IA Act of 1940: Sec 201-224

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

2) 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 2

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.
D) A financial adviser whose investment advice relates solely to U.S. Government
backed securities.

Question 3

3) 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 3

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

Question 4

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

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 clients’ material non-public information.
C) Plan and coordinate a business continuity plan in case of disaster.
D) Require the reporting of employee securities transactions.

Answer 5

B) Prevent the misuse of clients’ material non-public information.

Question 6

6) 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 6

A) A non-assignment clause.

Question 7

7) Which category of persons or entities is included in the general restriction on performancebased 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 7

D) Family-owned corporations.

Question 8

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 $1,000,000 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 $2.1 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 $1,000,000 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 $2.1 million

Question 9

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

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

11) The Advisers Act definition of an “investment adviser representative” under Rule 203A-2
encompasses all of the following EXCEPT:
A) A supervised person of the investment adviser who has more than five clients who are
natural persons.
B) A supervised person of the investment adviser, more than 10% of whose clients are
natural persons.
C) A supervised person who regularly solicits natural person clients within the parameters
stated in option “A” and “B” of this question.
D) A supervised person of the investment adviser, more than 10% of whose clients are
high net worth individuals.

Answer 11

D) A supervised person of the investment adviser, more than 10% of whose clients
are high net worth individuals.

Question 12

12) 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 12

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

Question 13

13) 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 13

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

Question 14

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

Answer 14

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

Question 15

15) 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 15

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

Question 16

16) 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 16

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

Question 17

17) 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 17

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

Question 18

18) 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 18

B) Documentation of each procedural review conducted.

Question 19

19) 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 19

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 20

20) 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 20

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

Question 21

21) Which THREE advertising activities would be prohibited by SEC advertising rules pursuant
to Advisers Act Section 206(4)-1? (Choose THREE.)
A) Including a firm’s performance figures for its five clients with the best performance.
B) Including a firm’s performance figures for its five clients with the best performance and
five clients with the worst performance.
C) Including a list of a firm’s top five investment recommendations over the course of the
past six months in an advertisement.
D) Including a firm’s performance figures for its five clients with the largest holdings.

Answer 21

A) Including a firm’s performance figures for its five clients with the best
performance.
B) Including a firm’s performance figures for its five clients with the best
performance and five clients with the worst performance.
C) Including a list of a firm’s top five investment recommendations over the course
of the past six months in an advertisement

Question 22

22) 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 22

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 23

23) Which would LEAST likely be considered a violation of SEC advertising rules pursuant to
Rule 206(4)(1) of the Advisers Act?
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 23

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

Question 24

24) 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 24

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

Question 25

25) 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 25

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

Question 26

26) 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 26

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

Question 27

27) 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 27

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

Question 28

28) 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 28

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