Chapter 7 Part 3

Question 1

The investors in these types of hedge funds consist solely of

Answer 1

qualified purchasers, which include individuals who own at least $5 million in investments, and other entities (such as corporations and partnerships), if they own and invest on a discretionary basis at least $25 million in investments

Question 2

A fulcrum fee is a fee that

Answer 2

“has lwo parts, a base fee plus a performance-based fee. Whether the fee increases or decreases must
be measured in relation to an appropriate index over a specific period (e.g., compared to the S&P 500 Index for the calendar quarter). The benchmark index must be comprised of securities with similar risks and objectives as those of the portfolio”

Question 3

The broker-dealer/agent definition of advertising involves

Answer 3

communication to an untargeted audience, such as through television or radio. While the Advisers Act includes television and radio communication as advertising, there are various other forms of communications that are also defined as advertising

Question 4

In general, advertising may not contain

Answer 4

an untrue statement of material fact, or include statements that are otherwise false or misleading

Question 5

Even if an investment adviser or investment adviser representative is cerlain that a statement is true, the adviser should

Answer 5

still take the appropriate steps for verification.

Question 6

It is also a violation to represent rumors, opinions, or other unfounded statements as being

Answer 6

factual, either in advertisements or in other client communications

Question 7

If hypothetical returns are used in an illustration, the assumptions used must be

Answer 7

disclosed.

Question 8

Investment adviser advertising may NOT Refer, directly or indirectly, to

Answer 8

testimonials about the adviser or its services

Question 9

Investment adviser advertising may NOT Refer to past

Answer 9

“specific recommendations that were profitable. However, an adviser may advertise or furnish a list of all recommendations it has made within the preceding period of not less than
one year. Basically, the list needs to be an accurate reflection of the adviser’s recommendations during that period. The adviser may not cheny-pick by including only those recommendations
with favorable results”

Question 10

Such advertisements must also

Answer 10

“State the name of each security recommended, the date and nature of each recommendation (e.g., whether to buy, sell, or hold), the market price at that time, the price at which the
recommendation was to be acted upon, and the market price of each security as of the most recent practicable date, and Contain the following cautionary legend on the first page: ““It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list”

Question 11

Investment adviser advertising may NOT Represent that a graph, chart, formula, or similar device can, by itself, be used to determine

Answer 11

which securities to buy or sell without disclosing the limitations in doing so

Question 12

Investment adviser advertising may NOT Advertise that any report, analysis, or other service is free of charge if this is

Answer 12

not entirely true. A product or service may not be referred to as free unless there is no obligation or condition of any kind attached to its receipt

Question 13

To identify whether something is considered advertising, the key is the

Answer 13

intended audience. If the advisory communication is meant to reach more than one person, it is advertising

Question 14

Any written communication, including notices, circulars, letters, and signage, addressed to

Answer 14

more than one person and any notice appearing in any publication that offers investment advisory services with regard to securities

Question 15

Material that offers any analysis, report, or publication concerning securities or material that is intended to be used in determining

Answer 15

which security to purchase or sell, or when to purchase or sell a security

Question 16

An adviser who furnishes its clients with research reports or recommendations produced by third parties must

Answer 16

disclose that the adviser is not the author of these materials. However, advisers that use various outside source materials and data prepared by others to formulate their own independent conclusions do not need to disclose the source information

Question 17

“One of these statements, known as the Clouer Capital Letter, discusses performance results. In the letter, the SEC stated it believed the advertising of actual performance data would be
prohibited if it”

Answer 17

“Failed to disclose the effect of material market or economic conditions on the results portrayed; Included results that do not reflect the deduction of advisory fees, brokerage and other
commissions, and any other expenses that a client paid (except custodial fees); Failed to disclose whether, and to what extent, the results portrayed reflect the reinvestment of dividends and other earnings; Suggested or made claims about the potential for profit without also disclosing the possibility of loss; Compared results to an index without disclosing all material facts relevant to the comparison; Failed to disclose material conditions, objectives, or investment strategics used to obtain the results portrayed; Failed to disclose prominently, if applicable, that the results portrayed relate only to a select group of the adviser’s clients, the basis on which the selection was made, and the effect of this practice on the results portrayed”

Question 18

Sales literature is a category that applies to

Answer 18

broker-dealers’, not investment advisers’, communications

Question 19

advisory communications that do not fall under the definition of advertising are still covered by

Answer 19

the anti fraud rules

Question 20

An investment counsel is

Answer 20

a firm or individual, registered as an IA, whose principal business consists of acting as an investment adviser, and a substantial part of its business consists of rendering investment supervisory services