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S63 > Chapter 4 - Section 2 - Model Rules for IAs > Flashcards

Chapter 4 - Section 2 - Model Rules for IAs Flashcards

1
Q

True or False: IAs shall not exercise any discretionary power in placing an order for the purchase or sale of securities without obtaining written discretionary authority from the client within ______ business days after the first transaction placed pursuant to oral discretionary authority.

A

True: According to the Model Rules, Investment Advisers (IAs) shall not exercise any discretionary power in placing an order for the purchase or sale of securities without obtaining written discretionary authority from the client within 10 business days after the first transaction placed pursuant to oral discretionary authority.

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2
Q

What is the only exception in exercising discretion that does not require written discretionary authorization?

A

The only exception in exercising discretion that does not require written discretionary authorization is when the discretion relates solely to the time and/or price of executing a transaction. This means that an Investment Adviser (IA), Broker-Dealer (BD), or Agent can decide the specific time and price at which to execute a client’s order without needing written authorization, as long as the client’s general instructions are followed.

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3
Q

True or False: IAs must act in the best interests of their clients, placing the clients’ interests above their own. This includes providing suitable investment advice and full disclosure of any potential conflicts of interest.

A

True

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4
Q

IAs must provide clients with a written disclosure document Form _________ that includes information about their business practices, fees, conflicts of interest, and disciplinary history.

A

ADV

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5
Q

True or False: IAs are not required to maintain accurate and detailed records of their business activities, including client communications, transactions, and financial statements.

A

FalseThey are required to be maintained. These records must be kept for a specified period and be available for regulatory inspection.

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6
Q

If an IA has __________ of client assets, they must follow specific rules to protect those assets, including using a qualified custodian and providing clients with regular account statements.

A

custody

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7
Q

True or False: IAs must ensure that their advertising and marketing materials are not misleading. This includes avoiding false or unsubstantiated claims about their services or the performance of their investment strategies.

A

True

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8
Q

True or False: IAs must establish and maintain a comprehensive compliance program to ensure adherence to all applicable laws and regulations. This includes appointing a Chief Compliance Officer (CCO) to oversee the program.

A

True

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9
Q

True or False: IAs are prohibited from engaging in any fraudulent, deceptive, or manipulative practices. This includes making false statements, omitting material facts, and engaging in schemes to defraud clients.

A

True

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10
Q

True or False: IAs must not engage in trading securities based on material, non-public information. This ensures fair and transparent markets. What is this called?

A

True; Insider Trading

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11
Q

True or False: IAs are generally allowed to borrow money or securities from clients.

A

False: IAs are generally prohibited from borrowing money or securities from clients, except under specific conditions that ensure the client’s interests are protected. Unless the client is a BD, an affiliate of the IA, or a financial institution engaged in the business of loaning funds.

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12
Q

________________refers to the improper practice of mixing a client’s funds or securities with those of the Investment Adviser (IA), Broker-Dealer (BD), or Agent. According to the Model Rules, this practice is prohibited because it can lead to confusion about ownership and potentially result in the misuse of client assets. Proper segregation of client funds from personal or firm funds is required to ensure transparency, accountability, and protection of client interests.

A

Commingling

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13
Q

Under NASAA’s Unethical Business Practices Module Rule, IAs and IARs are prohibited from borrowing money or securities from a client or lending money to a client unless the client is:

A
  • A broker-dealer
  • An affiliate of the investment adviser, or
  • A financial institution that’s engaged in the business of loaning funds
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14
Q

True or False: IAs and IARs are not permitted to borrow money from, or lend money to, an immediate family member who happens to be a client of the firm.

A

True

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15
Q

Another practice that generally is prohibited is sharing in a client’s account. However, an agent may share in the profits and losses in a client’s account if:

A
  • The sharing arrangement is approved in writing by the customer and the agent’s broker-dealer
  • The sharing is proportionate based on the amount invested by each party
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16
Q

True or False: IAs shall make misrepresentations to advisory clients or prospective advisory clients, including qualifications of the advisor or its employees, the nature of the services offered, fees to be charged, and omission of material facts.

A

False: IAs shall not make any misrepresentation to any advisory client or prospective advisory client including qualification of the advisor or its employees, the nature of the services offered, fees to be charged and omission of material facts.

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17
Q

True or False: IAs shall not provide a report or recommendation to any advisory client prepared by someone other than the advisor without disclosing that fact.

A

True

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18
Q

The _________________, while evaluating advisory fees, has the authority to investigate and compare the fees of other advisors for similar services

A

State Administrator

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19
Q

IAs shall not disclose to the clients in writing _________ any advice is rendered, any material conflict of interest.

A

before

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20
Q

IAs shall not fail to disclose to clients in writing before advice is rendered, any material conflict of interest including:

A
  1. Compensation arrangements
  2. Charging an advisory fee for rendering advice where a commission will be received
  3. Holdings of a recommended security (by a firm or IAR), or involvement in a recommended investment
  4. Charging performance-based fees
  5. Disclosure of all sources of compensation
  6. Vacation or trip purchases
  7. Ownership in any property that will be purchased by a REIT
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21
Q

______________ are commission rebates that money managers (IAs) receive for channeling some or all of their trades through certain brokerage firms.

A

Soft dollars. Soft dollars would include research reports, software applications and real-time quotes, but not the payment of the salary of an analyst. Those would be hard dollars. The key is that the service(s) the adviser receives as part of a soft-dollar arrangement must benefit its clients and be reasonable in relation to commissions paid.

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22
Q

True or False: IAs shall not fail to disclose to clients in writing at the time the advice is rendered, any material conflict of interest.

A

False It must be disclosed BEFORE advice is rendered.

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23
Q

IAs shall not publish, circulate, or distribute any advertisement which does not comply with the rules under the ____________________.

A

Investment Advisers Act of 1940

24
Q

True or False: IAs shall not disclose the identity, affairs, or investments of any clients unless required by law or unless consented to by the client.

A

True: This would also include a. discussing that a person is a client b. disclosing investments held in specific clients account and c. discussing a prominent clients account with a journalist

25
Q

True or False: IAs shall not take custody of a client’s funds or securities unless the IA has notified the state administrator that they have custody, and the state administrator has not prohibited this practice.

A

True

26
Q

Where must IAs maintain client funds and securities?

A

With qualified custodians, such as banks or broker-dealers.

27
Q

How often must qualified custodians send account statements to clients?

A

At least quarterly.

28
Q

What examination must IAs with custody of client funds or securities undergo annually?

A

An annual surprise examination by an independent public accountant.

29
Q

True or False: Advisers may include provisions in contracts that claim to waive compliance with the Advisers Act or any of its rules.

A

FalseThey may not. The contract language may not lead clients to believe they have waived any available right to take legal action against the adviser (i.e., through exculpatory contract provisions). This also means that advisory contracts may not contain hedge clauses that absolve the adviser from liability or mandatory arbitration provisions. (A client may be asked to voluntarily sign a predispute arbitration agreement at the time of account opening.)

30
Q

True or False: An adviser may not assign its clients’ contracts without their consent.

A

True

31
Q

______________is considered the direct or indirect transfer of an advisory contract by the adviser, or the transfer of a controlling block of the investment adviser’s outstanding voting securities
by a security holder of the advisory firm.

A

Assignment

32
Q

A ___________ fee is a type of performance-based fee that adjusts based on the performance of an investment relative to a benchmark.

A

A fulcrum fee is a type of performance-based fee that adjusts based on the performance of an investment relative to a benchmark. Here are the key points:

  1. Performance-Based: The fee increases if the investment outperforms the benchmark and decreases if it underperforms.
  2. Qualified Clients: Only qualified clients, such as those with a net worth over $2.2 million or an account value over $1 million, can be charged this fee
  3. Regulatory Conditions: The Investment Advisers Act of 1940 allows this fee structure to align the interests of advisers and clients.
33
Q

_______________ is an unethical and illegal trading practice where a broker, trader, or another market participant uses non-public information or pending orders to make trades for their own benefit.

A

Front Running. Example: An IA placing a customer’s buy order ahead of several previously entered large buy orders for the same security in order to realize profits from the increase in price resulting from the increase in demand.

34
Q

__________________ is a form of market manipulation where traders buy and sell a security among themselves to create the illusion of increased trading activity. This deceptive practice aims to influence the price of the security, making it appear more attractive to other investors. The goal is to lure unsuspecting investors into buying the security, driving up its price, at which point the manipulators sell their holdings for a profit. This practice is illegal and undermines market integrity.

A

Painting the tape

35
Q

______________ involves buying large amounts of securities, often stock, to keep the price from falling.

A

Pegging

36
Q

________________ refers to non-public, material information about a company that could influence an investor’s decision to buy or sell the company’s securities

A

Insider information
Civil Penalties: The Securities and Exchange Commission (SEC) can impose fines up to three times (treble damages) the profit gained, or loss avoided from the illegal trades.
Criminal Penalties: Individuals convicted of insider trading can face significant prison sentences, often up to 20 years.

37
Q

IAs with custody must maintain a minimum net worth of $____________. An ____________ balance sheet must be filed.

A

$35,000; audited
**advisers who have custody due to direct fee deduction or due to advising pooled investment vehicles (mutual funds) are exempt from this minimum net worth requirement

38
Q

If the IA is registered at the State level under the USA and requires prepayment of fees _____ months or more in advance in excess of $______.

A

six; 500

39
Q

IAs with discretionary authority over client funds or securities, but without custody, must maintain a minimum net worth of $___________. A _______________ must be filed (not audited).

A

$10,000; balance sheet

40
Q

If the IA is registered at the Federal level under the Investment Advisors Act of 1940 and requires prepayment of fees ______ months or more in advance in excess of $______. The minimum net worth requirement is _____________ and an __________ balance sheet must be filed.

A

six; $1,200; positive net worth; audited

41
Q

IAs must file a balance sheet with the state securities Administrator within ____ days following the end of the IA’s fiscal year.

A

90

42
Q

True or False: If an IA has offices in multiple states, the IA need only to comply with the Minimum Net Worth requirements of the state in which it maintains its principal place of business.

A

True

43
Q

If an IA’s net worth falls below the minimum required, the IA must notify the State Administrator ______________________________.

A

by the close of the next business day. After notifying the State Administrator that an Investment Adviser’s (IA’s) net worth has fallen below the minimum required, the IA must take the following steps:

  1. File a Financial Condition Report: By the close of the next business day, the IA must file a detailed report of its financial condition with the State Administrator. This report typically includes:
    • A trial balance of all ledger accounts.
    • A statement of all client funds or securities that are not segregated.
    • A computation of the aggregate amount of client ledger debit balances.
    • A statement of the number of client accounts.
  2. Ongoing Monitoring: The State Administrator may monitor the IA’s financial condition more closely to ensure compliance with regulatory requirements and to protect clients’ interests.
44
Q

All books and records of Investment Advisers must be maintained and preserved in an easily accessible place for a period of not less than _____ years from the end of the fiscal year during which the last entry was made on record, the first ____ years in the principal office of the IA.

A

Five; two

45
Q

Partnership agreement or incorporation articles, charters, minute books, and stock certificate books of the IA shall be maintained in the Principal’s office of the IA and preserved until at least ____ years after the termination of the business.

A

three

46
Q

What does “custody” include according to NASAA rules?

A

Having physical possession of client funds or securities.

47
Q

How does NASAA define “custody” in terms of authority?

A
  • Having the authority to obtain possession of client funds or securities, such as through a power of attorney.
  • The authority to write checks from the client’s check book
  • Being a trustee of the trust account.
48
Q

According to NASAA rules, what situations would not constitute “custody?”

A
  • Funds and Securities that are inadvertently sent to the IA as long as they are returned promptly within 3 business days
  • receiving a check from a client made payable to a third party, provided the adviser forwards the check within three business days
  • prepayment of advisory fees.
49
Q

True or False: The State Administrator may prohibit an IA from taking custody of client funds and securities.

A

True

50
Q

Notice must be given to the State Administrator if an Investment Adviser has custody of client funds and/or securities on form _______.

A

ADV - Part 1

51
Q

IAs must undergo an ___________ surprise examination by an independent public accountant to verify client assets. This helps ensure that client funds and securities are properly accounted for and safeguarded.

A

annual

52
Q

IAs must maintain client funds and securities with qualified custodians, such as __________ or ______________. This requirement is designed to protect client assets from potential misuse.

A

banks or broker-dealers

53
Q

The qualified custodian must send account statements directly to clients at least ___________. This provides clients with transparency and helps them monitor their investments.

A

quarterly

54
Q

The intended purpose of Form _______ is to facilitate the annual surprise examination of client funds and securities held by Investment Advisers (IAs).

A

ADV-E

55
Q

_____________ notice must be given by the IA to each client in writing the location and manner in which funds and securities will be maintained and of any changes to this information.

A

Prompt

S63 (19 decks)

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