Chapter 5 Part 3

Question 1

Form ADV-H is filed by an adviser that is

Answer 1

“unable to file forms electronically. A tcmpora1y
hardship exemption is available if the adviser normally files forms electronically but is unable to do
so through the IArD system. reasons for this may be a computer malfunction or electrical outage. This exemption docs not permit the adviser to file on paper; instead, it extends the deadline for an electronic filing for seven business days”

Question 2

If the adviser is a small business and electronic filing would impose an undue hardship, the adviser can request

Answer 2

a continuing hardship exemption. A small business is a firm that has assets under management of less than $25 million

Question 3

If the adviser has been granted a continuing hardship exemption, the adviser must

Answer 3

complete and submit the paper version of Form ADV to FINRA. FINRA will enter the data into the IARD system for the firm, and the firm will reimburse FINrA for the expense of data entry

Question 4

Every registered investment adviser must update its brochure at least

Answer 4

once a year by filing an annual updating amendment, formerly Schedule I. This amendment must be filed within 90 days of the end of its fiscal year. ‘f’he 1nain itcn1s that n1ust be updated are the IA’s assets under management. Other items required to be updated include the number of accounts, clients, employees, and investment adviser representatives

Question 5

If any material information in the adviser’s brochure becomes inaccurate, the adviser must

Answer 5

“update
its brochure promptly, i.e., within 30 days. It cannot wait until the end of the year. A change in the adviser’s name, location, reportable disciplinary or financial issues, changes to custody disclosures, and changes due to successions and ownership arrangements would be considered material infmmation”

Question 6

A successor adviser may simply file

Answer 6

“an amendment to Form ADV in lieu of filing a new application if
the changes are limited to a change in: The form of organization, The state of incorporation or partnership”

Question 7

Discretionary authority exists when

Answer 7

a client gives an investment adviser the authority to act on behalf of his investment account. The discretionaty authority granted to an IA is usually limited discretion.

Question 8

Once limited discretion is granted, it allows the adviser to

Answer 8

enter orders to buy and sell securities without the client’s approval for each transaction

Question 9

If full discretion is granted, it allows the IA to

Answer 9

enter orders to buy and sell securities as well as withdraw cash and securities from the client’s account without the client’s approval for each transaction

Question 10

according to the SEC and the NASM Model Rule on Custody Requirements for Investment Advisers, an adviser that has full discretion has

Answer 10

custody of client assets. If the adviser is deemed to have custody, then custody rules apply

Question 11

Oral discretion allows an adviser to

Answer 11

“buy or sell securities for a client without
written authorization. However, for investment advisers, oral authorization is sufficient for a very limited time-for a period of only 10 business days after the discretion is granted. By the end of the 10-day period, the adviser must obtain written authorization”

Question 12

The oral discretion provision only applies to

Answer 12

investment advisers. Broker-dealers and agents are allowed to use discretion only upon written authorization from the client

Question 13

The SEC and USA define custody as the

Answer 13

legal responsibility for, or control over, someone’s assets. The USA states that an adviser is considered to have custody when the IA is in possession of client funds or securities

Question 14

An adviser will also be considered lo have custody when:

Answer 14

the IA has legal ownership or access to client’s funds or securities vvithin a partnership, corporation, or investment pool; The IA bas full discretionary authority over a client’s account; The adviser inadvertently receives client’s funds or securities and docs not return themto the client within three business days.

Question 15

investment advisers are required to notify the Administrator if they have or will have possession of

Answer 15

client funds or securities. The Administrator has the power to permit or to disallow any adviser from maintaining custody

Question 16

IAs maintaining custody must Use a

Answer 16

qualified custodian to hold the funds and securities in a separate account. (Qualified custodians include an FDIC-insured bank or savings association or a registered broker-dealer holding client assets in customer accounts.)

Question 17

IAs maintaining custody must Provide written notification to all clients of the

Answer 17

custodian’s name, address, and the manner in which the funds will be maintained

Question 18

IAs maintaining custody must Send quarterly account statements to clients that contain the

Answer 18

amount of funds, a list of each security held in custody, a record of all transactions, and any fees deducted by the adviser. If a qualified custodian sends the account statements, the adviser must have a reasonable basis for believing that the statements have been provided

Question 19

If an IA sends the account statements

Answer 19

The IA must have an independent CPA verify and audit the accounts by examination each year; The IA’s financials and auditor’s report must be forwarded to the Administrator within 120 days of completion; If the auditor discovers material discrepancies, the Administrator must be notified within one business day.

Question 20

minimum financial requirement

Answer 20

Custody of client assets = $35,000 at all times, Limited discretionary authority over client accounts (not custody) = $10,000, Prepaid fees of more than $500, six months or more in advance = Positive Net Worth at all times