Chapter 7 Part 2

Question 1

Other permissible uses of soft dollars include

Answer 1

“traditional research reports and other related publications,
discussions with research analysts concerning the securities they follow, software for analyzing portfolios, the attendance fees for a conference or seminar where company executives discuss their company’s performance, market and economic data serviccs, and certain types of trading software”

Question 2

Unacceptable Soft-Dollar Arrangements

Answer 2

payment for advertising and marketing, travel expenses, meals and entertainment, overhead and administrative expenses, employee salaries, accounting fees, professional licensing fees, computer terminals, and the correction of trading errors

Question 3

The general rule regarding handling conflicts of interest may be referred to as

Answer 3

the Disclose or Abstain Principle

Question 4

abstain Aeling as an issuer or affiliate of

Answer 4

an issuer of securities

Question 5

abstain Recommending unregistered, nonexempt securities or the use

Answer 5

of nonregistered broker-dealers

Question 6

abstain Any activity that seeks to

Answer 6

defraud or deceive clients

Question 7

abstain Charging

Answer 7

unreasonable fees

Question 8

abstain Failing to disclose to all customers the availability of

Answer 8

fee discounts

Question 9

abstain Using contracts that seek to limit or avoid

Answer 9

an adviser’s liability under the law (hedge clauses)

Question 10

abstain Limiting a client’s options with regard to the pursuit of a

Answer 10

civil case or arbitration

Question 11

abstain Borrowing money from or

Answer 11

lending money to clients

Question 12

An investment advisory firm must keep all information concerning its clients

Answer 12

confidential. However, firms may release the information if required lo do so by law, or with the client’s approval

Question 13

written contracts are

Answer 13

not required under federal law

Question 14

Advisers may not include provisions in contracts that claim to

Answer 14

waive compliance with the Advisers Act or any of its rules or hedge clauses that absolve the adviser from liability, (e.g., through exculpatory contract provisions).

Question 15

contract language may not lead clients to believe they have waived any available right to

Answer 15

take legal action against the adviser. This means advisory contracts may not contain mandatory arbitration provisions

Question 16

A client may be asked to voluntarily sign a

Answer 16

predispute arbitration agreement at the time of account opening

Question 17

A client’s contract may not be

Answer 17

assigned by the adviser without the client’s consent

Question 18

Assignment is the

Answer 18

direct or indirect transfer of an advisory contract by the adviser or any change in the overall management or control of the advisory firm. If an adviser is a corporation, the acquisition of a majority of the adviser’s shares by another entity is a change of control requiring client consent. If an adviser is organized as a partnership, the death or resignation of a majority of the partners is a change of control requiring client consent. The death or resignation of a minority of the partners does not constitute a change of control. However, the adviser must notify clients within a reasonable period. Client consent is required for a contract to be assigned to another adviser

Question 19

Performance based fees are fees that are based on

Answer 19

a share of the capital gains or capital appreciation in the account. Congress placed a general prohibition on performance fees in the Advisers Act. However, several exceptions are allowed for sophisticated investors who understand the investment adviser may be compensated on unrealized gains and may have an incentive to make speculative investments

Question 20

The Advisers Act permits performance-based fees for certain clients. The types of clients who may be charged a performance-based fee include

Answer 20

registered investment companies, such as mutual funds; Qualified clients that have at least $1,000,000 under management with the adviser or have more than $2,000,000 in net worth; Clients that are not U.S. residents; Knowledgeable individuals associated with the investment adviser, such as an executive officer, director, trustee, general partner, or nonclerical employee who has participated in the investment activities of the adviser for at least 12 months; Section 3(c)(7) hedge funds