IACCP Stud Session Q&A

Question 1

Under which circumstance must an SECregistered
Adviser obtain a surprise examination by
an independent public accountant to verify the
assets for which it is deemed to have custody?

a) SEC-registered Adviser has authority to deduct fees
from its client accounts.
b) SEC-registered Adviser holds general power of attorney
for two of its client accounts.
c) SEC-registered Adviser requires prepayment of its total
annual financial planning retainer in the amount of
$1,000.
d) SEC-registered Adviser is general partner and manager
for a hedge fund that relies on the audit provision under
the custody rule.

Answer 1

Answer: B

Under Rule 206(4)-2 of the Advisers Act, the client funds and
securities of which investment advisers have custody must be verified by a surprise examination at least once during each calendar year by an independent public accountant. This rule allows for two exceptions:
(1) an adviser with limited custody solely because of its authority to
deduct advisory fees from client accounts; and
(2) an adviser to a pooled investment vehicle(s) that is subject to an
annual financial statement audit by an independent public accountant registered with, and subject to regular inspection by, the PCAOB, and that distributes the audited financial statements prepared in accordance with GAAP to the pool’s investors within the time period prescribed by the rule.
SEC-registered advisers that require prepaid fees of less that $1200 more than six months in advance are not required to obtain an annual surprise examination.

See Advisers Act Custody Rule 206(4)-5

Question 2

Which three entities are excluded from the
Advisers Act definition of “investment
adviser”? (Choose three.)

a) A bank or bank holding company.
b) Any broker or dealer whose provision of investment
advice is solely incidental to the conduct of his
business as a broker or dealer and who receives no
special compensation therefore.
c) The publisher of any bona fide newspaper, news
magazine or business or financial publication of
general and regular circulation.
d) An investment institution that provides investment
advice solely to a registered investment company.

Answer 2

Answer: A, B & C

Investment advisers to registered investment
companies are not excluded from the definition of
“investment adviser” and, moreover, must register with
the SEC regardless of the amount of assets under the
adviser’s management.

See Advisers Act 202(a)(11) for the definition of an
“investment adviser” (and exclusions thereof).

Question 3

DCH, an SEC-registered adviser, is notice filed in
Massachusetts, Connecticut, Rhode Island, Vermont and
Maine. The Adviser’s office and all of its employees are
located in Massachusetts. The Adviser’s representatives all
meet the Advisers Act definition of “Investment Adviser
Representative.”

Where must the representatives of DCH (i.e., individuals who
provide investment advice on behalf of DCH) be licensed as
investment adviser representatives?

a) Massachusetts, Connecticut, Rhode Island, Vermont, and
Maine
b) Any state in which the investment adviser representative
provides advice to more than 5 clients who reside in that
state
c) Massachusetts
d) Washington DC, where the SEC is headquartered

Answer 3

Answer: C

Section 203A and Rule 203A-3 of the Advisers Act
prohibit any state from requiring licensing, qualification or
registration of any supervised person of an SEC-registered
investment adviser that does not have a place of business
within that state. Thus, regardless of whether DCH is notice
filed in other states, IA Reps of DCH need only comply with
any qualification and/or licensing requirements of the state
in which they have a place of business (i.e.,
Massachusetts).

See Advisers Act Rule 203A-3
(Definition of Investment Adviser Representative)

Question 4

DCH, an SEC registered investment adviser, has three supervised persons
who provide investment advice to clients (Adam, Bob and Chris).
Adam provides advice to: six individual clients who have $500,000 (3 clients) and $700,000 (3 clients) in assets under DCH’s management respectively. Two of the above clients have a net worth of $1,000,000. He also provides advice to sixty-five (65) small companies each with a net worth of $5,000,000.
Bob provides advice to: eight individual clients, who have $500,000 (4 clients) and $1,100,000 (4 clients) in assets under DCH’s management respectively. All eight of the above clients have a net worth of $1,200,000. He also provides advice to twenty-five (25) small companies each worth over $5,000,000. Chris provides advice to: eight individual clients, who have $500,000 (5 clients),
$700,000 (2 clients), and $800,000 (1 client) in assets under DCH’s management respectively. All eight of the above clients have a net worth of $1,200,000. He also provides advice to forty (40) small companies each worth over $10,000,000.
Who should be licensed as an investment adviser representative?

a) Adam and Bob c) Chris only
b) Adam and Chris d) Adam only

Answer 4

Answer: C

This question requires a thorough understanding of Advisers Act Rule
203A-3 and the federal definition of “Investment Adviser Representative.”
In general, an IA Rep is any supervised person of an SEC-registered
investment adviser who: (i) has more than 5 “natural person” clients, and (ii) more than ten percent of whose clients are “natural persons.”
Nevertheless, it is important to note that for purposes of this definition, a “qualified client” (i.e., a person who has either $1,100,000 in assets under the adviser’s management or a net worth of $2.2 million or more) does not count as a natural person.
* 10% or less of Adam’s clients are “natural persons,” and therefore Adam does not need to license as an IA Rep.
* Bob does not have more than 5 clients who are “natural persons,” but rather has 4 natural person clients remembering that those with $1,100,000 or more in assets under DCH’s management do not count as “natural persons”).
* Chris has 8 natural person clients, which comprise just over 15% of his client base. Chris, therefore, must license as an IA Rep.

See Advisers Act 203A-3
(Definition of Investment Adviser Representative)

Question 5

DCH provides investment advice to:
1) John Doe;
2) A revocable living trust set up by John Doe’s grandfather
for the benefit of John Doe and two of his minor children
(assume grandfather is living);
3) John Doe’s cousin who lives with John Doe;
4) John Doe’s 20-year-old sister who lives down the street;
5) John Doe’s 19-year-old son who lives across the country
from John.
How many clients does DCH have?

a) One
b) Two
c) Three
d) Four

Answer 5

Answer: C

The Advisers Act defines a “client” as a natural person, and (i)
any minor child of the natural person; (ii) any relative (by blood or
marriage) of the natural person who has the same principal
residence; (iii) all accounts of which the natural person and/or the
persons referred to above are the only primary beneficiaries; and
(iv) all trusts of which the natural person and/or the persons
referred to above are the only primary beneficiaries. A legal
organization (e.g., corporation, partnership, trust, etc.) also counts
as a client where the investment advice relates to the entity and not
the owner, while two or more legal organizations that have identical
clients are considered one client. Thus, John, the trust, and John’s
cousin would all be considered one client.

See Advisers Act Rule 203(b)(3)-1

Question 6

An investment adviser that votes
proxies on behalf of advisory clients
must fulfill which two requirements?
(Choose two.)

a) Abstain from voting any proxies on behalf of an
ERISA plan client.
b) Offer its proxy voting policies and procedures to all
clients for which it votes proxies.
c) Maintain copies of each proxy statement it receives
and each vote it casts.
d) Send clients an annual statement concerning how
their proxies were voted.

Answer 6

Answer: B & C
A6:
Advisers Act Rule 206(4)-6 requires an investment
adviser that votes proxies for advisory clients to offer its
proxy voting policies and procedures to all clients for which
it votes proxies and maintain copies of each proxy
statement it receives and each vote it casts.

See SEC Proxy Voting Release
(SEC Release No. IA-2106, January 31, 2003)
Available at: http://www.sec.gov/rules/final/ia-2106.htm

Question 7

Which three scenarios would trigger a violation of
the SEC Pay-to-Play Rule? (Choose three.)

a) A subadviser of a pooled investment vehicle, whereby a
government entity (Pension X) is an investor and pays advisory
fees, makes a political contribution to the official in charge of
selecting investment advisers for Pension X.
b) An adviser of a pooled investment vehicle whereby a government
entity (Pension X) is an investor and pays advisory fees, makes a
political contribution to the official in charge of selecting investment
advisers for Pension X.
c) An adviser of a pooled investment vehicle directs its outside
counsel to make a political contribution to an official in charge of
selecting investment advisers for Pension X which is an investor in
the adviser’s pooled investment vehicle and pays advisory fees to
the investment adviser.
d) A Covered Associate of a registered investment adviser makes a
political contribution of $150 to a politician in his/her voting district,
and that politician is part of a committee that advises on municipal
fund investments.

Answer 7

Answer: A, B & C

Rule 206(4)-5 prohibits an investment adviser from providing
or agreeing to provide, directly or indirectly, payment to third-parties
(e.g., finders, solicitors, placement agents and pension consultants)
or third-party solicitation firms for a solicitation of advisory business
from any government entity on behalf of such adviser, unless such
third parties are “regulated persons,” which include certain brokerdealers, registered investment advisers and municipal advisers that are themselves subject to pay to play restrictions.
Option (d) does not violate Pay to Play because a covered
Associate is allowed to make political contributions to a candidate,
they are eligible to vote for up to $350.00 total during one election.

See Advisers Act Pay-to Play Rule 206(4)-5

Question 8

An SEC-registered adviser will be deemed to
have custody in which three situations?
(Choose three.)
a) Adviser holds client securities in a fire-proof safe in
its offices.
b) Adviser’s Portfolio Manager serves as a trustee for
a new corporate account.
c) Adviser has the authority to directly debit advisory
fees from client accounts.
d) A client writes a check payable to the client’s
custodian, which Adviser forwards on to the
custodian.

Answer 8

Answer: A, B & C

Generally, an investment adviser that has any direct or indirect
access to client funds or securities is deemed to have “custody” of
client assets. A and C depict situations where the adviser (if only
momentarily) has possession of or access to a client’s funds or
securities, while B indicates a relationship in which the PM has the
ability to disburse funds on behalf of the account. Where a check is
made payable to a third party, the adviser has no access to the
underlying funds and therefore does not have custody of the funds.
Please note that where an adviser only has custody due to the direct
debiting of fees, the adviser may continue to answer “no” to custody
questions on Form ADV.

See SEC Final Custody Rule (SEC Release No. IA-2968, December 30, 2009)
Available at: http://www.sec.gov/rules/final/2009/ia-2968.pdf
See SEC Staff Responses to Questions About the Custody Rule (Sept. 9, 2010)
Available at: http://www.sec.gov/divisions/investment/custody_faq_030510.htm

Question 9

An independent promoter for an SEC registered
adviser must provide the solicited
client with: (Choose one.)

a) A copy of the promoter’s agreement entered into
between the promoter and the adviser.
b) Disclosures regarding compensation and conflicts
of interest unless already provided by the adviser.
c) A copy of the adviser’s Form ADV Part 2.
d) A copy of the adviser’s Code of Ethics.

Answer 9

Answer: B

Rule 206(4)-1 requires an adviser or an unaffiliated
promoter to provide solicited clients with disclosures regarding
promoter compensation and conflicts of interest. While a
contract must be in place between the adviser and the promoter
where compensation exceeds $1,000 in a twelve-month period,
there is no requirement that a copy of the agreement itself be
given to clients, nor must a Code of Ethics or Form ADV Part 2
be provided by the promoter(although the adviser is required to
provide clients with a copy of its Code of Ethics upon request
and a copy of its Form ADV Part 2 prior or at the time of
executing an advisory agreement).

See Advisers Act Rule 206(4)-1

Question 10

Which three groups of books and records
are considered required books and records
according to the Advisers Act? (Choose three.)

a) Check books, bank statements, cancelled checks
and cash reconciliations of the investment adviser.
b) All paid or unpaid bills or statements (or copies
thereof), paid or unpaid, relating to advisory
business.
c) Marketing brochures (or other advertising materials)
sent to fewer than 10 advisory clients.
d) General and auxiliary ledgers (or other comparable
records) reflecting asset, liability, reserve, capital,
income and expense accounts.

Answer 10

Answer: A, B & D

The Advisers Act books and records rule
explicitly encompasses all of the records described in
this question except for marketing brochures (or
other advertising materials) sent to fewer than 10
advisory clients, which the rule explicitly exempts
from record retention requirements.

See Advisers Act Rule 204-2 (Books and Records)

Question 11

Which two situations are aspects of an
investment adviser’s fiduciary duty to its
clients? (Choose two.)

a) If an investment adviser representative is also a registered
representative of a broker-dealer that effects trades for
advisory clients, the adviser must offset any commissions
received by the representative, against the advisory fee
charged to clients.
b) An investment adviser must ensure that any investment
recommendation given to a client is suitable to the client’s
financial circumstances and risk tolerance.
c) An adviser has a duty to seek best execution on behalf of
the clients.
d) An adviser must refrain from entering into business
transactions with the advisory client’s other service
providers.

Answer 11

Answer: B & C

Best execution and suitability of recommendations are
cornerstones of an investment adviser’s fiduciary duty owed
to advisory clients. While advisers are not prohibited from
engaging in the activities described in A and D, the adviser
should ensure that these activities and any potential conflict
of interest arising from these activities are fully disclosed in
Form ADV. Moreover, these activities may be prohibited
under other state and/or federal statutes or regulations in
certain circumstances (e.g., ERISA).

See SEC v. Capital Gains Bureau (U.S. Supreme Ct., 1963)

Question 11

An SEC-registered investment adviser’s
access persons are required to submit
personal securities holdings and/or
transaction reports at which three intervals?
(Choose three.)

a) Initially upon becoming an access person
b) Monthly
c) Quarterly
d) Annually

Answer 11

Answer: A, C & D

Advisers Act Rule 204A-1 requires all access
persons to submit an initial holdings report of
reportable securities (updated annually) and
quarterly transaction reports.

See Advisers Act Code of Ethics Rule 204A-1

Question 12

Personnel at DCH Advisers buy and sell the same
securities that they also recommend to advisory
clients. Moreover, certain DCH personnel may
receive confidential, nonpublic information about
public companies on which they sit on the Board
of Directors.
Which three procedures may be implemented and
utilized to help detect and prevent front-running,
insider trading or other violations of the securities
laws? (Choose three.)

a) Blackout Periods
b) Pre-clearance Procedures
c) Restricted Lists
d) Form ADV Disclosure

Answer 12

Answer: A, B & C

The procedures listed in A, B and C (or a combination
thereof) may all be utilized to help detect and prevent
violations of the federal securities laws, including insider
trading (which is of primary concern here). While thorough
and accurate Form ADV disclosure may, in certain
situations, help protect advisers against claims of a breach
of fiduciary duty and/or conflict of interest, it cannot (in and
of itself) protect against other violations of the federal
securities laws such as insider trading violations.

See SEC Release No. IA-2256, IC-26492
[Code of Ethics (2004)]

Question 13

Which Form ADV disclosure is explicitly
required for an SEC-registered investment
adviser?

a) Pre-clearance procedures
b) A short description of the adviser’s Code of Ethics
c) A short description of the adviser’s Policies and
Procedures Manual
d) Blackout period procedures

Answer 13

Answer: B

Item 11 of Form ADV Part 2 explicitly asks for a
description of the adviser’s Code of Ethics.

See SEC Release No. IA-2256, IC-26492
[Code of Ethics (2004)]

Question 14

Which two securities are exempt pursuant
to SEC Codes of Ethics reporting
requirements? (Choose two.)

a) U.S. Government Bonds
b) Exchange-Traded Funds
c) Unaffiliated open-end registered mutual funds
d) Municipal Bonds

Answer 14

Answer: A & C

U.S. government bonds and open-end mutual funds
are not “reportable securities” for Code of Ethics purposes.
It is important to note that a SEC No-Action Letter (National
Compliance Services, November 30, 2005) clarified that
while unit investment trust exchange-traded funds (“ETFs”)
(i.e., ETFs that trade in the secondary market) are
reportable, open-end ETFs (akin to open-end mutual funds)
are not reportable.

See Advisers Act Code of Ethics Rule 204A-1

Question 15

An adviser should compare which two sets
of trading documents in order to detect trade
errors?

a) Pre-trade order tickets and post-trade order
tickets
b) Pre-trade order tickets and post-trade
confirmations
c) Post-trade order tickets and post-trade
confirmations
d) Post-trade confirmations and Investment
Committee minutes

Answer 15

Answer: B

Consistent with an investment adviser’s fiduciary duty
to its clients, losses caused by the adviser’s own trade error
are the responsibility of the adviser and should not be borne
by clients. The most effective way to detect trade errors is
by comparing a pre-trade order ticket to the post-trade
confirmation to ensure that the two documents are
consistent. Reviewing a post-trade order ticket to the
confirmation is of little help in determining whether the order
was erroneously executed during the initial order.

Best Practices/Fiduciary Duty

Question 15

The SEC Codes of Ethics Rule does not
require:

a) Personal securities transaction reports for access
persons.
b) Acknowledgements from all supervised persons
that they received a copy of the firm’s Code of
Ethics.
c) Pre-clearance procedures for access persons to
buy or sell a reportable security for their own
account(s).
d) Reporting of any violations of the firm’s code of
ethics by supervised persons promptly to the
CCO and/or other designated persons.

Answer 15

Answer: C

While Advisers Act Rule 204A-1 requires access
persons to obtain the adviser’s approval before investing in
an initial public offering (“IPO”) or private placement, there
is no such requirement that an adviser pre-clear an access
person’s investment in any other type of security.
Nevertheless, mandatory pre-clearance for other types of
securities is a best practice utilized by many advisers.

See Advisers Act Codes of Ethics Rule 204A-1

Question 16

Pursuant to Section 28(e) of the Securities
Exchange Act of 1934, which two
products/service are characteristic of
eligible soft dollar products/service under
the safe harbor? (Choose two.)

a) A research product obtained via commissions
paid from client accounts over which the
investment adviser has investment discretion.
b) A research product received via commodities
trades placed by the investment adviser.
c) A research product received from a broker which
the client has directed the investment adviser to
use.
d) A brokerage service that assists the investment
adviser in executing client transactions.

Answer 16

Answer: A & D

Commissions generated from transactions involving
commodities or financial futures are not afforded the
protection of Section 28(e).
Likewise, Section 28(e) is not available for directed
brokerage arrangements since the safe harbor is only
available where a person with investment discretion is
causing a client to “pay up.” In directed brokerage
arrangements, the client selects the broker-dealer to be
used and therefore the adviser is not causing the client to
pay up.

See SEC Soft Dollar Guidelines,
(SEC Release No. 34-54165, July 24, 2006)
Available at: http://www.sec.gov/rules/interp/2006/34-54165fr.pdf

Question 17

Pursuant to the SMC Capital No-Action
letter, what methods of trade allocation may
an adviser follow when aggregating client
trades?

a) Pro-rata allocation only
b) Rotational allocation but full and fair disclosure
must be made to clients
c) Pro-rata or random allocation in the sole
discretion of the adviser so long as no client is
favored over others
d) Pro-rata, rotational or random allocation as long
as sufficient disclosure is made and no clients are
favored nor disadvantaged

Answer 17

Answer: D

In the SMC Capital, Inc. no-action letter, the SEC
indicated that aggregation of client orders would not violate
the anti-fraud provisions of Section 206 of the Advisers Act
if the practice of allocating orders is fully disclosed in the
adviser’s Form ADV and separately disclosed to existing
clients and no advisory account is favored over any other
account. All clients participating in the aggregated order
shall receive an average share price with all other
transaction costs shared on a pro-rata basis.
See SMC Capital No-Action Letter

[SMC Capital, Inc. (September 5, 1995)]

Question 17

Which scenario best describes an agency
cross transaction?

a) The investment adviser places a discretionary trade
between an advisory client and a non-advisory
brokerage client of an affiliated broker-dealer and
receives a commission.
b) The investment adviser purchases a security from or
sells a security to an advisory client.
c) The investment adviser/broker-dealer purchases 10
shares of stock A from a market-maker, then
immediately sells the 10 shares to an advisory client at
the same price.
d) An investment adviser moves Client A’s stock to Client
B’s account, and Client B’s stock to Client A’s account
(the stock never hits the market and no commission is
charged).

Answer 17

Answer: A

For purposes of the Advisers Act and SEC Rules, an
agency cross transaction for an advisory client is defined as
“a transaction in which a person acts as an investment
adviser in relation to a transaction in which such investment
adviser, or any person controlling, controlled by or under
common control with such investment adviser, acts as
broker for both such advisory client and for another person
on the other side of the transaction” (SEC Rule 206(3)-
2(5)(b)).

See Advisers Act Rule 206(3)-2

Question 18

An adviser is most likely to use “fair
market” valuation for which type of
securities?
a) Interests in Hedge Funds
b) Fixed Income Securities
c) Exchange-traded Funds
d) Exchange-listed Securities

Answer 18

Answer: A

Fair Market valuation is typically utilized for hedge
funds. A hedge fund manager generally should value
investments according to applicable Generally Accepted
Accounting Principles (GAAP). For companies such as
hedge funds, GAAP typically requires the use of “fair value”
– the amount at which an item could be exchanged in a
current transaction between willing parties other than in a
forced or liquidation sale.

Best Practices/Fiduciary Duty

Question 19

If a client directs the investment adviser to
utilize a particular broker-dealer, which
three disclosures must be made in Form
ADV Part 2? (Choose three.)

a) Directed brokerage may cost the client more
money.
b) Not all advisers require clients to direct
brokerage.
c) Adviser does not have the ability to refuse the
directed brokerage request.
d) Most favorable execution may not be achieved.

Answer 19

Answer: A, B & D

Form ADV Part 2A Item 12 A 3 requires that if a client
directs the investment adviser to utilize a particular brokerdealer,
the following disclosures (among others) must be
made:
* Not all advisers require their clients to direct brokerage.
* Adviser may be unable to achieve most favorable execution of
client transactions.
* Directing brokerage may cost clients more money. For
example, in a directed brokerage account, the client may pay
higher brokerage commissions because the adviser may not
be able to aggregate orders to reduce transaction costs, or the
client may receive less favorable prices.

Question 20

An investment adviser is not required to
promptly update Form ADV (i.e., within 30
days) in which situation?

a) A change in assets under management in Part 1
b) A material inaccuracy in information in Part 2A
c) A change in ownership in Schedule A
d) A change in disciplinary disclosure in Part 1 and
Part 2A: Item 9

Answer 20

Answer: A

In addition to the Form ADV annual updating amendment
requirement, advisers must amend Form ADV by filing additional
amendments (other-than-annual amendments) promptly if:
* Information you provided in response to Items 1, 3, 9 (except
9.A(2), 9.B.(2), and 9.E), or 11 of Part 1A or Items 1, 2.A.
through 2.F., or 2.I. of Part 1B become inaccurate in any way;
* Information you provided in response to Items 4, 8, or 10 of Part
1A or Item 2.G. of Part 1B become materially inaccurate; or
* Information you provided in your brochure becomes materially
inaccurate.

See General Instructions to Form ADV
Available at: www.sec.gov/about/forms/formadv-instructions.pdf

Question 20

ABC Advisers provides discretionary management services
to clients. ABC Advisers is given brokerage discretion to
determine the broker-dealer to use for client transactions and
the commission costs that will be charged to its clients. ABC
directs all trades through its affiliated broker-dealer, XYZ
Brokers, whom it believes provides the best quality
brokerage services to its clients.
Which statement properly characterizes this situation?

a) ABC is violating its fiduciary duty of best execution.
b) ABC is not necessarily violating its best execution obligations, but
will be under heightened scrutiny and should ensure it fully
discloses all potential conflicts of interest.
c) ABC should disclose in Form ADV that it will not be able to achieve
best execution.
d) Since this is a directed brokerage arrangement, ABC has no
fiduciary duty of best execution in the above scenario.

Answer 20

Answer: B
A23:
Investment advisers who manage or supervise client
portfolios on a discretionary basis have a fiduciary obligation of
best execution. As a fiduciary, a money manager has an
obligation to obtain ‘best execution’ of clients’ transactions
under the circumstances of the particular transaction. The
money manager must execute securities transactions for clients
in such a manner that the clients’ total cost or proceeds in each
transaction is the most favorable under the circumstances.

Full and fair disclosure is always important, and this
covers best execution practices, which can be described in
Form ADV Part 2, an advisory agreement, etc. Remember that
disclosures must match the firm’s actual practices.

Best Practices/Fiduciary Duty

Question 21

ABC Advisers offers non-management investment
consulting services. ABC employs Bob, who is also a
registered representative of a broker-dealer. Clients may
elect to engage Bob to implement advisory
recommendations, for which Bob will receive commissions.

Which statement is most accurate?

a) Bob may not execute securities transactions for advisory clients
of ABC.
b) Bob may execute securities transactions as long as there is
adequate Form ADV 2A disclosure that Bob will receive
additional compensation.
c) Bob may execute securities transactions, but must offset
commission charges against the investment adviser consulting
fees charged to the client.
d) Bob may execute securities transactions without offsetting
commission charges or drafting Form ADV disclosure because
ABC does not manage advisory accounts and therefore no
conflict of interest is present.

Answer 21

Answer: B

Form ADV: Part 2A, Items 5 and 11:
Item 5: Fees and Compensation requires Advisers to
disclose if the Adviser or a supervised person accepts
compensation for the sale of securities or other
investment products.
Item 11: Code of Ethics, Participation or Interest in
Client Transactions and Personal Trading requires
Advisers to disclose all Participation and Interest in
Client Transactions in which Applicant or a related
person Acts as Broker or Agent and effects securities
transactions for compensation for any clients.

Question 22

What are two Rule 206(4)-1 required actions
for advisers? (Choose two.)

a) Disclose number of clients invested in a
composite.
b) Reflect the deduction of advisory fees when
advertising performance.
c) Show performance of specific investments in a
fair and balanced manner.
d) Disclose that performance records are kept for
the required 5-year period pursuant to the
Advisers Act.

Answer 22

Answer: B & C

Rule 206(4)-1 requires advertising performance
results to be shown on a net of advisory fees basis
and performance of specific investments to be
discussed in a fair and balanced manner.

See Rule 206(4)-1

Question 23

When a portfolio manager changes advisory
firms, the manager’s performance at the
previous adviser may be included in the new
firm’s performance if which three conditions
are met? (Choose three.)
a) Both investment adviser firms have substantially
similar investment objectives, policies and
strategies.
b) There must be an agreement between the
previous firm and the current advisory firm.
c) The current firm obtains back-up documentation
of performance from the predecessor firm.
d) No other person played a significant part in
achieving the performance from the predecessor
firm included in the current firm’s advertisement.

Answer 23

Answer: A, C & D

Rule 206(4)-1 allows portability of performance
results if certain conditions are met. There is no
requirement for an agreement between current and
predecessor firms.

See Rule 206(4)-1

Question 24

A “wrap-fee” program can be best
described as a service whereby an
investment adviser:

a) Offers multiple investment advisory services
(e.g., portfolio management and financial
planning) for a single “wrapped” fee.
b) Charges a fee or fees not directly based on
transaction costs which covers both advisory
services and trade executions.
c) Offsets all client commission costs against the
advisory fee charged.
d) Executes a predetermined number of client
transactions under a single “wrapped” fee

Answer 24

Answer: B

Wrap Fee Program: Any advisory program under which a
specified fee or fees not based directly upon transactions in a
client’s account is charged for investment advisory services
(which may include portfolio management or advice concerning
the selection of other investment advisers) and the execution of
client transactions. [Used in: Part 1, Item 5; Schedule D]

See General Instructions to Form ADV
(Glossary of Terms)
www.sec.gov/about/forms/formadv-instructions.pdf

Question 25

Testimonials would be allowed under the
Advisers Act if: (Choose two.)

a) Appropriate disclosures are made clearly and
prominently along with the testimonials.
b) Conflicts of interest are disclosed, if any.
c) Disclosures regarding compensation for
testimonials are made in small font at the
bottom of the page.
d) A payment for the testimonial in the amount
of $2,800 was made based on an oral
agreement between an adviser and promoter
and terms of such an agreement were
disclosed to the prospective client.

Answer 25

Answer: A & B

Rule 206(4)-1 requires, among other things, that an
adviser clearly and prominently discloses or reasonably
believes that the person giving a testimonial discloses
whether compensation was paid for the testimonial and the
existence of any material conflicts of interest. Additionally,
an adviser is required to enter into a written agreement with
any person giving a testimonial unless the testimonial is
disseminated for no compensation or de minimis
compensation.

See Rule 206(4)-1

Question 26

Which two circumstances are true in a firm’s
requirement to prepare and deliver a Wrap Fee Program
Brochure (ADV Part 2A, Appendix 1)? (Choose two.)

a) The firm may rely on another sponsor to create and deliver to
the firm’s wrap fee program clients in a wrap fee program
which has multiple sponsors.
b) The firm can combine the required disclosures into the Form
ADV Part 2A Brochure and wrap fee program brochure if the
firm provides other advisory services outside of the wrap fee
program, offering a single disclosure brochure for all clients.
c) The firm must prepare a wrap fee program brochure if they
offer multiple investment advisory services (e.g., portfolio
management and financial planning) for a single “wrapped” fee.
d) The firm does not need to prepare a wrap fee program
brochure if the firm only acts as a portfolio manager to a wrap
fee program.

Answer 26

Answer: A & D

If you sponsor a wrap fee program, you must give a wrap fee
program brochure to each client of the wrap fee program.
However, if a wrap fee program that you sponsor has multiple
sponsors and another sponsor creates and delivers to your wrap fee
program clients a wrap fee program brochure that includes all the
information required in your wrap fee, you do not have to create or deliver a separate wrap fee program brochure.

A wrap fee program brochure takes the place of your advisory firm
brochure required by Part 2A of Form ADV, but only for clients of wrap fee programs that you sponsor.

The wrap fee program brochure must be used to meet the
disclosure brochure requirements for sponsors of wrap fee programs. Disclosing a wrap fee program in a Part 2A brochure will not satisfy a sponsor’s disclosure brochure requirements, even if the sponsor must use Part 2A to disclose other advisory services. Similarly, a wrap fee brochure cannot be used to meet the disclosure brochure requirements for other advisory services.

Question 26

An investment adviser may include reference
to specific investment advice in an
advertisement in which situation? (Choose
one.)

a) If an adviser presents such investment advice in a
manner that is fair and balanced.
b) If adviser uses a list of the 15 holdings that contributed
most positively to a representative account’s
performance directly next to an equally conspicuous
disclosure of the two holdings that contributed most
negatively, but only if performance calculation
methodology is disclosed.
c) If adviser uses past recommendations with the following
disclaimer: “Past performance is no guarantee of future
results.”
d) If all of the adviser’s clients have utilized the presented
investment advice.

Answer 26

Answer: A

The rule prohibits reference to specific investment
advice in advertising where such investment advice is
not presented in a manner that is fair and balanced.

See Advisers Act Rule 206(4)-1(a)(5).

Question 27

Which two specific requirements regarding the
delivery of the ADV Part 2A Brochure to clients are
true? (Choose two.)

a) The brochure is delivered only to clients with a written
advisory agreement (clients with oral agreements are
excluded).
b) Within 120 days of fiscal year end, a summary of
material changes with the updated brochure or with an
offer to provide a copy of the updated brochure is
delivered to clients.
c) Clients who must receive a brochure include: clients who
receive only impersonal investment advice, pay less than
$500 per year, or are SEC-registered investment
companies for business development companies.
d) Documentation must be kept to evidence delivery.

Answer 27

Answer: B & D

• Under SEC Rule 204-3(b), firms must deliver the brochure to all clients, even if the advisory agreement with the client is oral.
• Each year you must (i) deliver, within 120 days of the end of your fiscal year, to each client a free updated brochure that either includes a summary of material changes or is accompanied by a summary of
  material changes, or (ii) deliver to each client a summary of material
  changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure.
• Firms do not have to deliver an interim amendment to clients unless the amendment includes information in response to Item 9 of Part 2A (disciplinary information).
• Firms are not required to deliver the brochure to either clients who
  receive only impersonal investment advice from you and who will pay you less than $500 per year or clients that are SEC-registered investment companies or business development companies (the client must be registered under the Investment Company Act of 1940 or be a business development company as defined in that Act, and the advisory contract must meet the requirements of section 15(c) of that Act).

See SEC Rule 204-3(c).

Question 28

Regulation S-P requires that a registered
investment adviser:

a) Provide to customers an initial privacy notice not later
than when the customer relationship is established,
and an annual privacy notice after that.
b) Provide to pension plan clients an initial privacy notice
not later than when the customer relationship is
established, and an annual privacy notice after that.
c) Provide to institutional clients an initial privacy notice
not later than when the client relationship is
established, and an annual privacy notice after that.
d) Provide to customers an initial privacy notice not later
than when the customer relationship is established,
and annual privacy notices only if the firm discloses
client information to non-exempt third parties.

Answer 28

Answer: D

All investment advisers and broker-dealers, among others, must
deliver initial privacy notices that describe in general terms the firm’s
information sharing and collecting practices.

       Reg S-P was amended in 2015 to not require annual delivery of the privacy statement if: * The financial institution does not disclose nonpublic personal information of consumers to third parties, other than disclosure permitted by Exempt Category; and * The financial institution has not changed its policies and practices with regard to disclosing nonpublic personal information from the policies and practices that were disclosed in the most recent disclosure sent to consumers.

The privacy rule protects individuals who are defined as “consumers.”
However, a subcategory of “consumers” are “customers” who must receive certain privacy notices, such as an annual privacy notice, that do not have to be delivered to consumers.
The privacy rule does not apply to institutional or business clients.

• See: Regulation S-P: Privacy of Consumer Financial Information and Safeguarding
  Personal Information (https://www.law.cornell.edu/cfr/text/17/part-248/subpart-A)

Question 29

A Chief Compliance Officer who has supervisory
responsibilities and relies on the defense provided
for in section 203(e)(6) (Censure, denial, or
suspension of registration) of the Advisers Act
must ensure which two actions? (Choose two.)

a) The adviser has adopted procedures reasonably
designed to prevent and detect violations of the
federal securities laws.
b) The adviser has an appointed Chief Executive Officer.
c) The adviser has provided an advisory contract to all
clients.
d) The adviser has a system in place for applying
procedures.

Answer 29

Answer: A & D

Footnote 73 in Compliance Programs Rule Release:
Section 203(e)(6) provides that a person shall not be deemed to have
failed to reasonably supervise another person if: (i) the adviser had
adopted procedures reasonably designed to prevent and detect violations of the federal securities laws; (ii) the adviser had a system in place for applying the procedures; and (iii) the supervising person had reasonably discharged his supervisory responsibilities in accordance with the procedures and had no reason to believe the supervised person was not complying with the procedures.

See Compliance Programs of Investment Companies and Investment
Advisers Adopting Release (SEC Release No. IA-2204).
http://www.sec.gov/rules/final/ia-2204.htm
See also Section 203(e)(6).

Question 29

Which transaction is an investment adviser
required to report to the Financial Crimes
Enforcement Network (FinCEN)?

a) All related cash transactions totaling more than
$10,000 within a five-day period.
b) One cash transaction totaling more than $15,000.
c) One cash transaction totaling more than $10,000
or two or more related cash transactions totaling
more than $15,000.
d) One cash transaction or two or more related cash
transactions totaling more than $10,000.

Answer 29

Answer: D

All advisory firms have a responsibility to report to
FinCEN on FinCEN/IRS Form 8300 (Form 8300) the receipt of
cash in excess of $10,000 (coin and paper money) and cash
equivalents such as cashier’s checks, money orders, bank
drafts, or traveler’s checks, -OR- having a face amount of not
more than $10,000 received in any transaction in which the
recipient knows that the instrument is being used in an attempt
to avoid the reporting requirements.

See FinCEN/IRS Form 8300 and Instructions
http://www.fincen.gov/forms/files/fin8300_cashover10k.pdf

Question 30

Which three guiding principles did the SEC
provide in the Final Release adopting the
Compliance Programs Rules? (Choose three.)

a) The title of Chief Compliance Officer does not in and
of itself carry supervisory responsibility.
b) The Compliance Programs Rules do not require
advisers to hire an additional executive to serve as
chief compliance officer.
c) Rule 206(4)-7 requires all advisers to appoint a
board of directors to oversee compliance activities.
d) Rule 206(4)-7 does not require advisers to
consolidate all compliance policies and procedures
into a single document.

Answer 30

Answer: A, B & D

Having the title of Chief Compliance Officer does not, in and of
itself, carry supervisory responsibilities. Thus, a Chief Compliance
Officer appointed in accordance with rule 206(4)-7 (or rule 38a-1) would not necessarily be subject to a sanction by us for failure to supervise other advisory personnel. A compliance officer who does have supervisory responsibilities can continue to rely on the defense provided for in section 203(e)(6) of the Advisers Act.
Rule 206(4)-7 does not require advisers to consolidate all
compliance policies and procedures into a single document.

See Compliance Programs of Investment Companies and Investment
Advisers Adopting Release (SEC Release No. IA-2204).
http://www.sec.gov/rules/final/ia-2204.htm

Question 31

A Chief Compliance Officer to a registered
investment company is required to meet which three
mandates? (Choose three.)

a) Review, no less frequently than annually, the adequacy of the
policies and procedures of the fund and of each investment
adviser, principal underwriter, administrator, and transfer agent
and the effectiveness of their implementation.
b) Annually provide a written report to each investment adviser,
principal underwriter, administrator and transfer agent.
c) Adopt and implement written policies and procedures reasonably
designed to prevent violation of the Federal Securities Laws by
the fund, including policies and procedures that provide for the
oversight of compliance by each investment adviser, principal
underwriter, administrator, and transfer agent of the fund.
d) Obtain the approval from the fund’s board of directors, including a majority of directors who are not interested persons of the fund, of
the fund’s policies and procedures and those of each investment
adviser, principal underwriter, administrator, and transfer agent of
the fund.

Answer 31

Answer: A, C & D

The Chief Compliance Officer will report directly to the board
of directors. She must annually furnish the board with a written
report on the operation of the fund’s policies and procedures and
those of its service providers.

Rule 38a-1 requires fund boards to adopt written policies and
procedures reasonably designed to prevent the fund from violating
the federal securities laws.

See Investment Company Act Rule 38a-1
http://www.sec.gov/rules/final/ia-2204.htm

Question 32

An investment adviser is required to complete
which mandate according to the Advisers Act
Compliance Programs Rule 206(4)-7?

a) Approve a chief compliance officer appointed by the
investment company board of directors.
b) Adopt comprehensive anti-money laundering policies and
procedures.
c) Review, no less frequently than annually, the adequacy of
the policies and procedures and the effectiveness of their
implementation.
d) Review, no less frequently than quarterly, the accuracy of
disclosures made to investors, clients, and regulators,
including account statements and advertisements.

Answer 32

Answer: C

Rule 206(4)-7 requires each registered adviser to review
its policies and procedures annually to determine their
adequacy and the effectiveness of their implementation. The
review should consider any compliance matters that arose
during the previous year, any changes in the business activities
of the adviser or its affiliates, and any changes in the Advisers
Act or applicable regulations that might suggest a need to
revise the policies or procedures.

See Advisers Act Rule 206(4)-7
http://www.sec.gov/rules/final/ia-2204.htm

Question 33

An individual charged with insider trading
would most likely be charged under which
statute?

a) Rule 10b-5 (Employment of manipulative and
deceptive devices) of the Securities Exchange Act
of 1934
b) Rule 17e-1(Brokerage transactions on a securities
exchange) of the Investment Company Act of 1940
c) Title I of The Employee Retirement Income
Securities Act (ERISA)
d) Section 215 (Validity of contracts) of the
Investment Advisers Act of 1940

Answer 33

Answer: A

Rule 10b-5-1 of the Securities Exchange Act of
1934 provides that a person trades on the basis of material
nonpublic information if a trader is “aware” of the material
nonpublic information when making the purchase or sale.
The rule also sets forth several affirmative defenses or
exceptions to liability.

See Rule 10b-5 of the Securities Exchange Act
(Employment of Manipulative and Deceptive Devices)

Question 33

Which two types of supervised persons
are also considered access persons?
(Choose two.)

a) Persons having access to nonpublic information
regarding client purchases or sales.
b) Persons serving as directors of an affiliate of the
adviser.
c) Persons recommending securities transactions
to clients.
d) Third-party service providers engaged in
implementing recommended transactions.

Answer 33

Answer: A & C

Rule 204A-1(e)(1)(i) of the Advisers Act defines “access
persons” as:
Any of your supervised persons:
(A) Who 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
(B) Who is involved in making securities recommendations
to clients, or who has access to such recommendations that are
nonpublic.

NOTE: If providing investment advice is your primary business, all
of your directors, officers and partners are presumed to be access
persons.

Question 34

Which two persons qualify as “accredited
investors”? (Choose two.)

a) David, who is trustee for a trust with assets in
excess of $1,000,000.
b) Adam, who currently has $750,000 in assets under
management with a registered investment adviser.
c) Bob, whose individual net worth exceeds
$1,000,000.
d) Charlie, who along with his wife Christine, had
annual income in excess of $300,000 in each of the
two most recent fiscal years and who is expecting
$500,000 in income for the current year.

Answer 34

Answer: C & D

Rule 501 of Regulation D (Securities Act of 1933) includes the
following persons/entities under the definition of “accredited investor”:
1) A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such natural person;
2) A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
3) A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

See Securities Act of 1933 Rule 501(a)(“Accredited Investor”)

Question 35

Which fact about the adviser’s business
does not have to be identified in Item 4
(Advisory Business) of Form ADV Part 2?

a) Adviser provides advice on financial planning and
insurance.
b) The dollar amount of the adviser’s discretionary
and/or non-discretionary assets under management.
c) The identification of the firm’s principals who own
25% or more of the firm.
d) The identification of the firm’s principals who own
15% or more of the firm.

Answer 35

Answer: D

For purposes of this item, your principal
owners include the persons you list as owning
25% or more of your firm on Schedule A of Part
1A of Form ADV (Ownership Codes C, D or E).

Question 36

Which three items must be included on an
adviser’s order memoranda? (Choose three)

a) The account for which the order was entered.
b) Any modification or cancellation of the order or
instruction.
c) The identity of the person reconciling the order.
d) The identity of the bank, broker or dealer by or
through whom the order was executed.

Answer 36

Answer: A, B & D

The Advisers Act books and records rule requires advisory firms to
maintain a memoranda of each order given by the adviser to buy or
sell any security or of any instructions received by the adviser
regarding the purchase, sale, receipt or delivery of any security
showing:
a) Any modification or cancellation of the order or instruction;
b) The terms and conditions of the order, instruction, modification or
cancellation;
c) The identity of the person who recommended the transaction to the client and of the person who placed the order;
d) The account for which the order was entered and the date of entry;
e) The identity of the bank, broker or dealer by or through whom the order was executed (where appropriate); and
f) Any designation of orders entered pursuant to use of a discretionary power.

See Advisers Act Rule 204-2 (Books & Records)

Question 36

Which disclosure is not required to be
included on the cover page of a firm’s Form
ADV, Part 2A?
a) Additional information about adviser is available on
the SEC’s website at https://adviserinfo.sec.gov/.
b) Adviser’s website address (if adviser has one)
c) “RIA” designation
d) The information in this brochure has not been
approved or verified by the U.S. Securities and
Exchange Commission or by any state securities
authority.

Answer 36

Answer: C

If Advisers refer to themselves as a
“registered investment adviser” or describe
themselves as being “registered,” they must
include a statement that registration does not
imply a certain level of skill or training.

(Form ADV instructions for Part 2A)