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Series 66 > Federal Regulations Governing Investment Advisers > Flashcards

Federal Regulations Governing Investment Advisers Flashcards

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1
Q

Is an organization that provides ratings of securities and is nationally known considered an IA under the USA?

A

No

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2
Q

True or False: According to the USA, investment advisers may generally charge performance-based fees.

A

False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.

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3
Q

True or False: An IA that has full discretion over a client’s account at a separate BD is considered to have custody.

A

True

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4
Q

According to the USA, all investment advisory contracts must be in __________ form.

A

According to the USA, all investment advisory contracts must be in written form.

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5
Q

If an IA maintains custody of a client’s funds or securities, how often must account statements be provided to clients?

A

Statements must be sent quarterly.

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6
Q

If an IA maintains custody of client funds, are unannounced audits required?

A

Yes. IAs must arrange for unannounced audits on an annual basis.

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7
Q

True or False: An IA maintaining custody of client assets need not notify the Administrator.

A

False. The Administrator must be notified in writing using Form ADV.

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8
Q

When an IA has custody, with whom are the assets held?

A

Assets are held by a qualified custodian. Clients must be notified of custodian’s name, address, and manner of holding.

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9
Q

Define “assignment” as it relates to IA contracts.

A

The transfer of ownership of a client’s account from one advisory firm to another. Client consent is required.

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10
Q

Regardless of assets under management, IAs must register with the SEC if any client is a ______________________________.

A

Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.

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11
Q

What is required of an IA if the firm goes through a majority change in ownership?

A

The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided.

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12
Q

An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?

A

No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.

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13
Q

Under the USA, are banks and bank holding companies excluded from the IA definition?

A

No. Banks, savings institutions and trust companies are excluded, but bank holding companies are not.

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14
Q

Is an IAR who is employed by a federal covered adviser required to register in the state?

A

Yes. IARs of federal covered advisers must register in any state in which they have a place of business.

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15
Q

If employed by a federal covered IA, is an IAR required to register in all states in which she is conducting business?

A

No. If the IAR has no place of business in the state, no state registration is required.

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16
Q

What is required of an IA to assign an advisory contract to another adviser?

A

Written permission of the client

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17
Q

If an adviser exercises full discretionary control over a client’s account, does this constitute custody?

A

Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.

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18
Q

An IA has custody if it inadvertently receives client securities and hasn’t returned them within ____ business days.

A

An IA has custody if it inadvertently receives client securities and hasn’t returned them within 3 business days.

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19
Q

True or False: Bank holding companies are not considered IAs under the Investment Advisers Act of 1940.

A

True

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20
Q

True or False: Bank holding companies are excluded from the IA definition under the USA.

A

False

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21
Q

True or False: If an adviser’s only clients are insurance companies, it is exempt from SEC registration.

A

True

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22
Q

Under the IA Act of 1940, are banks and bank holding companies excluded from the IA definition?

A

Yes

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23
Q

When an adviser files Form ADV with the SEC, when does registration become effective?

A

Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings.

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24
Q

True or False: Bank holding companies are not considered IAs under the USA.

A

False. They are excluded from the definition under the IA Act of 1940, not under the USA.

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25
Q

The program where a single fee is charged in lieu of commissions and advisory fees is generally called a ______ program.

A

The program where a single fee is charged in lieu of commissions and advisory fees is generally called a wrap program.

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26
Q

True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA’s services separately.

A

True

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27
Q

Is an exculpatory provision in an advisory contract permitted?

A

No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited.

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28
Q

True or False: Notification to existing clients is required for a minority change in ownership of an IA.

A

True. However, if a majority change occurs, client consent is required since this would be considered an assignment.

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29
Q

True or False: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the U.S.

A

True

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30
Q

The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than _____ clients.

A

The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than 10 clients.

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31
Q

Identify the acronym: NRSRO

A

Nationally Recognized Statistical Ratings Organization

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32
Q

Identify the acronym: RIA

A

Registered Investment Adviser

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33
Q

What is the federal law that governs investment advisers?

A

The Investment Advisers Act of 1940

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34
Q

Define investment supervisory services.

A

The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client.

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35
Q

Define assignment.

A

The transfer of an advisory contract by the adviser or any change in the overall management of the advisory firm.

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36
Q

A client has just learned that his account will now be handled by another IAR. Is this considered an assignment?

A

No. Control of the account has not changed simply based on an IAR leaving the firm.

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37
Q

Define solicitor.

A

Any person who, directly or indirectly, solicits any client for, or refers any client to, an IA.

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38
Q

May a solicitor receive compensation from an IA?

A

Yes, if the IA is registered, a written agreement exists, and a court has not limited the solicitor’s activities.

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39
Q

May an IA use testimonials in its promotional material?

A

No

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40
Q

Define testimonial.

A

An advertisement in which an individual recommends the IA’s services based on personal experiences with the firm.

41
Q

An newly hired investment adviser representative wants to put the initials “IAR” on her business card. Is this allowed?

A

No. However, she may spell out “Investment Adviser Representative.”

42
Q

When is a pension consultant required to register as an investment adviser?

A

When it is being paid to provide securities-related investment advice

43
Q

If a pension consultant advises a plan regarding the law firm it should hire, must the consultant register as an IA?

A

No. IA registration is not required since the consultant is providing incidental advice that is not securities-related.

44
Q

True or False: A pension consultant that advises a plan regarding the accountant it should hire must register as an IA.

A

False. IA registration is not required if a consultant provides incidental advice that is not securities-related.

45
Q

True or False: A pension consultant being paid to create an asset allocation program for a plan must register as an IA.

A

True. The consultant must register as an IA since it is providing securities-related advice for compensation.

46
Q

True or False: A person soliciting for an IA must annually provide a disclosure regarding the IA’s performance.

A

False. However, at the time of contact, the solicitor must provide clients with a solicitor disclosure document.

47
Q

True or False: An IA may offer discounted fees to clients if proper disclosure is made in its brochure and Form ADV.

A

True

48
Q

An adviser is registered with the SEC under the Investment Advisers Act of 1940. What is the firm considered?

A

A federal covered adviser

49
Q

True or False: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts.

A

False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500.

50
Q

If ABC Advisers has $112 million under management, it must register with ________.

A

If ABC Advisers has $112 million under management, it must register with the SEC.

51
Q

If a firm provides advice solely based on U.S. government securities, is it required to register as an IA with the SEC?

A

No. U.S. government securities advisers are excluded from the IA definition under the IA Act of 1940.

52
Q

Define impersonal advisory services.

A

Services costing less than $500 per year that are not tailored to meet the investment objectives of a specific client

53
Q

Does a solicitor for an IA provide securities recommendations?

A

No. Solicitors only solicit new clients; they do not recommend or approve transactions.

54
Q

An investment adviser with more than $___________ under management must register with the SEC.

A

An investment adviser with more than $110 million under management must register with the SEC.

55
Q

Is registration with the SEC required of an adviser that manages $87 million of assets?

A

No. An established FCA must register with the state Administrator if the AUM falls below $90 million.

56
Q

What must a federal covered adviser do if its assets under management fall below $90 million?

A

Withdraw its federal registration and register with a state Administrator(s)

57
Q

For an IA to act as both an adviser and broker-dealer, what must be disclosed to clients before trades are effected?

A

The fact that the IA may be collecting both advisory fees and commissions

58
Q

If an IA is in possession of checks drawn by its client and made payable to third parties, how may custody be avoided?

A

By ensuring that it forwards the check within three business days

59
Q

Define the local exemption from SEC registration for an IA.

A

The IA’s clients reside in the state in which its office is located and its advice is not related to exchange-listed securities

60
Q

For how long does the registration of an adviser that is registered with the SEC remain in effect?

A

Until it has been withdrawn, cancelled, or revoked by the SEC.

61
Q

The IA Act of 1940 considers any communication that is directed to more than ___ person(s) to be advertising.

A

The IA Act of 1940 considers any communication that is directed to more than one person to be advertising.

62
Q

If an IA has $20 million under management and advises an investment company, with whom must it register?

A

Any IA that advises an investment company must register with the SEC (regardless of its AUM).

63
Q

An IA manages more than $110 million in assets and has only insurance companies as clients. Is SEC registration required?

A

No. An SEC exemption is provided to IAs whose only clients are insurance companies.

64
Q

Before an IA may assign a client’s contract to another advisory firm, it must obtain the ________ ________.

A

Before an IA may assign a client’s contract to another advisory firm, it must obtain the client’s consent.

65
Q

An IA inadvertently receives client funds/securities and doesn’t return them within three business days. Is this custody?

A

Yes

66
Q

Define the term custody.

A

The legal responsibility for, or control over, another person’s assets

67
Q

An IA is established as a partnership and two of its five partners retire. Is this considered an assignment?

A

No, since it is only a minority change of partners. A majority must retire for it to be considered an assignment.

68
Q

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $_________ under management.

A

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $1,000,000 under management.

69
Q

Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $____________.

A

Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $2,000,000.

70
Q

An IA is created as a sole proprietorship is then converted to a partnership. This is considered client contract __________.

A

An IA is created as a sole proprietorship is then converted to a partnership. This is considered client contract assignment.

71
Q

True or False: IAs are permitted to charge different fees to different clients for the same service.

A

True. Provided proper disclosure is made, charging clients different fees is permitted.

72
Q

Due to SEC Release 1092, what other candidates are included in the expanded IA definition?

A
  1. Sports and entertainment reps,
  2. pension consultants and
  3. financial planners
73
Q

Will a client always pay lower fees in a wrap account?

A

No. Depending on the frequency of the client’s trading, he may ultimately pay more than if the fees are paid separately.

74
Q

May investment adviser’s advertising refer to testimonials?

A

No. Testimonials may not be circulated to clients.

75
Q

The rule governing the disclosure requirement of an IA to its clients is referred to as the __________ Rule.

A

The rule governing the disclosure requirement of an IA to its clients is referred to as the Brochure Rule.

76
Q

When assigning an IA contract to another IA, _______ _______ must be obtained from the client prior to assignment.

A

When assigning an IA contract to another IA, written consent must be obtained from the client prior to assignment.

77
Q

Federally Covered Advisors Include who? 7

A
  1. Investment advisers with $110 million or more in assets under management.
  2. Advisers to registered investment companies (e.g. mutual funds)
  3. Advisers that provide advisory services in 15 or more states
  4. Advisers that are not regulated or required to be regulated as investment advisers in the state in which they have their principal office and place of business (With the exception of Wyoming, all states, DC, and Puerto Rico require the registration of state investment advisers.
  5. Pension consultants that provide advice to employee benefit plans with assets of at least $200 million
  6. Affiliates of federal-registered IAs, if their principal office and place of business is in the same as that of the SEC-registered adviser.
  7. Newly formed advisers that reasonably believe they will become eligible for federal registration within 120 days of formation.
78
Q

An FCA begins its registration process how?

A

By filing Form ADV with the SEC (electronically through the IARD)

79
Q

At what level (fed/state/both) are IARs required to register at?

A

State only.

80
Q

When an IAR’s associated with a federal covered adviser begins or ends, the Administrator must be notified by who?

A

The IAR.

81
Q

As described in the SEC Release IA-1092 the IA definition now included people that gave advice about what?

A

The IA definition includes any persons that provide advice regarding the selection of investment managers and any persons recommending asset allocation programs.

82
Q

According to the SEC Release IA-1092m a person is considered to be in the business of providing advice if it what?

A
  1. Holds itself out as an investment adviser
  2. Receives any separate or additional compensation representing a definable charge for providing advice.
  3. Provide recommendations, analyses, or reports about specific securities or specific categories of securities on anything other than rate, incidental, isolated, and non-recurring instances.
83
Q

When are IARs required to register in a state?

A

When they have places of business there

84
Q

When do IAs have to register in a state?

A

They have to register in every state their IARs have a place of business and every state where they have, between all of their IARs, 6 or more retail clients.

85
Q

When must a federal covered adviser that is entering into a contract with a client deliver its brochure by?

A

Either before or at the time it enters into an investment advisory contract with a client.

86
Q

A federal covered adviser is not required to provide a brochure to who? 2

A
  1. Registered investment companies or

2. Clients whose contract is limited or impersonal advisory services for which the client pays less than $500 per year.

87
Q

What types of clients may be charged performance-based fees? 5

A
  1. Registered investment companies (e.g. mutual funds)
  2. Qualified clients that have at least $1 million under management with the adviser or have more than $2 million in net worth.
  3. Clients who are not U.S. residents
  4. 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.
  5. Section 3(c)(7) hedge funds
88
Q

How long must a federal registered adviser keep books and records?

A

For 5 years. For the 1st two years the records must be maintained in an appropriate office of the investment adviser.

89
Q

What documents must a federal registered adviser keep for the lifetime of the adviser and at least three years after the business is closed? 5

A
  1. Partnership agreements
  2. Articles of incorporation
  3. Charters
  4. Minute books
  5. Stock certificate books
90
Q

If clients impose limitations on how advisers may execute securities trades in their accounts, such as directing the firm to use a specific broker-dealer to execute their securities transactions, what is the adviser obligated to do?

A

To fully disclose how clients may be affected by these limitations.

91
Q

Solicitors may receive a fee from an adviser for the solicitation of advisory clients if what conditions are met? 3

A
  1. The adviser is registered
  2. There is no outstanding SEC order suspending, limiting, or barring the solicitor’s activities
  3. There is a written agreement between the solicitor and the investment adviser.
92
Q

If the solicitior is an associated party, such as a partner, officer, director, or employee of the investment advisor, or another entity affiliated with the adviser, what must happen?

A

The relationship must be disclosed to the client.

93
Q

When the solicitor is a non-affiliated person, what conditions must be satisfied?

A
  1. The agreement between the adviser and solicitor must describe the solicitation activities and compensation agreement.
  2. The solicitor must provide the client with the adviser’s brochure and a separate solicitor disclosure document at the time of the solicitation. The solicitor’s disclosure must disclose the names of both the adviser and the solicitor, the nature of the relationship, the terms of the compensation, and any amount charged to the customer above the adviser’s normal fee to pay for the solicitation of the account.
  3. The adviser must keep a signed acknowledgment from the client confirming receipt of both the adviser’s and the solicitor’s disclosure document.
94
Q

What is considered advertising under the Investment Advisers Act? 3

A
  1. Communication that is targeted to reach more than on person, generally covering the use of:
    -television
    -radio
    -notices
    -circulars
    -letters
    -signage
    as well as:
  2. material that offers any analysis, report, or publication concerning securities, or material that is intended to be used in determining which security to purchase or sell, or when to purchase or sell a security.
  3. Graphs, charts, formulas, or similar devices to be used in determining which security to buy or sell, or when to buy or sell a security.
95
Q

What else is included in the SEC’s definition of advertising? 10

A
  1. Adviser’s website
  2. Adviser’s posting on internet bulletin boards
  3. Form letters and mass mailings
  4. marketing brochures
  5. E-mail messages sent to more than one person
  6. Press releases
  7. Newsletters
  8. Telemarketing scripts
  9. Slides used in marketing presentations
  10. Audio/videotapes of marketing presentations
96
Q

What is an investment counsel?

A

A firm or individual that is registered as an IA, whose principal business consists of acting as an investment adviser, with a substantial part of its business consisting of providing investment supervisory services. (continuous advice related to the investment of a client’s funds on the basis of the individual needs of the client.

97
Q

If the SEC determines that a violation of the Investment Advisers Act has been or is about to be committed, what is in its power to do? 8

A
  1. may require a statement in writing as to the relevant facts and circumstances and may conduct any investigation it deems appropriate.
  2. Administer oaths
  3. Subpoena witnesses
  4. Compel Attendance
  5. Gather evidence
  6. Require the production of books and records
    If SEC determines that a person has violated or is about to engage in any action that violates the Investment Advisors Act, it may:
  7. Seek an injunction in a federal court
  8. Transmit any evidence of violations to the U.S. Attorney General
98
Q

What is the maximum penalty possible for any person who violates the Investment Advisers Act, an SEC rule, or other regulation relating to the Investment Advisers Act?

A

They may be subject to a maximum fine of $10,000, imprisonment for up to five years, or both.

Series 66 (12 decks)

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