Compliance Program Rules - Act of 1940& SEC Rules

Question 1

1) Pursuant to Section 202 of the Advisers Act, an “assignment” is defined as any direct or indirect transfer of an investment advisory contract by the assignor of:

a) A majority block of the assignor’s outstanding voting securities.
b) A substantial block of the assignor’s outstanding voting securities.
c) A controlling block of the assignor’s outstanding voting securities.
d) Any change in the percentage of the assignor’s outstanding voting securities.

Answer 1

c) A controlling block of the assignor’s outstanding voting securities.

Question 2

The Advisers Act defines a “Supervised Person” as “Any partner, officer, director (or other person occupying a similar status or performing similar functions) or employee of an investment adviser, or other person who ___________.”

a) Has access to nonpublic information regarding any clients’ purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund, or who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic.

b) Provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser.

c) Is under the direct supervision of an officer or officers designated by the board of directors or senior management.

d) Provides investment advice, except for persons associated with an investment adviser whose functions are solely clerical or ministerial in nature.

Answer 2

b) Provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser.

Question 3

Under the Advisers Act, Section 202(a)(11) definition of an “investment adviser” generally EXCLUDES which THREE? (Choose THREE.)

a) A bank that is not affiliated with an investment company.
b) An accountant performing investment advisory services solely incidental to his or her accounting profession.
c) An Internet website operator who provides only impersonal investment advisory services.
d) A financial adviser whose investment advice relates solely to U.S. Government backed securities.

Answer 3

a) A bank that is not affiliated with an investment company.
b) An accountant performing investment advisory services solely incidental to his or her accounting profession.
c) An Internet website operator who provides only impersonal investment advisory services.

Question 4

An investment adviser need NOT be registered, pursuant to Section 203 of the Advisers Act, if its only clients are:

a) Insurance companies.
b) Investment companies.
c) Irrevocable trusts.
d) Defined benefit plans.

Answer 4

a) Insurance companies.

Question 5

Section 204A of the Advisers Act explicitly requires SEC-registered investment advisers to establish, maintain, and enforce written policies and procedures reasonably designed to:

a) Prevent money laundering by clients.
b) Prevent the misuse of material non-public information.
c) Plan and coordinate a business continuity plan in case of disaster.
d) Require supervision of branch offices.

Answer 5

b) Prevent the misuse of material non-public information.

Question 6

Which category of persons or entities is included in the general restriction on performance-based fees?

a) Persons who are not U.S. residents.
b) Section 3(c)(7) private investment companies.
c) Certain knowledgeable employees of the adviser.
d) Family-owned corporations.

Answer 6

d) Family-owned corporations.

Question 7

Pursuant to Section 205 of the Advisers Act, investment advisory contracts are required to include:

a) A non-assignment clause.
b) Client investment policy questionnaire.
c) A privacy clause prohibiting the misuse of material, non-public information.
d) An arbitration clause.

Answer 7

a) A non-assignment clause.

Question 8

In general, an investment adviser may NOT enter into an agreement with a client where the adviser is paid on the basis of a share of the capital gains or appreciation of client assets under management (e.g., “performance-based fees”) UNLESS the client:

a) Owns at least $250,000 in investments.

b) Has an income of $200,000 in each of the two most recent fiscal years (or an income of $300,000 jointly with a spouse) and a reasonable expectation of the same income in the current year.

c) Upon entering into the advisory agreement, has at least $1,100,000 under management with the adviser, or whom the adviser reasonably believes has a net worth (either individually or jointly with a spouse) of at least $2.2 million.

d) Is a natural person that has a net worth of more than $1 million.

Answer 8

c) Upon entering into the advisory agreement, has at least $1,100,000 under management with the adviser, or whom the adviser reasonably believes has a net worth (either individually or jointly with a spouse) of at least $2.2 million.

Question 9

If, after opportunity for notice and hearing, the Commission finds on the record that it is in the public interest and that the investment adviser has committed one of the violations outlined in Section 203(e) of the Advisers Act, the Commission could take any of the following actions EXCEPT:

a) Suspension for a period not to exceed 12 months.
b) Place limitations on the activities, functions, or operations of the investment adviser.
c) Formal censure.
d) Institute Criminal Proceedings.

Answer 9

d) Institute Criminal Proceedings.

Question 10

Pursuant to Rule 203(b)(3)-1 of the Advisers Act, which THREE are deemed to be a “single client”? (Choose THREE.)

a) A corporation, general partnership, limited partnership, limited liability company, trust or other legal organization that receives investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries.

b) A parent and adult child who live in separate households.

c) All trusts of which a natural person client and minor children are the only primary beneficiaries.

d) Any relative, spouse, or relative of the spouse of a natural person client who has the same principal residence.

Answer 10

a) A corporation, general partnership, limited partnership, limited liability company, trust or other legal organization that receives investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries.
c) All trusts of which a natural person client and minor children are the only primary beneficiaries.
d) Any relative, spouse, or relative of the spouse of a natural person client who has the same principal residence

Question 11

Rule 204-2 of the Advisers Act explicitly requires the following books and records to be maintained by investment advisers for the requisite five-year period EXCEPT:

a) A record of all communications (or copies thereof) made to third party consultants or administrators regarding compliance functions of the advisory firm.

b) A record of all accounts in which the investment adviser is vested with any discretionary power with respect to the funds, securities or transactions of any client.

c) All bills or statements (or copies thereof), paid or unpaid, relating to the business of the investment adviser as such.

d) All powers of attorney and other evidences of the granting of any discretionary authority by any client to the investment adviser (or copies thereof).

Answer 11

a) A record of all communications (or copies thereof) made to third party consultants or administrators regarding compliance functions of the advisory firm.

Question 12

To be found in violation of Section 206 of the Advisers Act, an investment adviser must, directly or indirectly:

a) Intentionally defraud an existing advisory client.
b) Engage in activity that operates as a fraud or deceit upon any existing advisory client or prospective client.
c) Negligently defraud any existing advisory client or prospective client.
d) Engage in activity that operates as a fraud or deceit upon an existing advisory client.

Answer 12

b) Engage in activity that operates as a fraud or deceit upon any existing advisory client or prospective client.

Question 13

Which activity would most likely be considered a violation of Section 206 of the Advisers Act?

a) An SEC-registered investment adviser that fails to conduct an annual review of its policies and procedures.

b) An investment adviser, while acting as principal for his own account, knowingly selling or purchasing a security from a client after obtaining the informed written consent of the client.

c) An investment adviser that fails to offset advisory fees against commissions received when causing an ERISA plan client to transact business through an affiliated broker-dealer.

d) An investment adviser that pays a solicitation fee to a third party in consideration of client referrals.

Answer 13

a) An SEC-registered investment adviser that fails to conduct an annual review of its policies and procedures.

Question 14

Which attribute was NOT identified as key for a Chief Compliance Officer in the Compliance Programs Rule?

a) Autonomy from oversight by management to compel employee adherence to policies and procedures.
b) In a position of sufficient seniority and authority to compel employee adherence to policies and procedures.
c) Competent and knowledgeable regarding the Advisers Act.
d) Empowered with full responsibility, authority and resources to develop and enforce policies and procedures.

Answer 14

a) Autonomy from oversight by management to compel employee adherence to policies and procedures.

Question 15

Pursuant to Rule 38a-1 of the Investment Company Act, which is NOT required to be included in the annual report to a mutual fund Board of Directors?

a) Material changes to fund policies and procedures since the previous report.
b) Documentation of each procedural review conducted.
c) Recommendations for changes based on the annual review.
d) Material compliance matters.

Answer 15

b) Documentation of each procedural review conducted.

Question 15

According to the Investment Advisers Act of 1940 Compliance Programs Rule, the annual compliance review must address which of the following?

a) The adequacy of the adviser’s compliance policies and procedures and effectiveness of their implementation.
b) Any deficiency letter from the adviser’s most recent SEC examination.
c) Any Code of Ethics violations.
d) Notification to any client harmed by any violation discovered.

Answer 15

a) The adequacy of the adviser’s compliance policies and procedures and effectiveness of their implementation.

Question 16

Which is NOT required by either the Investment Advisers Act of 1940 Compliance Programs Rule or the Books and Records Rule?

a) Maintain copies of all policies and procedures that are currently in effect.
b) Maintain copies of all policies and procedures that were in effect at any time during the last five years.
c) Amend corporate documents evidencing designation of the CCO position.
d) Maintain any records created to document the annual review process.

Answer 16

c) Amend corporate documents evidencing designation of the CCO position.

Question 17

Section 208 of the Advisers Act prohibits an SEC-registered investment adviser from using the term “Investment Counsel” to describe its business UNLESS:

a) Its principal business consists of acting as an investment adviser and a substantial part of its business consists of rendering non-discretionary management services.

b) It provides continuous and regular services to advisory clients.

c) At least one investment advisory representative is an attorney licensed to provide legal advice in the state(s) where the principal place of business is located.

d) Its principal business consists of acting as an investment adviser and a substantial part of its business consists of rendering investment supervisory services.

Answer 17

d) Its principal business consists of acting as an investment adviser and a substantial part of its business consists of rendering investment supervisory services.

Question 18

Pursuant to Section 215 of the Advisers Act, an investment advisory contract may NOT:

a) Allow for an investment adviser to engage in “agency cross transactions.”
b) Contain any provision subjecting an advisory client to arbitration should a contractual dispute arise.
c) Allow for the modification or termination of an advisory agreement or any provisions therein absent written consent of the client.
d) Contain any condition or stipulation binding a person to waive compliance with any provision of the Advisers Act.

Answer 18

d) Contain any condition or stipulation binding a person to waive compliance with any provision of the Advisers Act.

Question 19

All of the following requirements must be fulfilled by an SEC-registered investment adviser in order to effect agency cross transactions for an advisory client pursuant to Rule 206(3)-2 of the Advisers Act, EXCEPT:

a) The investment adviser provides written disclosure of potential conflicts of interest to clients, and receives written consent from clients prospectively authorizing the adviser to effect agency cross transactions for the client.

b) The investment adviser sends a written confirmation to each client at or before the completion of each transaction.

c) The investment adviser must offset the commission charged to an advisory client for the agency cross transaction against the advisory fee received from the client.

d) The investment adviser sends to each advisory client for whom it conducts agency cross transactions a written summary of the account, on at least an annual basis, identifying the total number of transactions during the period since the last summary.

Answer 19

c) The investment adviser must offset the commission charged to an advisory client for the agency cross transaction against the advisory fee received from the client.

Question 20

Which would LEAST likely be considered a violation of SEC advertising rules pursuant to Rule 206(4)(1) of the Advisers Act PRIOR TO MAY 2021?

a) A publication containing testimonials of any kind concerning the investment adviser or its services.

b) A publication referring directly to past specific recommendations made by the investment adviser, which were or would have been profitable to any person.

c) A publication containing a representation, either directly or indirectly, that any graph, chart, formula or other device being offered can in and of itself be used to determine which securities to buy or sell.

d) A publication containing a statement that the investment adviser is registered with the Securities and Exchange Commission.

Answer 20

d) A publication containing a statement that the investment adviser is registered with the Securities and Exchange Commission.

Question 21

Which is NOT an example of a qualified custodian for purposes of satisfying the SEC “Custody” rule?

a) An insurance company registered in the state(s) where it principally conducts business.
b) A bank or savings association that has deposits insured by the Federal Deposit Insurance Corporation.
c) A futures commission merchant registered under Section 4f(a) of the Commodity Exchange Act with respect to clients’ funds and security futures.
d) A broker-dealer registered under the Securities Exchange Act of 1934.

Answer 21

a) An insurance company registered in the state(s) where it principally conducts business.

Question 22

Which example would NOT be considered custody under Rule 206(4)-2 of the Advisers Act?

a) Acting as the adviser and general partner to an investment related limited partnership in which clients are invested.

b) Acting as trustee of a trust for an advisory client.

c) Having limited power of attorney over a client account to execute securities transactions.

d) Taking possession of a client’s stock certificate.

Answer 22

c) Having limited power of attorney over a client account to execute securities transactions.

Question 23

PRIOR TO MAY 2021, in order for an adviser to pay a cash fee, directly or indirectly, to a solicitor, which requirement must be in place?

a) The solicitor must have an office at the adviser’s main place of business.
b) The cash fee must be paid pursuant to a written agreement with the solicitor to which the adviser is a party.
c) The adviser must include the solicitor on Schedule D of Form ADV.
d) The adviser must hire an independent representative to audit the cash fee paid to the solicitor.

Answer 23

b) The cash fee must be paid pursuant to a written agreement with the solicitor to which the adviser is a party.

Question 24

If an adviser has proxy voting authority with respect to client securities, the adviser must:

a) Adopt a written statement that describes how a proxy was voted and file that statement with the SEC.
b) Adopt and implement written policies and procedures to ensure proxies are voted in the best interests of clients.
c) Appoint a Chief Proxy Voting Officer responsible for administering proxy voting policies and procedures.
d) Annually contact clients to review proxy voting procedures.

Answer 24

b) Adopt and implement written policies and procedures to ensure proxies are voted in the best interests of clients.

Question 25

SEC-registered investment advisers must disclose which THREE of the following to clients? (Choose THREE.)

a) Custody of client’s funds or securities.
b) A financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients.
c) Required prepayment of advisory fees of more than $1200. from clients, six months or more in advance.
d) Maintenance of accounting records on a cash basis.

Answer 25

a) Custody of client’s funds or securities.
b) A financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients.
c) Required prepayment of advisory fees of more than $1200. from clients, six months or more in advance.