IACCP Practice Exam 1

Question 1

Item ID: IT000014
Under which TWO circumstances is an investment adviser required to register with the SEC? (Choose two.)

A. Acting as adviser to a registered investment company.
B. Acting as a pension consultant to $40 million in client assets.
C. Acting as an adviser solely to church pension plans.
D. Providing investment advice exclusively through an interactive website.

Question 2

Item ID: IT000016
Which TWO are EXCLUDED or EXEMPTED from the definition of “investment adviser” under the Investment Advisers Act of 1940? (Choose two.)

A. A pension consultant for $65 million of ERISA plan assets.
B. A publisher of a bona fide newsletter.
C. An adviser providing advice solely to insurance companies.
D. An adviser to a registered investment company.

Question 3

Item ID: IT000050
Which action would result in an investment adviser having custody under the Investment Advisers Act of 1940?

A. Returning inadvertently received stock certificates within three business days.
B. Billing for management fees by sending an invoice directly to a client.
C. Having sole check writing authority over a client’s non-managed account.
D. Accepting a check made payable to a third party.

Question 3

Item ID: IT000078
Adviser is registered with the SEC, has its principal place of business in a state that registers investment adviser representatives, and employs three portfolio managers: Tom, Larry and Bill. All of Adviser’s clients reside in that state. Tom manages corporate accounts exclusively. Larry manages 50 corporate accounts and also manages the personal portfolios of the presidents of 30 of the corporations whose corporate accounts he manages. Larry imposes a minimum account size of $1.5 million for these personal portfolios. Bill specializes in providing management services to individuals with a net worth of $1 million or less. He manages 100 portfolios with a median value of $250,000. The state may require investment adviser representative registration of:

A. Larry and Bill
B. Tom, Larry and Bill
C. Bill only
D. No one

Question 4

Item ID: IT000067
An investment adviser claims in its disclosure brochure that: “The information in this brochure has been approved by the SEC.”
Which provision under the Investment Advisers Act of 1940 is violated by this claim?

A. The Anti-fraud Rule
B. The Brochure Rule
C. The Codes of Ethics Rule
D. Fiduciary duty

Question 5

Item ID: IT000086
Which THREE types of clients can be charged performance-based fees under the Investment Advisers Act of 1940? (Choose three.)

A. Mutual funds having more than $1 million in managed assets.
B. Hedge funds established under Investment Company Act Section 3(c)(7) (exemption for private funds).
C. Clients with at least $1.1 million under management with the adviser or a minimum net worth of $2.2 million.
D. Natural persons having $500,000 under management with the adviser.

Question 6

Item ID: IT000103
When using an outside promoter to obtain clients, the investment adviser is required to take which step at the time of the promotional activity?

A. Disclose or have reasonable belief that the promoter discloses that cash or non-cash compensation was provided for the promotional activity, if applicable.
B. Provide a copy of the client’s last custodial statement listing all marketable securities.
C. Obtain a statement from the client supplying the name and address of the previous investment adviser.
D. Compile a written description of the client’s investment objectives.

Question 7

Item ID: IT000158
What is the PRIMARY reason the SEC requires investment advisers to file an annual updating amendment to Form ADV Part 1A?

A. To monitor the increase and/or decrease in the number of clients being advised.
B. To pay renewal fees for the adviser and the investment adviser representatives.
C. To report any material changes in the investment adviser that occurred during the year.
D. To reaffirm eligibility for the investment adviser to remain registered with the SEC.

Question 7

Item ID: IT000105 If an investment adviser has proxy voting authority, which record is NOT required to be maintained?

A. Proxy statements received for client securities.
B. Records of votes cast on behalf of clients.
C. Records of written requests for proxy voting information.
D. Evidence of annual offer of proxy policies and procedures.

Question 8

Item ID: IT000167
Investment Advisory Firm A refers a client to Investment Advisory Firm B for a fee.
Which TWO types of disclosures would Firm A be required to provide to the client? (Choose two.)

A. A brief statement of any material conflicts of interest on the part of Firm A.
B. A copy of Firm B’s Form ADV Part 2.
C. A written copy of Firm B’s code of ethics.
D. The material terms of any compensation arrangement, including a description of the compensation provided or to be provided, directly or indirectly, to Firm A.

Question 9

Item ID: IT000334
How can an investment adviser address material conflicts of interest as they relate to proxy voting?

A. Appoint an investment analyst to vote proxies on behalf of clients.
B. Instruct portfolio manager to vote proxies in accordance with management direction.
C. Delegate responsibility for voting proxies to a proxy voting service.
D. Delegate responsibility for voting proxies to an adviser who has a business relationship with a board member of a company.

Question 10

Item ID: IT000458
Adviser is owned by Local Bank. All of Adviser’s clients use Local Bank to custody the assets in their advisory accounts. Pete is Chief Operating Officer (COO) of both Adviser and Local Bank.
Which statement is TRUE? Adviser is:

A. not required to get a surprise annual audit but Local Bank is required to provide an internal control report.
B. not required to get a surprise annual audit but Local Bank is required to get a surprise annual audit.
C. required to get a surprise annual audit but Local Bank is not required to provide an internal control report.
D. required to get a surprise annual audit and Local Bank is required to provide an internal control report.

Question 11

Item ID: IT000477
Adviser is actively looking for state and local government clients. According to the SEC Pay-to-Play Rule, which THREE would be considered a covered associate (rather than simply an access person) and therefore be subject to the Pay-to-Play prohibitions? (Choose three.)

A. Individuals who solicit government clients for Adviser.
B. The marketing manager for Adviser.
C. A political action committee that is controlled by the CEO of Adviser.
D. The spouse of the CEO of Adviser.

Question 12

Item ID: IT000513
Which TWO factors are considered mandatory provisions to be included in advisory contracts, if an adviser, as a matter of best practice, chooses to enter into written advisory contracts with its clients? (Choose two.)

A. Inclusion of a hedge clause.
B. “No Assignment” clause without client consent.
C. Disclosure of changes in the general partners of the partnership.
D. Earned, unpaid fees are not due upon termination of contract.

Question 13

Item ID: IT000494-1
Which THREE of the following advisers are exempt from SEC registration? (Choose three.)

A. An adviser whose only clients are venture capital funds.
B. A UK-based adviser whose only client is a private fund with 12 U.S. investors.
C. A US-based adviser whose only client is a private fund with $100 million Regulatory Assets Under Management (RAUM).
D. An adviser whose only clients are mutual funds.

Question 14

Item ID: IT000496-1
Sam Jones is the Chief Investment Officer and Chief Executive Officer of Smith Family Advisers, LLC. Smith Family Advisers, LLC currently manages $250 million in securities. All of the clients of Smith Family Advisers, LLC are members of the Smith family, and prior to last year, the firm was entirely owned by members of the Smith family. Last year, in recognition of Sam’s long service and sound advice, the managing members of Smith Family Advisers, LLC gave Sam a 5% interest in Smith Family Advisers, LLC.
Is Smith Family Advisers, LLC required to register with the SEC?

A. Yes, because Sam is not a member of the Smith family.
B. Yes, because Sam is listed as a “Control Person” on Schedule A.
C. No, because an investment adviser holding itself out as a “family office” is not required to register even if it has non-family owners.
D. No, because Sam owns less than 25% of Smith Family Advisers.

Question 15

Item ID: IT000079 An investment adviser’s status as a “fiduciary” is derived from:

A. the SEC examination program.
B. industry best practice.
C. U.S. Supreme Court case law.
D. SEC enforcement actions.

Question 16

Item ID: IT000129
Under the Investment Company Act Rule 17j-1 regarding personal investment activities of investment company personnel, which statement is TRUE regarding the code of ethics of an adviser to a mutual fund?

A. The adviser’s code must be summarized in the mutual fund’s Statement of Additional Information.
B. The mutual fund’s Chief Compliance Officer must be the person responsible for enforcing the adviser’s code as it relates to the fund.
C. The adviser’s code must be distributed to shareholders of the mutual fund.
D. The mutual fund’s board of directors must approve the adviser’s code.

Question 17

Item ID: IT000159
Traders 1, 2, 3, and 4 use Broker A for 5-15% of their trades, while Trader 5 uses Broker A for 60% of his trades. An investigation by Compliance discovers that Broker A has regularly paid for repairs and maintenance on Trader 5’s sports car. However, it appears that Trader 5’s use of Broker A is consistent with obtaining best execution. The firm’s Brochure does not contain any disclosure concerning the receipt of gifts.
If Adviser’s code of ethics does not have a prohibition on accepting gifts from brokers, has Trader 5 violated the Adviser’s fiduciary duties to its clients?

A. No, because the Advisers Act does not prohibit the receipt of expensive gifts from brokers even if it is a conflict of interest.
B. No, because Trader 5 obtained best execution despite the conflicts of interest.
C. Yes, because the receipt of expensive gifts and concomitant conflicts of interest should be disclosed to clients.
D. Yes, because all Advisers must have a gift policy.

Question 18

Item ID: IT000490-1
Doug is a trader for an investment advisory firm. Doug shares a residence with his wife, son, daughter and retired mother. Doug and his wife do not have any investment accounts.
Which TWO family members will have to give Doug quarterly transaction reports to submit? (Choose two.)

A. Doug’s wife because she manages a municipal bond portfolio for a state pension plan.
B. Doug’s mother because she holds only open-end funds, high quality short-term corporate debt, blue chip stocks and U.S. government paper in her brokerage account.
C. Doug’s son who has an employee-directed 401(k) plan whose investment options include only open-end funds, high quality short-term corporate debt, blue chip stocks and U.S. government paper.
D. Doug’s daughter because her only investments are in her employer’s stock which is received through an Employee Stock Ownership Plan.

Question 18

Item ID: IT000180
An investment adviser’s code of ethics requires a complete report of each firm’s access person’s securities holdings, at the time the person becomes an access person and at least how frequently thereafter?

A. Annually
B. Quarterly
C. Monthly
D. Any time the access person acquires additional holdings

Question 19

Item ID: IT000181
According to the SEC Investment Adviser Codes of Ethics Rule, all are requirements for access persons EXCEPT to:

A. Periodically report their securities holdings to the Chief Compliance Officer or other designated person.
B. Obtain the investment adviser’s approval prior to accepting any gifts.
C. Report personal securities transactions on a quarterly basis.
D. Obtain the investment adviser’s approval before investing in certain types of securities.

Question 20

Item ID: IT000205
Under the SEC Investment Adviser Codes of Ethics Rule, all are reportable securities EXCEPT:

A. Proprietary mutual funds
B. Money market funds
C. Foreign issuers
D. Exchange listed securities

Question 21

Item ID: IT000476-1
Which TWO types of supervised persons are also considered access persons? (Choose two.)

A. Back office personnel who input client new account information into the firm’s client management programs and enter trades, but do not talk to clients.
B. Persons serving as directors of an affiliate of the adviser.
C. Passive directors and officers of the RIA.
D. Third-party service provider who provides exception reporting to the RIA.

Question 22

Item ID: IT000028 Which THREE reasons make it important for an investment adviser to maintain updated client suitability information? (Choose three.)

A. It assists the investment adviser in meeting its fiduciary obligations.
B. It prevents litigation resulting from aggressive investment techniques.
C. It facilitates the investment adviser in meeting its regulatory obligations.
D. It aids the investment adviser in detecting and preventing money laundering activities.

Question 23

Item ID: IT000126 Which are TWO accepted components of best execution? (Choose two.)

A. Financial stability of the broker-dealer.
B. Commission rates.
C. Referral arrangements with broker-dealers.
D. Gifts sent to advisers by broker-dealers.

Question 24

Item ID: IT000045
An investment adviser has uncovered a trade error resulting from a block trade.
Which activity is considered a breach of fiduciary duty?

A. The adviser reimburses each client for accrued interest resulting from the error.
B. The adviser uses soft dollars to correct the error.
C. The adviser only notifies fee-paying clients of the error.
D. The adviser utilizes an agency cross-transaction to remedy the error.

Question 25

Item ID: IT000137 When trading for a client’s account, Investment Adviser accidentally instructed the broker to buy 1000 shares of Y at $1.00 per share when Adviser actually wanted to buy 1000 shares of X at $1.00 per share. Adviser realizes its mistake the next day, when Y is trading for $0.95 per share and X is trading for $1.05 per share. Adviser must sell Y and buy for the client:

A. $950 worth of X
B. $1,000 worth of X
C. $1,050 worth of X
D. $1,100 worth of X

Question 26

Item ID: IT000171 An investment adviser manages performance-based and asset-based fee accounts. Trade allocation of IPO shares could result in which TWO potential conflicts of interest? (Choose two.)

A. Higher fees
B. Preferential treatment of certain clients
C. Frontrunning
D. Scalping

Question 27

Item ID: IT000503-1
Which TWO statements accurately describe an adviser’s obligations regarding trade errors? (Choose two.)

A. Adviser must make the client whole.
B. Adviser must not use soft dollars to correct error.
C. Adviser has 30 days to correct the error.
D. Adviser must notify clients of the error before notifying the broker.

Question 28

Item ID: IT000491
Which situation is considered eligible “research” under the SEC’s guidance on soft dollars?

A. A subscription to a well known business newspaper.
B. Proprietary reports from brokers on client-held securities.
C. Maintenance on computer terminals used for research.
D. Dinners with securities analysts.

Question 29

Item ID: IT000015
In Form ADV Part 1, who is NOT considered a “high net worth individual”?

A. An individual with a net worth of $1 million.
B. An individual with $1 million assets under management.
C. A qualified purchaser.
D. A couple with a net worth of $2 million, excluding their home.

Question 30

Item ID: IT000053
Which is NOT prohibited by Rule 206(4)-1?

A. Inclusion of a material statement of fact that the adviser does not have a reasonable basis for believing.
B. Discussion of potential benefits of an investment strategy without disclosure of material risks or material limitations associated with such strategy.
C. Discussion of composite performance.
D. An implied statement that the calculation or presentation of performance results in the advertisement has been approved or reviewed by the the SEC.

Question 31

Item ID: IT000058 Adviser markets performance data for 1990 to present. In 2005 Adviser decides to stop marketing performance of 1990 to 1995. Adviser’s record destruction policy should provide that records supporting 1993 performance:

A. must be maintained for five years after the firm goes out of business.
B. may be destroyed in 2006 for those accounts whose performance was not advertised.
C. may be destroyed in 2006 for all accounts.
D. may be destroyed in 2011 for all accounts.

Question 32

Item ID: IT000087
Adviser manages small-cap, large-cap and fixed income portfolios. In a quarterly newsletter to be sent to all clients and a few prospective clients, Adviser discusses the performance of certain securities in each portfolio.

What must Adviser do in order to distribute the newsletter?
A. Ensure that the securities are listed in a manner that is fair and balanced.
B. Disclose the criteria used to select the single best security.
C. Disclose that Adviser does not imply that it is currently recommending these securities.
D. No additional disclosure is needed since a newsletter is not an advertisement.

Question 33

Item ID: IT000154
An adviser manages portfolios that include both unaffiliated mutual funds and equities. The adviser creates a composite, which includes mutual fund performance that the adviser knows was calculated on a gross-of-fee basis.
What must the adviser do?

A. Disclose that the mutual fund performance was not calculated by the adviser.
B. Ensure compliance with Investment Advisers Act of 1940 requirements.
C. Submit the advertisement to The Financial Industry Regulatory Authority (FINRA) for review.
D. Ensure compliance with Investment Company Act of 1940 requirements.

Question 34

Item ID: IT000173 Which TWO examples fall within the definition of an “advertisement”? (Choose two.)

A. A notice, circular, letter or other written communication addressed to more than one person.
B. Oral communications between the adviser and a client or prospective client.
C. Communications tailored to meet the individual needs or circumstances of a person.
D. Any endorsement or testimonial for which an investment adviser provides compensation.

Question 35

Item ID: IT000427
Great Big Holding Company is the sole owner of two large financial services firms: Great Big Adviser (an SEC-registered adviser) and Great Big Broker. Great Big Adviser is the sole owner of Little Insurance and Great Big Broker is the sole owner of Little Tax Prep.
o Frank is the President of Little Insurance and Vice President of Great Big Holding Company.
o Tim is the President of Great Big Broker and President of Little Tax Prep.
o Jeff is President of Great Big Adviser and a registered representative of Great Big Broker.
o Greg is the President of Little Tax Prep and an investment adviser representative of Great Big Adviser.
According to the Glossary in the Form ADV instructions, Frank, Tim, Jeff, and Greg are all “related persons” of Great Big Adviser.
Which person is NOT an “advisory affiliate” of Great Big Adviser?

o Frank
o Tim
o Jeff
o Greg

Question 36

Item ID: IT000451
An SEC-registered adviser must provide a Form ADV Part 2A Firm Brochure to which TWO clients? (Choose two.)

A. A subscriber to the SEC-registered adviser’s monthly newsletter.
B. A mutual fund registered under the Investment Company Act of 1940 to which the SEC-registered adviser provides sub-advisory services.
C. The general partner of a hedge fund to which the SEC-registered adviser provides portfolio management services.
D. A 401K plan to which the SEC-registered adviser provides pension consulting services.

Question 37

Item ID: IT000350-1
According to the SEC Books and Records Rule, which length of time must advisers who use performance data in their advertisements maintain the advertisements and all data supporting the performance figures?

A. Five years after the adviser goes out of business.
B. Five years after the end of the fiscal year in which the advertisement/performance was last disseminated.
C. Six years after the end of the fiscal year in which the advertisement/performance was last disseminated.
D. Ten years after the end of the fiscal year in which the advertisement/performance was last disseminated.

Question 38

Item ID: IT000509-1
Adviser is answering a Request for Proposal from a prospective institutional client. The Request for Proposal asks Adviser to provide performance data for one account of a comparable size as the prospective institutional client and in the same style being considered by the prospective institutional client. Adviser replies by providing an appropriate client’s most recent performance report. The client’s report shows performance gross of fees and only shows the previous three years of performance.
Has Adviser violated the marketing rule of the Advisers Act?

A. Yes, because the Request for Proposal did not specifically request performance gross of fees and did not request performance for a specific time period.
B. Yes, because responses to Requests for Proposals are advertisements.
C. No, because the reply was provided in good faith.
D. Yes, because advertisements can only be delivered to current clients.

Question 39

Item ID: IT000038
A Chief Compliance Officer (CCO) who has supervisory responsibility has adopted procedures “reasonably designed” to prevent and detect violations of the securities laws. A system is in place for applying those procedures and the CCO has reasonably discharged those supervisory responsibilities in accordance with the procedures. The CCO was not aware that a supervised person was not complying with the procedures.
If the SEC were to conduct an investigation, what would be the MOST likely outcome?

A. The CCO will be deemed to have failed reasonably to supervise.
B. The CCO shall not be deemed to have failed to reasonably supervise.
C. The CCO shall be deemed to have failed to adequately assess the risk exposure for the firm.
D. The CCO shall be suspended from future activity in a supervisory capacity.

Question 39

Item ID: IT000131
Amendments to Regulation S-P regarding privacy require any adviser that maintains or otherwise possesses consumer report information for a business purpose to:

A. maintain the consumer report information for a period of five years.
B. maintain records of the disposal process for the consumer report information.
C. properly dispose of the information while protecting it against unauthorized access.
D. cease and desist from possessing consumer report information in the future.

Question 40

Item ID: IT000364
What are advisers required to report to the Financial Crimes Enforcement Division (FinCEN)?

A. One cash transaction OR two or more related cash transactions totaling more than $10,000.
B. Each instance in which clients request a copy of their anti-money laundering file.
C. Frequent transactions that are not consistent with client’s objectives or net worth.
D. A potential client’s refusal to provide personally identifying information.

Question 40

Item ID: IT000512
All financial institutions including investment advisers must fulfill which THREE requirements regarding compliance with OFAC? (Choose three.)

A. Notify OFAC within 10 days of any blocked or rejected transactions.
B. Freeze or reject all funds and transactions of persons on the SDN List or otherwise subject to an OFAC administered sanctions program.
C. File by September 30th of each year a comprehensive report on all blocked property held as of June 30 of the current year.
D. Immediately cease communications with any person who appears on the SDN list.

Question 41

Item ID: IT000059
What is NOT required of a fund under the Investment Company Act Compliance Programs Rule (Rule 38a-1)?

A. The designation of the Chief Compliance Officer must be approved by the board of directors.
B. The policies and procedures must be approved by the board of directors.
C. The annual review of the policies and procedures must be approved by the board of directors.
D. The policies and procedures must provide for oversight of the fund’s service providers.

Question 42

Item ID: IT000046 Which THREE activities should TYPICALLY require a review and possible changes to a firm’s written policies and procedures according to the SEC? (Choose three.)

A. Rulemaking and regulatory changes.
B. Changes in a firm’s business activities.
C. Compliance issues within the firm.
D. Replacing a retiring portfolio manager.

Question 43

Item ID: IT000111
In developing written policies and procedures, which TWO factors must an investment adviser consider? (Choose two.)

A. Actual and potential conflicts of interest.
B. Compensation and benefit arrangements for mid-level staff.
C. Complexity and types of clients.
D. Knowledge and competency of senior management.

Question 44

Item ID: IT000511-1
Under the Compliance Program Rule, it is a best practice to create which TWO of the following records? (Choose two.)

A. Written policies and procedures.
B. Appointment of board members.
C. Written report of corrective actions taken per annual review.
D. Amendments to written policies and procedures.

Question 44

Item ID: IT000121 The annual review requirement under the Investment Company Act Compliance Programs Rule requires which TWO actions? (Choose two.)

A. A fund board must conduct the annual review.
B. The Chief Compliance Officer must submit a report documenting the review to the service providers.
C. The Chief Compliance Officer must submit a report documenting the review to the fund board.
D. A fund must review its service providers’ policies and procedures annually.