or BD have place of business in the state (2) investors are individuals (vs institutions) unless the security or the transaction is exempt (ie..represent US Treasury selling T-Bond or represent issuer of commercial paper in direct sale to pension fund) Agents must be engaged in selling /buying (ie...Board Member or officer not trading is not agent) and need not register separately if included on U4 of registered BD

Answer 53

Employees of IAs involved directly or indirectly with investing client assets or selling services of firm registered as IA Registration is required if (1)individual and/or BD have place of business in the state (2) investors are individuals (vs institutions) and IAR has more than 5 clients in a state Unless role is clerical or ministerial work for IA (ie..bookkeeper, receptionist)

Answer 54

When specific investment selection advice is being provided to client based on client situation that is not within scope of existing professional role (ie....BD agents only execute directed trades - security name and quantity), and not compensated for advice Can also apply to financial publications and communications based on irregular communication triggered from market movements or signals as well as specific buy and sell positions to take For electronic media or websites, if specific recommendations are made based on client specific input, then authors of report/website must register as IA Federal Covered Advisors as defined under Investor Advisor Act of 1940 as IA therefore not defined under state securities law Administrator has authority to name other individuals/entities outside scope of IA regs

Answer 55

For state registered adviser, within 48 hrs of signing service contract or at time of signing IF customer has 5 days to cancel without penalty Federal covered advisor (non state registered-Fed only) must provide brochure before or at time client signs advisory agreement Brochure is not required if advice is impersonal (not specific to client) and costs less than $500 For existing clients, disclosure brochure must be delivered annually

Answer 56

Securities regulators only register professionals but do not certify to their competency whereas other independent orgs- CFP, CFA, CPA..) "certify" competency of professionals

Answer 57

When advisor has direct or indirect control of assets and when advisor can deduct mgmt fees direct from client account unless clients written permission is given and a billing statement explaining how fees determined is provided every time fees taken

Answer 58

Ongoing relationship with client where advisor is monitoring account, oversees the investments and trades on account with discretion

Answer 59

Change in Assignment - advisor can not sell or transfer customer contract to 3rd party without consent Change in Partnership Structure - Any change in partners must be communicated to all clients within reasonable time of occurrence; If in this change there is a change in primary or majority owner then change in Assignment would occur and client written agreement required Compensation - advisors can not be compensated on basis of share of capital gain for appreciation performance unless agreed to in writing and basis specified, otherwise should be compensated hourly or by % AUM

Answer 60

- Factual, not contain misleading or inaccurate info - Can not claim past performances are guarantee - Can not extrapolate gains from less than 1 yr performance or apply not reflect portfolio gains against related benchmarks - Software provided online that helps DIY, must disclose limitations, assumptions and difficulties with respect to use - Free services must be free

Answer 61

- Develop and implement written policies and procedures reviewed annually - All communication must comply with securities law covering advertising, communication with clients, compliance, record-keeping and antifraud - Monitor and provide guidelines for IAR activity in social media - Solicited or directly written commentary or testimonials as well as direct compensation are not allowed for independent reviews....must be unsolicited, and no control over which comments are shown, including use of "likes" or noting who are clients

Answer 62

Margin: - Hypothecation: gives BDs authority to pledge customer margin securities as collateral to secure margin loan -Credit: client gives loan consent that allows client's securities to be used as part of lending program to short sellers - Margin disclosure statement: outlining risks, firm rights and client responsibilities when trading on margin - Options Disclosure: details specifics of trading in options with signed agreement initiating contract 3rd Party: Requires signed agreement for anyone (POA) acting on behalf of client After Hours: Disclosure that must be provided to outline risks of: - Lower liquidity - Higher volatility - Changing prices - Unlinked markets - Exaggerated effects of news announcements - Wider spreads

Answer 63

purchase 155 shares of a technology stock today if the firm/agent choose the stock or bond on behalf of the customer, they are using their discretion. On the other hand, if the customer tells them to buy or sell a certain number of shares, and only leaves time/price discretion with the firm, that does not require written discretionary authority.

Answer 64

False the CFA and CFP lead to a waiver of the Series 65 exam, but not an exemption from registration as an IAR

Answer 65

Advisers have to keep records not just up to the point when they retire or go out of business; they keep records "in an easily accessible place for a period of five years from the end of the fiscal year during which the last entry was made and, for the first two years, the records must be maintained in the adviser’s principal office."

Answer 66

False: for a broker-dealer (not an RIA) the discretion must be in writing and received BEFORE the first trade--the margin agreement must be signed promptly AFTER the first trade.

Answer 67

An individual who uses the offices of a federal covered adviser in State A to merely sell the advisory services of the firm for compensation (place of business is State A, is an IAR even though Federal Covered Advisor is not an Investment Advisor - pg 328) An RIA is not an IAR, and vice versa. (Financial Planner and securities agent setting up FP business is RIA) The IAR in State B can have up to 5 clients who reside in State A without having to register, provided he is not soliciting in State A or holding himself out as if he were an adviser in State A.

Answer 68

Selling security into location where not registered An offer of rescission will be sent to the investor on the issuer's letterhead informing him that if he agrees, to sign the form and return it with any certificate or ownership evidence of the security and he'll receive the purchase price plus the rate of interest used by the courts.

Answer 69

I, III An adviser does not deduct advisory fees from performance figures without disclosure (of how determined and impact on portfolio results - pg 351) FINRA might administer the IARD system, but advisers don't register with FINRA; advisers register with the SEC or the states. There is no legal requirement to earn the CFA or CFP distinction. Back-tested portfolios are little pretend investment portfolios containing what the adviser woulda/coulda/shoulda purchased in the past.

Answer 70

marketable securities the NASAA model rule on minimum financial requirements for advisers specifically tells advisers not to include prepaid expenses or loans to partners--if the firm is a partnership--or to officers or stockholders--if the firm is a corporation. Seems like a good idea to me. If the advisory business is doing poorly, what are the chances that the partners are doing well enough to repay the loan they took out? Talk about some shaky assets. Marketable securities have a value--they are an asset. Marketing rights, goodwill and other intangible assets should not be included, either.

Answer 71

private placement common stock on NYSE, Nasdaq (see pg 308)

Answer 72

US Treasuries or Government Municipals Any foreign government Bank, S/L, Credit Union, Trust company Debt issued by insurance co Railroad-Common Carrier Federal Covered Security

Answer 73

An individual selling exempt securities on behalf of a broker-dealer Many people with their Series 7 license sell exempt securities, such as municipal and Government bonds. The fact that they sell securities for compensation on behalf of a broker-dealer is why they must register as an agent of the broker-dealer. Individual representing issuer is not agent, nor is selling US Treasury bonds for US Treasury (pg 338) CFO is not agent selling and commercial paper to pension is exempt

Answer 74

Barry must register in State B because he is holding himself out to the public as an investment adviser in State B The "de minimis" exemption is for advisers who are not "holding themselves out as advisers" in the state and who have no more than 5 non-institutional clients. If he didn't have the billboard, he could serve the three clients without registering in State B.

Answer 75

4) conviction of misdemeanor theft does not need to be disclosed on Form ADV after 10 years Some states call it a "license," others call it a "registration." either way, passing an exam only allows you to APPLY for a license. Will you get one? Probably not if you have misdemeanor theft convictions in the previous 10 years. Believe it or not, Form ADV only goes back 10 years, while U-4 asks if you have EVER been convicted of securities-related misdemeanors or any felonies. Agents register with FINRA; IARs register with the state Administrator(s).

Answer 76

They are unethical and considered null and void in an administrative or civil proceeding against the adviser ex (without) culpability (fault). An advisory contract can not ask the client to hold the adviser blameless, no matter what.

Answer 77

Brianna must register as an investment adviser representative in State B because she has a place of business in State B She has a place of business in State B, so she must register there. The question doesn't necessarily indicate that the clients live in State B. She is an IAR, not an RIA.(3rd bullet) WOrking for Federal Covered Investment advisor does not exempt IAR from registering in state where have place of business (pg 324)

Answer 78

Did the representative in fact tell the customer that ABC was profitable? in a criminal case it would be important to know the registered rep's "mens rea, " or awareness, but the Administrator only needs to know if the registered representative actually told the client something completely wrong and dangerous. There is no minimum amount that must be lost on an investment before the Administrator will proceed against a registrant or applicant.

Answer 79

Chicago Board Options Exchange SROs registered with the SEC include FINRA, NYSE, NASDAQ and CBOE. The SEC is not a mere SRO--they are the federal government. The Commodity Futures Trading Commission (CFTC) regulates commodities markets the way the SEC regulates securities markets.

Answer 80

- under no circumstances capital gains are not part of "yield." Yield only includes income payments (dividends, interest). Capital gains is/are part of "total return, " a different calculation. Capital gains are sporadic and do not represent a consistent "yield" to an investor.

Answer 81

If the adviser uses the services of a qualified custodian, the advisory firm must have a reasonable belief that the qualified custodian holding the assets provides periodic account statements to those clients So, if the custodian is sending account statements to clients, the IA does not have to. But, the IA has to have a reasonable belief that the statements are, in fact, being sent. Account statements are to be sent at least quarterly, not monthly.

Answer 82

1) a "no-load fund" can have no front- or back-end sales charge and must keep the 12b-1 to no > .25%. 2) A "100% no-load fund, " like what T Rowe Price offers, would have no 12b-1 either--of any kind. 3) A "B-share" has a back-end load, also called a Contingent Deferred Sales Charge (CDSC). 4) A shares have front end sales loads but limited fees 5) C Shares or level load funds have higher 12b-1 fees and best for short term investors

Answer 83

False Administrators can decide which securities are acceptable, but they must take a deposit of securities and not just cash.

Answer 84

A qualified client with $1.5 million under management The other two clients are the exceptions to the disclosure brochure rule (pg 343-344).

Answer 85

Each is automatically registered as an IAR when the firm's license is granted if there is a problem with the 3 owners, the firm won't get registered. If they pass inspection and want to be IARs, they are automatically registered as such. The other individuals they hire will register as IARs through a Form U4.

Answer 86

Disclose the potential conflict of interest and obtain the client's consent before settlement of the trade For a principal transaction, the IA must disclose the potential conflict of interest before executing the trade and receive the client's signed acknowledgement/consent by settlement. (pg 384, last para)

Answer 87

The representative acted improperly by using time and price discretion that had expired Time/price "discretion" don't require written authorization. But the time/price discretion also evaporates if the order isn't executed on that day (Tuesday in our example).

Answer 88

Assessable stock can charge fees to the owner in the future, so it isn't a "gift," but, rather, is considered to have been offered and sold--subject to full disclosure just like an offer of securities.

Answer 89

any content related to the individual's investment practice must be approved by the employing firm what the agent or IAR does through any social media outlet that involves securities/investing/his practice must be monitored and approved by the BD or RIA. And, if the agent or IAR is going to promote his securities practice, he must be clear about his affiliation with the BD or RIA.

Answer 90

The adviser must meet State X's record keeping requirements only if the adviser is properly registered in State X and is, in fact, meeting their record keeping (and net capital) requirements, the adviser only has to meet State X's requirements.

Answer 91

If he has a place of business in State B There aren't many differences for IARs based on whether the employer is federal covered or state registered, but this is one. The IAR of a federal covered adviser only registers in those states where he has a place of business. IARs for state-registered RIAs use the de minimis rule.

Answer 92

Must disclose that no ready market currently exists for the security there does not appear to be a liquid market or an accurate "market" price, so if the firm buys the stock from the customer, they can not pretend that he sold it "at the market." (pg ??)

Answer 93

A regulatory body with authority to enforce rules and impose fines and sanctions of members and associated persons FINRA is not a trade association like the Investment Company Institute--they are also not a government regulator. They might enforce SEC rules, but they are not a government enterprise or regulatory body. Rather they are an "SRO, " or self-regulatory organization with power over their member firms and the firms' principals, agents, and employees. FINRA does not regulate the advisory business.

Answer 94

a registered representative purchases shares for his son's UTMA account before placing a large customer buy order taking advantage of a customer order you're about to place is called front-running. The other three choices are all violations, as well: insider trading, selling dividends, and breakpoint selling.

Answer 95

Jason likely meets the definition of "investment adviser" Even if you just hold yourself out to the public as being in the business of providing investment advice, you're an investment adviser. He would likely register at the state level, starting at least with the state where this strip mall resides.

Answer 96

Choosing the time to enter a market order without signed discretionary authorization Broker-dealers can't use discretion until they have it in writing, unless the 'discretion' relates only to time/price to enter a trade that day. Called a "market not held" order, btw.

Answer 97

a broker-dealer the firm is acting as an investment banker, which is a broker-dealer. Although the word "advise" was used, we see that the firm is not advising people on how to invest in securities. They are, therefore, not an investment adviser.

Answer 98

A brochure introducing the agent to 500 retail investors agent emails must be monitored, but the communications subject to principal approval are delivered to more than 25 retail investors--called retail communications. FINRA Rule 2210 defines three categories of communications: Retail communication consists of any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. Correspondence consists of any written (including electronic) communication distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Institutional communication means any written (including electronic) communication that is distributed or made available only to institutional investors as defined but does not include a firm's internal communications. Institutional investors include banks, savings and loan associations, insurance companies, registered investment companies, registered investment advisors, a person or entity with assets of at least $50 million, government entities, employee benefit plans and qualified plans with at least 100 participants, FINRA member firms and registered persons, and a person acting solely on behalf of an institutional investor.

Answer 99

If the agent is not registered in all 50 states, a filter must be applied to make the site un-viewable to visitors outside his state of registration and principal office The agent, IAR, BD, or RIA's website must be clear that they are not attempting to do business in any state where they are not registered or exempt from registration requirements. And, if not registered in a website visitor's state, no followups will be made in which securities investments or investment advice are offered.

Answer 100

J J does not meet the definition of "agent" due to the nature of the transaction if the individual represents the BD, he is an agent. If he represents the issuer of the securities, he is not an agent if the transaction is exempt, as this one is (offer to certain institutional investors only).

Answer 101

Because he does not have a place of business there, Steve is exempt from registration in State B for IARs of federal covered advisers, the only thing that matters to the other states is having a place of business in the state. It's only the state-registered IARs and RIAs who use the "de minimis" exemption.

Answer 102

a networking arrangement the question provides the definition of a "networking arrangement," a situation requiring much disclosure to the BD customers.

Answer 103

A client enrolling in a wrap-fee program sponsored by the adviser The only two clients not required to receive the disclosure brochure are clients receiving impersonal advisory services and clients that are registered investment companies. The adviser to a registered investment company is typically affiliated with the investment company and the distributor, while most advisory clients are outside entities who need full disclosure.

Answer 104

Banks, S&L Security Issuer Credit Unions.. (pg

Answer 105

the applicant filed for personal bankruptcy 5 years earlier personal bankruptcies in the past are not cited as a reason for Administrative action in the Uniform Securities Act. (pg 296)

Answer 106

because she has a place of business in State B, she must register there a firm can be federal covered, but the IARs of the firm still register in the state(s) where they maintain a place of business.

Answer 107

Breakpoint Selling - Failure to disclose and offer quantity discounts Selling Away - Offering investments without knowledge or supervision of agent's employer Suitability Sells - Making sell recommendations to customers without determining suitability; ie..recommending certain investment to all of clients Churning - excessive quantity and frequency of sales within portfolio inconsistent with portfolio /investor makeup

Answer 108

Types of securities and analysis performed Services provided/fees charged Education and business background of all officers and employees determining advice Any compensation incentives Balance sheet if retain custody for $500+ or 6mo+ Criminal and regulatory violations over past 10 years

Answer 109

If a Federal Covered Advisor (know conditions such as size of AUM at $100M+), then SEC determines If IA registered in state , then Administrator of state where principal main office is located (if have multiple offices and registered in multiple states??) That rule provides that advisors registered and in compliance with the minimum net worth and bonding requirements of the state where the advisor has its principal office do not need to meet the (higher) requirements of any other states where the advisor does business. 15 U.S.C. § 80b-18a(c).

Answer 110

Regulates "control stock" whereby large shareholders, Officers, Board Members to report sales of corp stock adhering to volume limit and frequency of trade, reported quarterly but no later than with sale

Answer 111

- False or Misleading application - Willfully violated or failed to comply (consumancy) -Convicted within last 10 yrs of any securities related misdemeanor and of any felony - Is insolvent - Enjoined by court from engaging in securities business - Subject of Admin order within past 5 yrs for suspension, revocation or denial or previous Admin denial or from a national securities exchange under SEC of 1933 - not qualified based on training , experience and knowledge - failed to pay fees

Answer 112

Fees charged by the firm are non-negotiable registration is just a statement of fact--either the firm is registered or isn't required to be. The "RIA" looks like a certification, when it's just an abbreviation. Advisers must be clear whether fees are negotiable or not.

Answer 113

Front running - Selling or buying securities before receiving authorization from investor Selling Away - offering securities not offered by the firm

Answer 114

Total Return total return would be the compounded returns an investor makes by reinvesting all dividends and capital gains distributions into more shares earning more dividends and capital gains to be reinvested into more shares, and so on, and so on. The Sharpe Ratio, remember, measures risk-adjusted returns.

Answer 115

No. Would only be exempt if subject to an exempt transaction

Answer 116

Make a photocopy of the letter and send that copy to the client Advisers keep the originals of correspondence received from clients, so the IAR should keep the original and send a photocopy to the client.

Answer 117

SEC and FINRA have oversight of Broker Dealers and agents as well as member firms SEC- Federal Covered and Administrators - State RIAs and IARs

Answer 118

The agents must get permission from their respective firms, and the firms must be under direct or indirect common control. This is an item from NASAA'S Policy Statement “Dishonest or Unethical Business Practices for Broker-Dealers and Agents.” The agents must not only get permission, but the firms must be affiliated in some way.

Answer 119

The investment manager violated the fiduciary responsibilities under ERISA by not following the investment policy statement follow the investment policy statement.

Answer 120

This is allowable This is allowed. If the adviser receives advisory fees from the trustee, certain safeguards need to be followed in order to have the usual requirements waived (CPA surprise audit, e.g.) See Custody page???

Answer 121

promptly update his U4 information and remain in his current position all he has to do is promptly disclose this information. Unlilke regulatory or criminal disclosures, this will have no direct effect on his career. It might cause him to lose a few clients or prospects, but that is a different matter.

Answer 122

Interpositioning is a financial term that refers to the act of a broker placing themselves between a buyer and a seller in order to facilitate a transaction.

Answer 123

sell five ABC call options if she sells five call options, they are "covered calls," which generate premium income. If the stock does trade sideways (goes nowhere), the options will expire worthless. Rather than getting nothing when the stock goes nowhere, she will pocket the premiums collected.

Answer 124

Return the certificates to the sender within 3 days and keep special records To avoid being deemed to have custody--and the burdens of maintaining minimum financial net worth plus annual audits of the books--the adviser must return the securities to the sender within 3 days and keep records of what was received, what was sent, and when.

Answer 125

exempt from registration registered federal covered sold in an exempt transaction.”

Answer 126

investment adviser representatives similarly, partners, officers, directors, etc. of a broker-dealer are automatically registered as agents of the firm when the firm's registration is accepted. This means that no separate registration is required from ADV for Advisors and BD for Broker Dealers IA or Broker Dealer is entity and can be person if sole proprietor, but if multiple employees then registered auto as IAR/Agent. Additional employees would need to be added under Form U4 Principals are hired by BD to supervise operations and registered reps

Answer 127

TRUE: An agent can only sell securities that have been properly registered in a state or qualify for an exemption from registration. TRUE: An agent can only solicit business in a state if both the agent and broker-dealer are registered in that state. FALSE: An agent's registration to sell securities expires at the end of the broker-dealer's fiscal year. Registrations of persons (agents, broker-dealers, IA's, IAR's) all expire on December 31st unless properly renewed. For securities registrations it's different—there, the security is effective for one year going forward. So, if an agent gets registered on July 10th, her license will expire on December 31st. If a security is declared effective on July 10th, it's effective for a year going forward. TRUE: If an agent leaves a broker-dealer to go to another broker-dealer, the agent and both broker-dealers must notify the Administrator of the change.

Answer 128

An investment adviser acting as a sub-adviser to an open-end fund Other Federally Registered Investment Advisors (Federal Covered Advisor) - Operating in 15 or more states - $100M of assets - Advisor to registered investment company (ie..open end fund) - Pension consultants with clients of $200M - Mid size advisors to business development co - Affiliate of federally registered advisor is if principle office and place of business is same as that of SEC registered advisor - Newly formed, eligible in 120 days to be federal registered - Principle business in US Virgin or outside US

Answer 129

Full disclosure must be provided to all buyers. if the underwriter is actually owned by the issuer, or affiliated in any way, that must be disclosed to all investors.

Answer 130

"Investment counsel" is a term that requires that the adviser's primary activity is providing investment advice and that advice is deemed "continuous, supervisory management" Pg 347

Answer 131

A registered broker-dealer with state or federal member of FINRA and SIPC

Answer 132

risk of investment loss if the plan is set up corectly, the investment risk is passed off to participants in, for example, a 401k plan. But the trustees (CEO, CFO, etc.) still have to oversee the plan to make sure that cost-efficient investment options are available, that enough different choices are available, etc.

Answer 133

The security does not need to be registered with the state to be sold there that is all that the word "exempt" means. Excused from registration. Question does not reference exempt transaction which would be broker dealers underwriting new issue of securities, nor agents exempt from registering in state as well as exempt securities are still subject to anti fraud

Answer 134

An access person is anyone who has unsupervised to non public information about clients and their trading activities 1) Access persons must report securities holdings within 10 days of becoming access persons 2) Treasury securities and open-end funds that the adviser and access person do not manage are not considered reportable securities 3) access persons must typically have copies of account statements and trade confirmations sent to the chief compliance officer of the adviser

Answer 135

When both the customer and broker-dealer provide their written consent. (pg ??)

Answer 136

principal is when broker dealer is when a brokerage completes a customer's trade using their own inventory. Principal trading allows brokers to also profit from the bid-ask spread. Agency trading involves a brokerage finding a counter-party to the customer's trade, which can include customers at other brokerages. With agency trading, the broker must find someone willing to buy or sell the security for the same price as the counter-party. Therefore, when acting as a principal, firms make markups and markdowns with customers. when acting in an agency/broker capacity, commissions are charged. Question is related to broker-dealer comp NOT IAR acting as principal.

Answer 137

Joe Williams, an agent for XYZ Securities, has an active financial planning business that he conducts outside the scope of his employment at XYZ the lawyer and accountant are simply doing their jobs in this particular question. And an investment adviser rep is not an investment adviser.

Answer 138

as interest rates rise, prices fall; Preferred acts like bonds with converse interest rates and yields to prices there is no risk concerning falling rates, since rising market prices on an investment is a good thing. bond interest is not relevant, bond repayments are senior to preferred stock in bankruptcy

Answer 139

a check-box format ADV 2 used to be in a check-box format. To make it easier for prospects and clients to read, advisers now use a narrative format, in Plain English.

Answer 140

Jolie does not meet the definition of “investment adviser” and is not required to register; She's not giving advice based on the needs and situations of clients. She is not an adviser--she's a writer.

Answer 141

Hypothecation is allowing securities to be used as collateral in margin loan Matched purchases or matched sale-purchase agreement (MSPA), is when the Federal Reserve sells government securities such as U.S. Treasury bonds to an institutional dealer or the central bank of another country with the contractual agreement to purchase the security back within a short period of time, usually less than two weeks. Front running is buying or selling securities in firms account before placing customer order Pegging is when 2 or more parties agree to buy and sell a security at a specific time and price in order to move the market in the desired direction, they are engaging in a form of market manipulation known as "matched purchases."

Answer 142

Period covered must be 1 year Capital depreciation must offset capital appreciation, ie fees must reflect performance results in either direction (ie,,lower fees if lower results) The adviser reasonably believes the client understands the terms. The client must meet net worth or assets-under-management requirements as a qualified client Full disclosure of any prepaid fees and comp model (even if includes paper profits)

Answer 143

Your firm participated in the selling group for a recent subsequent primary distribution of ABC common stock if the firm makes a market in the stock, or is/was part of an underwriting syndicate . . . or if partners will benefit by pushing up the stock price, that all needs to be disclosed in order to avoid “conflicts of interest” that make the “research” less than objective.

Answer 144

systematic the theory espouses that investors can easily diversify to reduce non-systematic risk, so they should only expect to be compensated for the risk they can't diversify away: systematic/systemic.

Answer 145

If the custodian sends account statements directly to an adviser's clients, the adviser is still required to send its own statements to clients. This is not true This is different from billing statements which do require advisor to also send in order to avoid additional audits etc..

Answer 146

DOA - all states where offer was Discussed, Offered and Accepted

Answer 147

The broker-dealer is subject to State B's registration requirements There is no de minimis rule for broker-dealers. If they have a place of business in State B, the broker-dealer must register there. Or, if they have even one non-institutional customer there, same thing.

Answer 148

a sample client contract must be filed with the Administrator assignment of contract without client consent is simply NOT ALLOWED. Clients with $1 million+ under management, for example, can be charged performance-based compensation.

Answer 149

Gross performance may be cited only if the advertisement also presents net performance. Gross performance does not factor in the deduction of advisory fees; therefore, if the advertisement quotes gross performance, it must also quote performance net of fees. Testimonials are now considered a form of advertisement, subject to new SEC rules. The SEC does not allow advisers to claim that the SEC has "approved" of anything connected to the firm.

Answer 150

REITs Treasury's and GNMA/FNMA/FHLMC . . . are ALL EXEMPT SECURITIES. A REIT would only be exempt if it were a federal covered security--on NYSE, NASDAQ, or NYSE AMEX.

Answer 151

May over-ride the policy statement if it is inconsistent with ERISA Follow the policy statement, unless the statement itself VIOLATES ERISA. The only time to override policy statement is if it is in violation of ERISA rules

Answer 152

If solicator agreements are met and advisor is registered then not all states consider solicitors to be IARs, and do not need to be registered

Answer 153

consult with a qualified tax professional Rationale if he rents the house for two years, it is no longer a residence, so the tax-free capital gain is not available. Renting the house allows him to depreciate for tax purposes and write off improvements and repairs. Either way, an RIA or IAR needs to know about tax issues, but needs to know when to pass them off to a qualified tax professional.

Answer 154

Deliver the letter unopened to the branch supervisor agents must forward all written complaints to their principal/supervisor.

Answer 155

the firm must meet the SEC net capital requirements under the Securities Exchange Act of 1934 Rationale the SEC establishes net capital requirements for broker-dealers under the "exchange Act." For advisers registered with the state securities Administrator . . . the adviser just has to meet the requirements of its "home state."

Answer 156

an independent solicitor for an investment adviser who provides no advice himself not all states require solicitors to register, but most do. The financial planner is an RIA. We also see a securities agent, and an employee of an RIA who does seem to be involved with investments.

Answer 157

To avoid being deemed to have had custody of the securities, the investment adviser may forward the securities to the qualified custodian securities are returned to the sender; third-party checks are forwarded to the payee ... . both within 3 business days.

Answer 158

none of these choices if the fees are considered excessive, that could lead to disciplinary action. But, the Administrator does not set the items listed. Primarily, the Administrator is interested in full disclosure, to their office and to clients.

Answer 159

I, II often the individual representing the issuer is exempt or excluded from the definition of "agent," but that is only if the security or the transaction qualifies for an exemption.

Answer 160

The agent should collect payment made out to the mutual fund company payment should be made to the mutual fund company, NEVER to the agent.

Answer 161

municipal finance professionals--but not their employing firms--may make contributions to any candidate for whom they are eligible to vote up to $250 only the municipal finance professionals can donate to officials for whom they are eligible to vote, up to $250, without causing the firm to take a 2-year break from doing business with the entity related to that governor, mayor, etc.

Answer 162

They are exempt from SEC registration but may be subject to registration with state securities Administrators they don't have to register with the SEC; they may have to register with the state securities Administrators. Either way, they must file reports with the SEC, even though they are exempt from registration with the SEC.

Answer 163

This constitutes an offer and sale of a security (pg 299) a NOTE is the first example of a security named in the Uniform Securities Act. If the business owner defaults, the Adminstrator could take action for making unregistered offers of securities, for not being a registered agent himself, and for engaging in fraud. In fact, this is a very common occurrence in most states.

Answer 164

REVISIT ACT: When so doing would best serve the objectives of the beneficiaries the Uniform Prudent Investor Act definitely stresses the importance of diversification in managing the risk/reward characteristics of the portfolio, but Section 3 also states that, “A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”

Answer 165

REVIEW MATERIAL FOR WHEN NEED TO REFER TO ATTORNEY You should advise the Thompsons to consult with a tax attorney on this legal issue Rationale you need to understand the basics when it comes to taxation of bond interest, dividends, etc., but when the issue is complex, it often makes sense to consult with an attorney, CPA, or other specialist.

Answer 166

REVIEW DISCLOSURE REQUIREMENTS You may not accept the client's signature at this time you shouldn't get the customer to sign the contract without providing the disclosure document (which can be a copy of ADV Part 2). You either provide it 48 hours before taking their signature, or you give it to them at the time of signing if they have 5 days to cancel.

Answer 167

REVIEW RULES FOR IAR VS AGENT NOTIFYING UNDER FEDERAL COVERED ADVISOR: the IAR must notify the Administrator of his termination with the federal covered adviser, while the investment adviser who hires the IAR must notify the Administrator it's an either-or situation for the advisory business. If the firm is federal covered, only the IAR provides notification. If the firm is state-registered, only the firm provides notification.

Answer 168

REVISIT DISCLOSURE OF 3RD PARTY E REQUIREMENTS As long as the adviser discloses this practice in ADV 1 and ADV 2, no further disclosure is required investment advisers frequently order reports and analyses that assist in making recommendations or trading portfolios. They disclose this practice in the disclosure brochure to prospects and clients, as well as in ADV 1 when registering and renewing.

Answer 169

REVIEW ETHICAL PRACTICES IARs often invest in the same securities recommended to clients. investment advisory firms are responsible for supervising the personal trading of their IARs to make sure no one is engaging in frontrunning.

Answer 170

is not an agent and need not register Rationale he represents an issuer in an exempt transaction. He’s not being hired to sell securities in exchange for commissions—he is clearly not an agent.

Answer 171

REVIEW VOTING METHODS - PG 119 large shareholders prefer statutory voting Rationale cumulative voting benefits minority shareholders, while statutory benefits the large/majority owners, including the officers and directors of the company.

Answer 172

PLACE OF BUSINESS MUST REGISTER Correct Answer: an adviser with an office in the state whose only clients are banks and large pension funds Rationale an IAR is not an adviser. The SEC-registered adviser would only notice file--which is not a registration--in those jurisdictions where it maintains a place of business. Even though the adviser who has to register only serves institutional accounts, more importantly, it has a place of business in the state.

Answer 173

one year from the effective date 1 year from the effective date. Registrations for persons in the industry expire based on the calendar each year. A securities offering is not an ongoing thing, unlike an agent's registration, for example.

Answer 174

RR IS AN AGENT FOR BD Correct Answer: Investment adviser representatives have a fiduciary duty to their clients. Rationale Registered representatives sell securities. IARs manage accounts, sell advisory services, or provide financial planning services on behalf of an IA. Only the RIA and IARs are defined as fiduciaries to all clients.

Answer 175

directing transactions to a full-service broker-dealer that charges higher commissions than other firms but also has superior execution capability and superior research services "best execution" involves more than just "lowest price."

Answer 176

the applicant has answered untruthfully and is subject to denial of licensure U-4 doesn't mention anything about "in the past 10 years." Only Form ADV asks the question that way. This is "securities-related" because it's a "money crime" and people handle money in the securities industry.

Answer 177

the Administrator may stipulate which securities are acceptable as a deposit the Administrator can stipulate which securities are acceptable, but the Administrator can not force the adviser to post cash instead of securities to satisfy the bonding requirement.

Answer 178

Marvin is most likely an investment adviser representative, whether the employer is state- or federally-registered. if the individual employed by an investment adviser helps to determine recommendations made to clients, he is most likely an IAR.

Answer 179

A "networking arrangement" occurs when a broker-dealer operates on the premises of a traditional bank.

Answer 180

preferred stock, if she is in a lower- or middle- marginal tax bracket Municipal bonds are correctly associated with tax-efficient income, but if the investor is not in the top marginal bracket, her tax-equivalent yield on the municipal bonds would not be especially high. However, paying qualified-dividend rates on preferred stock dividends would be efficient.

Answer 181

All choices listed Rationale a BD operating at a bank is known as a "networking arrangement," requiring many different types of disclosure to customers.

Answer 182

Their shares trade over-the-counter Rationale mutual fund shares ARE NOT TRADED—they are redeemed to the fund for NAV. The closed-end fund shares trade, either on an exchange or OTC.

Answer 183

The adviser holds custody of client funds in excess of $35,000. there is no requirement that an IA hold custody; in fact, some Administrators do not allow custody by investment advisers., ALL other factors must be met

Answer 184

An unaffiliated federal covered adviser Rationale an IA may borrow from a client that happens to be a lending institution. IAs may also borrow from individuals and firms affiliated with the adviser.

Answer 185

State Securities registration rules

Answer 186

A copy of the solicitor disclosure document as well as the RIA must keep a list of all parties compensated for soliciting clients including the total cash and non-cash compensation paid and a summary of the business relationship with that entity (e.g., consulting, prime brokerage, securities lending, etc.). And, all agreements, correspondence and the separate disclosure documents for third-party solicitors.

Answer 187

"assignment of contract" occurs when a partner with a majority stake is admitted, leaves, or dies. Assignment can happen when a controlling block of the adviser's securities are transferred or "hypothecated," too. If the firm is a partnership, no assignment occurs based on partners with minority stakes, although the fact that the change occurred must be disclosed to clients. It's just not considered "assignment."

Answer 188

the agent accepts a plan to repay a credit card issuer a % of the debt owed. Any activity involving credit, bankruptcy, short home sale must be reported An arrest is not the same as a "charge." Any charge or conviction of any felony must be disclosed. Any charge or conviction of a misdemeanor involving crimes of a financial or fraudulent nature must be disclosed--not misdemeanor DUI or misdemeanor assault.

Answer 189

Unless she charges clients nothing for services--including tax preparation services--she most likely is an adviser and subject to registration requirements. If she receives compensation of any kind, and part of her services involve providing investment advice, she is an investment adviser. It does not matter how she itemizes her bills--if she provides investment advice for compensation, she is an investment adviser.

Answer 190

Takes the average of the stock’s high and low trading prices on the date of death. A question like this seems somewhat unlikely given the extreme level of detail.

Answer 191

A qualified custodian is a type of institution that is approved by regulators to hold assets on behalf of clients. For example, a bank is a qualified custodian.

Answer 192

The custodian may pay the adviser directly if attorneys for the trust have authorized the qualified custodian in writing to pay those fees The qualified custodian has to be authorized to make this payment of advisory fees directly to the adviser.

Answer 193

As long as the adviser follows certain safeguards, the minimum financial requirements and CPA audit are waived The adviser would be deemed to have custody, but if he follows the safeguards (client authorization, billing statements to custodian and client) the minimum net worth and CPA surprise audit are waived.

Answer 194

The adviser must deliver account statements to each LP or deliver audited financial statements annually and notify Administrator The adviser does have custody and either sends account statements or audited financial statements annually. If the latter, must notify the Administrator.

Answer 195

Karen must notify the Administrator of the termination; the state-registered adviser must notify the Administrator of the new association Unlike the brokerage side--where both the agent and the employer must notify--on the advisory side either the state-registered IA or the IAR notifies the Administrator.

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