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Series 65 > Section 1 - Laws and Regulations > Flashcards

Section 1 - Laws and Regulations Flashcards

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1
Q

Recordkeeping rules under USA

A

Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

Emails are treated as any other communication: 3 years for broker-dealers and 5 years for investment advisers.

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2
Q

IAR eligible to register with SEC when required to register in how many states?

A

15

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3
Q

AUM where SEC registration is required

A

$110M

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4
Q

private fund advisor registration form

A

Form PF

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5
Q

private fund advisor AUM exemption amount

A

$150M

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6
Q

exemption for investment advisor registration who limit clientele to…

A

insurance companies

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7
Q

AUM level under Dodd-frank where a pension fund manager must register with the state

A

$200M

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8
Q

where do federal covered investment advisers register under?

A

investment advisers act of 1940

those with >$110M AUM

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9
Q

When, if ever, would a broker-dealer be required to register as an investment adviser?

A

If it charges distinct fees for investment advice or management

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10
Q

who are not “persons”?

A

deceased
mentally incompetent
minors

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11
Q

The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, or investment adviser involved in any securities sale that violates the Uniform Securities Act is

A

consent to service of process

This power of attorney does not grant the Administrator the authority to terminate the registration at will nor does it empower the Administrator to verify information or expedite the registration process.

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12
Q

Under the Investment Advisers Act of 1940, an adviser’s registration usually becomes effective how many days after it is filed?

A

45

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13
Q

According to the Investment Advisers Act of 1940, for how many years must books and records be maintained for an account after the end of the year in which the last transaction occurred?

A

5 yrs

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14
Q

A state-registered investment adviser with discretionary authority over client accounts discovered on day 1, that the firm’s net worth is below the required amount. He must notify the administrator and then file a report no later than the

A

day 2

day 3

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15
Q

The primary responsibility for supervising the activities of an investment adviser representative who is affiliated with a federal covered investment adviser lies with

A

the investment adviser the IAR represents

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16
Q

What is the de minimis exception for state registration

A

> 5 retail/individual clients

ONLY APPLIES TO IAR

AGENT MUST BE REGISTERED IN EVERY STATE THEY DO BUSINESS

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17
Q

when does state adviser registration take effect?

A

30 days after initial application filed

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18
Q

when is a new IA permitted to register with the SEC?

A

If a new IA reasonably believes that he will have AUM of at least $100 million within the first 120 days of registering

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19
Q

Under the Investment Advisers Act of 1940, who are excluded from the definition of an investment adviser?

A

The act excludes the following from the definition: banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines); persons advising about certain securities (U.S. government or agency issues); broker-dealers not receiving special compensation for giving advice; and persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers

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20
Q

what is the IAR registration exemption for covered advisers?

A

federally covered = only have to register in state(s) where you have a place of business

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21
Q

time period for amendments to U4 IAR filing

A

30 days

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22
Q

how long must BD’s keep books and records?

A 
3 yrs
2 yrs (in office)
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23
Q

what notification is required after termination from BD?

A

immediate notification from both individual agent and BD firm

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24
Q 
what level do the following register at?
RIA
IAR
BD
Agent
A

State OR Federal
State
Both
Both

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25
Q

An individual may only act as an agent for multiple broker-dealers that are affiliated with each other. If the broker-dealers are unrelated, an agent may not work for them unless

A

the state securities Administrator, by rule or order, authorizes such employment.

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26
Q

state registration requirements for agents

A

Agents must be registered in every state in which they do business

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27
Q

when must a BD register with the state, regardless of what types of clientele it serves?

A

if they have an office in the state

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28
Q

Under federal law, which act regulates the activities of broker-dealers and associated persons?

A

Securities Exchange Act of 1934

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29
Q

The Uniform Securities Act authorizes the Administrator to make certain demands of broker-dealers. In general, the Administrator would require a broker-dealer to

A

A) file various financial reports
B) publish an announcement of the application for registration in a newspaper published in the state
C) promptly file a correcting amendment to any document on file with the Administrator which becomes inaccurate or incomplete in any material respect
D) post a surety bond if it has investment discretion over client accounts or maintains custody of customer funds and/or securities

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30
Q

In the event an agent transfers from one broker-dealer to another broker-dealer, what notification is required to the administrator?

A

all three (the former employer, the new employer, and the agent) must report the transfer to the Administrator

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31
Q

Regardless of when initial registration occurs, the renewal date for all professionals is ____.

A

December 31

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32
Q

The USA defines an agent as,

A

“any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities.”

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33
Q

The internet exemption applies to broker-dealers when the firm limits its communications to

A

the dissemination of general information.

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34
Q

under USA, who is responsible for providing that a security is exempt?

A

person requesting exemption

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35
Q

what is NOT a security?

A
  1. insurance/endowment policy or annuity where ins co promises to pay a fixed sum
  2. interest in a retirement plan
  3. collectibles
  4. commodities
  5. Condos used as a personal residence
  6. Currency
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36
Q

what are the main exempt transactions under the USA?

A
  1. between issuer and underwriter
  2. isolated nonissuer transaction
  3. unsolicited nonissuer transactions
  4. transaction executed by a trustee in bankruptcy, executor, admin, sheriff, conservator, etc
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37
Q

rule 147 exemption

A

intrastate offering limited to companies doing business solely in one state, exempt from federal SEC registration

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38
Q

define prospectus

A

any written communication that offers a security for sale

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39
Q

what is the private placement exemption?

A

exempts from state registration a limit of 10 OFFERS to retail clients

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40
Q

define Howey Case of 1946

A

decision ruled that an investment contract meeting the 4 prongs:

(1) an investment of money,
(2) into a common enterprise,
(3) with the expectation of profit, and
(4) due to the managerial efforts of others, is a security.

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41
Q

who meets the definition of accredited investor?

A
  1. individual w/ net worth, excluding principal residence, above $1M
  2. individual w/ income for past 2 yrs >$200k ($300 married)
  3. organization not formed for purpose of purchasing securities offered w/ NW >$5M
  4. Registered investment company, bank, insurance company regardless of size
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42
Q

what are the federal and state max penalties related to securities violations?

A

fed: $10k, 5yrs prison
state: $5k, 3yrs prison

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43
Q

The Administrator maintains jurisdiction over a license that has been withdrawn for a period of _____ after the effective date of the withdrawal.

A

1 year

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44
Q

where does the administrator have jurisdiction for a securities sale?

A

The Administrator has jurisdiction from the state in which the offer was made, received, and accepted

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45
Q

statute of limitations for securities sale civil liability

A

earlier of 3 years after the date of the sale or 2 years after discovery of the violation

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46
Q

when does cancellation by an administrator occur?

A

it occurs when a registrant no longer exists, ceases to do business, is declared mentally incompetent, or cannot be located.

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47
Q

if an adviser is sued by a client, what may the client be awarded AKA rescission?

A

the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney’s fees, less any revenue gained from the advice

customer has 30 days to accept/reject offer

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48
Q

Under the USA, an agent may file for a review of an Administrator’s revocation order within how many days of revocation?

A

60 days

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49
Q

If an investment adviser representative commits a criminal violation of the Uniform Securities Act, she is subject to legal action for

A

5 years after alleged violation

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50
Q

What is the rule on waivers of fees or rights for test purposes?

A

ALWAYS PROHIBITED - agreement is null and void

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51
Q

when must the initial ADV brochure be provided?

A

48 hrs before entering into contract
OR
at the time of contract if the client has 5 business days to terminate

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52
Q

Filing of the annual updating amendment to form ADV is within __ days of the end of the adviser’s fiscal year

A

90

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53
Q

Delivery of the IA’s brochure to the client is due within __ days of the end of the adviser’s fiscal year

A

120

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54
Q

what must investment adviser advertising reflect?

A
  1. fees
  2. actual market conditions during the referenced period 3. specific group of clients to which it applies.
  3. advertising that reflects past performance must show a minimum period of 1 year
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55
Q

how is performance-based compensation treated?

A

PROBHIBITED

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56
Q

what is required when investment advisers act as principals or agents in a transaction with an advisory client?

A

disclosure must be in writing

client consent to acting in this capacity must be obtained prior to the completion of the transaction.

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57
Q

An adviser who has control of or discretionary power over client assets or who charges fees of more than $500 six or more months in advance is required to disclose:

A

any condition that might affect its ability to carry out contractual obligations to its clients.

almost any legal or disciplinary proceeding that would involve its integrity.

58
Q

which new clients do not need to receive the form ADV?

A

those purchasing impersonal advice for less than $500 per year are exempted

59
Q

Under the Uniform Securities Act, prepaid fees are permitted if they are

A

detailed in the advisory contract and there is a refund of the fees if the contract is canceled prematurely.

If an adviser accepts more than $500 in prepaid fees, 6 months or more in advance of services, a balance sheet must be included in the brochure (Part 2 of Form ADV) given to customers.

60
Q

The adviser can act as broker to both parties upon proper written disclosure and consent, provided

A

the adviser did not recommend the transaction to both sides.

61
Q

in order for a solicitor to be in compliance, what must be disclosed?

A
  1. the name of the solicitor
  2. the name of the investment adviser
  3. the nature of the relationship between the investment adviser and solicitor
  4. the fact that the solicitor will receive compensation, the terms of the compensation arrangement, and indicate whether the client will pay a specific charge or a higher advisory fee because they recommended the investment adviser to the client.
62
Q

NASAA defines a substantial prepayment of fees

A

> $500, 6 or more months in advance

63
Q

how are the USA and investment advisers act of 1940 (federal) different in the type of advisory contracts they permit?

A

(not the general practice) federal law - permits oral contracts
USA state law - all initial and renewal contracts must be in writing

64
Q

2 principals in every securities trade

A

the buyer and the seller.

65
Q

how frequently must the custodian send statements to the client?

A

quarterly

66
Q

what is the general net worth requirement investment advisers who maintain custody must have?

A

$35k

67
Q

in order for investment discretion to take place, what are the 3 A’s, one of which must be missing?

A

Activity
Amount
Asset

time and price alone are not discretionary

68
Q

how long must written complaints be kept by

BD
IA

A

3yr

5yr

69
Q

which clients can you borrow from?

A

banks
person affiliated with your firm
BD in a margin account

70
Q

which clients can you NOT borrow from?

A

employees at lending institution that process your loan
agent at the BD who services your margin account
mortgage broker
family member

71
Q

if an investment adviser sends a customer an initial privacy notice with an opt-out provision, under Reg S-P, how many day must the firm NOT disclose nonpublic information?

A

30 days

72
Q

what qualifications must be in place to permit performance-based compensation (for agents only)?

A

net worth of $2.1M+
AUM of $1M+

non-spouse joint assets not permitted/included in calculation

73
Q

The term covered account does not apply to

A

institutional customers, such as banks, pension funds, and investment companies

74
Q

An AGENT may determine which securities to purchase or sell for a client when

A

written discretion authority has been received by the broker-dealer before executing the first discretionary transaction

75
Q

what type of orders are those permitting discretion with time and price?

A

day orders

only require oral permission

76
Q

define “selling away”

A

enacting transactions that are not recorded on the broker-dealer’s books unless the transactions are authorized in writing by the broker-dealer prior to execution.

77
Q

what is the timing rule for discretionary transactions?

A

oral discretionary authority is permitted to be used in a customer’s account for the first 10 business days after the date of the first transaction. Following that 10 days, the rule requires written authorization to be on hand for any future discretionary trading.

78
Q

what is the de minimis exception for investment advisers to political campaigns?

A

If the covered employee can vote for the person, the maximum contribution is $350 per election cycle. If the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle.

79
Q

The duties and responsibilities of a fiduciary are spelled out in

A

the Uniform Prudent Investors Act of 1994

using reasonable skill, care, and caution

80
Q

define covered account

A

an account, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions.

81
Q

what are the main characteristics of a trough?

A

high unemployment

low inflation

82
Q

what type of bond rate is most volatile?

A

ST

83
Q

what two types of industries are most affected by recession?

A

consumer durable goods

capital goods

84
Q

inflation inertia

A

prices will rise slowly during an initial period of inflation and then begin to “pick up steam” as a result of some economic shock

85
Q

how are deferred tax credits treated on BS?

A

liability

86
Q

Cash receipts are included in cash flow from ________ activities, even when it is generated through investments such as interest or dividends.

A

operating

87
Q

Which items change when a company pays a cash dividend?

A

total assets, total liabilities

88
Q

Form 8-K

A

used to report significant events that could affect the price of the company’s stock

Examples would be the resignation of a member of the board because of an operational dispute, liquidation of a significant asset, filing for bankruptcy, or change in management control.

When any of these occur, the Form 8-K must be filed with the SEC no later than 4 business days after the event.

89
Q

what is the liquidation liquidation in the event of company bankruptcy?

A 
secured creditors
unsecured creditors (e.g. unpaid wages and taxes)
subordinated debt
preferred stockholders
common stockholders
90
Q

measure of total risk of investment

A

st dev

91
Q

A broker-dealer (BD) registered in multiple states must meet the record retention requirements of

A

the SEC

92
Q

When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if

A

the check is forwarded within 3 business days.

When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody.

Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody.

93
Q

The effective date is determined by

A

the state Administrator or the SEC, not the person registering the security.

94
Q

Who must give notice to the administrator when beginning or terminating employment with the following?

state registered IA

federal covered IA

agent of BD

A

When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator.

In the case of a federal covered IA, only the IAR gives notice to the Administrator.

However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required.

95
Q

After an investigation, the Administrator wishes to have the registration of an investment adviser revoked. In order to do so, what may happen:

A

A) an appeal may be filed within 60 days of the final order
B) the investment adviser has a right to a hearing
C) the Administrator must be able to point to specific facts of law violated by the investment adviser
D) withdrawal is NOT allowed

96
Q

It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if

A

the Administrator, by rule, prohibits custody;
or
in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody.

97
Q

Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for (soft dollar benefits)

A

research and brokerage services provided in exchange for directed transactions.

98
Q

define Agency Cross Transaction

A

In an agency cross transaction, an investment adviser affiliated with, or under the control of, a broker-dealer represents both sides of a transaction.

Therefore, in addition to the advisory fee, commissions are earned.

When executing an agency cross transaction, prior written approval from the client is required.

Agency cross transactions are prohibited when the securities in the transaction have been recommended to both parties by the adviser.

99
Q

The USA specifically grants the Administrator the authority to make a _____ requiring written acknowledgment of unsolicited orders be recorded on a designated form.

A

RULE

100
Q

under the USA, what may be amended if the public offering price and underwriter’s discounts and commissions remain unchanged?

A

The Uniform Securities Act permits filing an amendment to an existing registration, increasing the number of shares to be offered and sold,

101
Q

What type of rate impact does the Fed have?

A

The Fed’s influence on rates is primarily on the short end of the yield curve. Both the discount rate, which it sets, and the federal funds rate, which it influences, are short-term rates. The Fed tightens short-term credit when the economy appears to be overheating. To slow things down, the Fed raises short-term rates to extremely high levels.

102
Q

what is the rule for agent registration when transacting an unsolicited order?

A

Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident.

103
Q

if an applicant commits a felony in state A, then attempts to register in state B where this same crime is considered a misdemeanor, how does the state B administrator treat this?

A

still a felony

subject to statutory disqualification

104
Q

The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser’s brochure. However, there are instances where the act grants an exemption if the client is

A

an investment company

a person receiving impersonal advice for which the annual fee is less than $500

105
Q

define wash trade

A

Performing wash trades involves the simultaneous or near-simultaneous selling and repurchase of the same security for the purpose of generating the appearance of trading activity and increasing the price. This is one of the most common forms of market manipulation.

106
Q

where are the following regulated?

broker dealers
pension plans
transfer agents
investment advisers

A

The Securities Exchange Act of 1934 regulates broker-dealers and transfer agents.

Investment advisers are regulated under the Investment Advisers Act of 1940 (and, to a certain extent, the Investment Company Act of 1940).

Pension plans in the private sector are regulated under ERISA.

107
Q

what type of signal is high short interest?

A

bullish

To replace the stock, an investor must go into the market to buy that stock. When all of those short sellers have to buy back the stock they shorted, it puts upward pressure on the price of that stock.

108
Q

who issues ADRs?

A

US depositary bank

109
Q

what is a main difference between common and preferred stock?

A

common has voting rights

110
Q

negotiable CD minimum face amount

A

$100k

111
Q

The most common collateral securing a Brady bond is

A

U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond

112
Q

When a company uses the securities of one subsidiary to collateralize a bond issue of another subsidiary, the bonds are known as

A

collateral trust certificates.

113
Q

how are treasury bonds quoted?

A

Treasury bonds are quoted as a percentage of par, ($1,000), plus 32nds. e.g. 95.28 = $958.75

114
Q

Registered investment companies are similar to other publicly registered entities in that

A

an annual audited report must be filed with the SEC.

115
Q

The tax consequence of transferring proceeds from one fund to another within the same family of funds is:

A

on the date of transaction, any gain/loss recognized for tax purposes

116
Q

The Investment Company Act of 1940

A

requires that an open-end investment company have a minimum of $100,000 in net assets prior to commencing a public offering.

Reports must be sent to shareholders on a semiannual basis.

contract between a management investment company must be in writing.

The initial contract must be approved by a majority vote of the outstanding shares AND the “noninterested” members of the board of directors.

No fund is permitted to own more than 3% of the outstanding shares of another registered investment company.

117
Q

NAV =

A

(assets - liabilities) / shares outstanding

118
Q

Letters of intent

A

permit investors to qualify for a reduced sales charge on the purchase of mutual fund shares over time.

They are valid for 13 months and may be backdated by up to 90 days to include previous purchases.

The investor is not legally obligated to comply with the terms of the letter, so some shares purchased at the reduced sales charge are held in escrow.

These shares are liquidated to repay the reduction in sales charge if the contract is not completed.

119
Q

Affiliated persons are

A

any investment company directors, officers, employees, or owners of 5% or more of the voting shares of stock, and/or any persons controlling or controlled by such persons.

120
Q

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption?

A

The 7-day redemption rule is required by the Investment Company Act of 1940.

121
Q

As defined in the Investment Company Act, investment companies include

A

face-amount certificate companies, management companies, and unit investment trusts

122
Q

unit investment trust

A

issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.

“An investment company with a low expense ratio and a portfolio that doesn’t change,”

123
Q

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of

A

a majority of the outstanding shares

124
Q

how are voting rights treated for variable annuities and variable life insurance holders?

A

Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value.

125
Q

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of

A

24 mo

126
Q

what is the lowest point to which a variable annuity can decrease?

A

face value = death benefit

127
Q

what is the difference between american and european options?

A

american - exercise ANYTIME

european - exercise only at EXPIRATION date

128
Q

what is the option perspective to remember when to buy a call/put?

A

call up

put down

129
Q

who typically uses forwards and futures?

A

producers

speculators

130
Q

Which of the following statements is most accurate when describing equity straddle options?

A

The option buyer is looking for market volatility.
The option seller is looking for market stability.

A straddle is the combination of a put and a call on the same stock with the same strike prices and expiration dates. The solution to the question is the same for any option position in that option buyers need price movement and option sellers make money from stability. In the case of a straddle, a buyer is expecting sharp movement but does not know the direction of the move. The seller of the straddle will benefit if there is no significant price movement.

131
Q

characteristics of a rights offering

A

A) the rights are marketable
B) it is issued to current stockholders
C) the subscription price is below the current market value
D) the subscription period is 30-45 days

132
Q

Investment companies must send financial reports to shareholders

A

semiannually

133
Q

Under the civil liabilities section of the Uniform Securities Act, how long does a client have to sue an investment adviser after the advice is given?

A

The civil liability statute of limitations is 3 years from the event or 2 years from discovery, whichever occurs first. The statute of limitations for criminal prosecution or punishment is 5 years.

134
Q

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities EXCEPT

A

stock on margin

135
Q

exchange specialist (DMM)

A

a dealer on the New York Stock Exchange who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks

136
Q

Registration by qualification becomes effective on

A

the date set by the Administrator

137
Q

core CPI

A

the Consumer Price Index excluding energy and food prices

138
Q

The IARD is used for filing

A

Form ADV Parts 1 and 2.

139
Q

If a new customer opens an account with a broker-dealer and tells the agent to buy investments at his discretion, before engaging in any transactions in the account, the agent must

A

receive a written discretionary power from the customer

140
Q

If the Administrator has summarily suspended an investment adviser representative’s registration, the registrant may request a hearing by written request and the hearing will be granted within

A

15 days

141
Q

For the fund to impose 12b-1 charges,

A

the distribution plan must be in writing and approved by a majority of the outstanding shares, as well as a majority of the board of directors, including a majority of directors classified as outside directors.

Series 65 (1 decks)

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