Chapter 6 Part 2

Question 1

For purposes of the Brochure Rule, the SEC’s definition of a wrap fee program does NOT include

Answer 1

Mutual Fund Asset Allocation programs-These programs charge a percentage-of-assets fee to manage a portfolio of no-load or load-waived funds, rather than a portfolio of individual securities; Managed Account Programs-These are traditional portfolio management programs in which clients are charged advisory fees together with transaction-based commissions (rather than a single fee).

Question 2

While the Brochure Rule dictates the written disclosure that must be made to clients, the Investment Advisers Act generally does not require specific

Answer 2

verbal disclosures when discussing an adviser’s services with a potential client. however, untrue or misleading verbal statements are prohibited

Question 3

the SEC has created rules that specify certain practices as prohibited, il has also taken action against advisers for practices that were not specifically

Answer 3

prohibited, but considered fraudulent. So advisers must always consider whether the representations they make to clients may be considered fraudulent, deceptive, or manipulative

Question 4

“In October of 1987, the SEC and the North American Securities Administrators Association (NASM) released a detailed discussion of their joint views on the applicability of the Investment
Advisers Act. The release, known as SEC Release IA- 1092, includes”

Answer 4

all persons who provide investment advice as an integral part of their business as investment advisers

Question 5

In the Release, the SEC and Nasaa provide

Answer 5

uniform interpretations of the application of federal and state adviser laws to these firms and individuals. a person must satisfy all three elements of the A-B-C test to be considered an investment adviser.

Question 6

When a person provides advice or

Answer 6

“issues reports or analyses related
to specific securities, the first component of the investment adviser definition is satisfied. The
confusion occurs, however, when it comes to more general infornmation. Also, be careful. A person can give advice about an investment instrument. However, the instrument may not be defined as a security.”

Question 7

the advice given must specifically relate to

Answer 7

securities, in order for securities laws to apply

Question 8

The second component of the investment adviser definition is met only when a person is in the business of

Answer 8

providing advice or issuing reports or analyses. This does not need to be the principal business activity of a person, but it must occur with some regularity

Question 9

According to SEC Release IA-1092, a person is considered to be in the business of providing advice if

Answer 9

“The person holds herself out as an investment adviser and provides investment advice; The person receives any separate or additional compensation representing a definable charge
for providing advice; The person provides recommendations, analyses, or reports about specific securities or specific categories of securities on anything other than rare, isolated, and nonrecurrent instances.”

Question 10

The compensation component of the definition of an investment adviser is satisfied by the

Answer 10

receipt of any economic benefit, or when the person receives any fee or additional compensation representing a definable charge for providing advice. The fee for advisory services may be part of a fee related to total services rendered, commissions, or a combination of both

Question 11

When an advisory fee is charged, it need not be paid directly by

Answer 11

the client to whom the advice is given. All that is required is that the adviser receive compensation for advisory services from some source.

Question 12

According to SEC release IA-1092, the IA definition may also include persons providing advice regarding

Answer 12

the selection of investment managers and anyone recommending asset allocation, or such professionals as financial planners, pension consultants, and other persons who provide information related to the general advantages and disadvantages of investing in securities as compared to, or in addition to, other types of investments

Question 13

Financial planning involves

Answer 13

preparing a financial program based on clients’ financial circumstances and objectives. Providers of financial planning services will normally assist their clients in implementing the recommended programs by either selling or recommending securities, insurance products, or other investn1ents, referring clients to attorneys or accountants, and reviewing their clients’ programs periodically to recommend revisions. If securities- related advice is provided, the financial planner will have satisfied the A-B-C test

Question 14

In addition to providing administrative services, pension consultants usually offer

Answer 14

a number of advismy services to employee benefit plans and to the fiduciaries of such plans. This type of advice is based on the analysis of a plan’s needs and includes recommendations on how to fund the plan, the appropriate asset allocation model, the review of the performance of an existing portfolio manager, or the selection of individual securities. Compensation for these services is generally provided through a consulting fee or an asset-based management fee

Question 15

Individuals who routinely provide financial advisory services to athletes or entertainers arc commonly referred to as

Answer 15

sports or entertainment representatives. These representatives offer a number of services, such as negotiating employment contracts and developing promotional opportunities, as well as providing advice related to investments, tax planning, budgeting, and money management. Some of these representatives assume discretion over a client’s funds for the purposes of collecting income, paying bills, and making investment decisions for the client

Question 16

excluded from Advisers Act definition of IAs

Answer 16

Banks or Bank Holding Companies, Providers of Investment Advice Incidental to Their Profession, Brokers, Dealers, and Registered Representatives, Publishers, U.S. Government Securities Advisers

Question 17

Banks or Bank Holding Companies

Answer 17

Banks and bank holding companies are excluded, as are state or federal chartered credit unions. However, not all banks or bank holding companies fall under the exclusion. For example, the Act does not consider savings and loan associations to be banks. Also ineligible for the exclusion are banks or bank holding companies that are investment companies, foreign banks, and investment adviser subsidiaries of banks

Question 18

Providers of Investment Advice Incidental to Their Profession

Answer 18

Lawyers, accountants, teachers, and engineers (LATEs) are excluded from the definition of investment adviser if their advice is incidental to the practice of their professions. However, the professional exemption is not available when investment advice is being provided as a separate entity.

Question 19

The SEC looks at the following factors in determining whether advice is solely incidental to the practice of a person’s profession

Answer 19

Whether the professional holds himself out publicly as providing advice (e.g., by word of mouth, business cards, letterhead, telephone listings, and signs); Whether the advice is reasonably related to the professional services provided; Whether the fee structure for investment advisory services is different from the charge for the professional services

Question 20

Brokers, Dealers, and Registered Representatives

Answer 20

are excluded as Jong as any investment advice provided is within the scope of the brokerdealer’s business, and there is no special con1pensation for the advice. Brokerage commissions do not constitute special compensation unless a clearly definable portion of it is for investment advice