State and Federal Regulations Governing Investment Advisers and IA - Representatives Flashcards
The Uniform Securities Act requires that an investment adviser deliver a written disclosure document to an advisory client or prospective advisory client. In which TWO of the following situations is the adviser NOT required to send this document to clients?
I. The firm advises only investment companies but does not send its brochure to them
II. The firm sends a newsletter to subscription clients who pay an annual fee of $120
III. The firm has no office in the state
IV. The firm advises only institutional investors
I and II
II and III
I and IV
II and IV
I and II
According to the Uniform Securities Act Rule 203, an investment adviser must give a client or prospective client a disclosure document (usually Form ADV Part 2) either 48 hours before or at the time of opening the account. Exceptions to this rule include an adviser whose clients are only investment companies or where the contract is for impersonal services for which the client pays a fee of less than $500. Please note, while an investment company is an institutional investor, not all institutional investors are investment companies. An investment adviser is required to provide the brochure to institutional investors other than investment companies. While there are many exemptions regarding institutional investors, this rule is NOT one of them. (89551)
All of the following statements are TRUE regarding the preparation and maintenance of records by investment advisers and broker-dealers, EXCEPT:
The Administrator may determine that the records prepared by investment advisers and broker-dealers may be different
All records must be preserved for a period determined by the Administrator
Correcting amendments must be filed promptly if information in a document previously filed becomes inaccurate
Only an Administrator within the same state may examine the records of an investment adviser or broker-dealer
D
An Administrator may inspect the records of a broker-dealer or investment adviser located within or outside the state. All of the other statements regarding recordkeeping are correct. (75516)
In order for an investment adviser to maintain custody of funds and securities:
The firm must have a three-year track record of no violations
The investment adviser must notify the Administrator and there must be no rule against custody
The Administrator must give permission to the investment adviser
At least $100,000 in Treasury bills must be posted as security
B.
An adviser must notify the Administrator of its intention to maintain custody of client funds and securities. In some cases, an Administrator may adopt a rule prohibiting an investment adviser from taking possession. (75598)
Which of the following documents must be filed with the state Administrator for registration of all broker-dealers, investment advisers, agents, and investment adviser representatives?
Form U4
Form ADV Parts 1 and 2
The Consent to Service of Process
Fingerprint cards for all registered employees
C.
The Consent to Service of Process appoints the state Administrator to serve as the applicant’s attorney for the purpose of receiving and processing noncriminal complaints. It is required of all registrants when they file for registration in a state. The other forms listed may or may not be filed by certain persons, but the Consent to Service of Process is the only form that is required of ALL persons. (89640)
Under the Uniform Securities Act, an institutional investor:
Has more than $2.1 million of net worth
Has a minimum of $1 million under management with an investment adviser
Is designated by rule or order of the Administrator
Is any financial institution
C.
Choices (a) and (b) provides the financial test that an individual must meet to be defined as a qualified client. Financial intuitions are also defined as institutional investors, but the best answer is choice (c). The Administrator has the power to designate a person as an institution, by rule or order. (89700)
An investment adviser with no place of business in a state will not be required to register with the Administrator under which of the following conditions?
The adviser has not been the subject of any disciplinary action
The adviser has been in business for 10 years
The adviser will provide advice only to mutual funds
The adviser will provide advice only to 401(k) plans with assets of at least $500,000
C
An adviser with no place of business in a state who only provides advice to mutual funds (a type of investment company), other investment advisers, broker-dealers, banks, trust companies, insurance companies, saving and loan associations, and employee benefit plans such as a 401(k) where the minimum amount of the assets is $1,000,000, is exempt from registration. (75576)
Which of the following investors may be charged performance fees by investment advisers?
Accredited investors under Regulation D
Exempt investors
Qualified clients
None, since investment advisers are prohibited from charging performance
C
Under the Investment Advisers Act of 1940 and the NASAA Model Rules, advisers are prohibited from charging performance fees—fees that are tied to the account’s performance. There is an exception for qualified clients.
A qualified client is an institutional or retail client with at least $1,000,000 under management with the adviser or who has a net worth in excess of $2,000,000. If the client is an individual, then the net worth calculation may NOT include the value of the client s primary residence.
An accredited investor under Regulation D is not the same as a qualified client, choice (a). For example, someone with a total net worth of $1,000,000 excluding their home, would be an accredited investor according to Regulation D, but not a qualified client. (89622)
Bonds may be required of all of the following entities, EXCEPT:
Investment advisers who do not have discretionary authority or custody of client funds or securities
Investment advisers who have discretionary authority but do not have custody of client funds or securities
Broker-dealers who do not have discretionary authority
Broker-dealers who have discretionary authority
A.
Investment advisers may need to post a bond if they have discretionary authority over client accounts or have custody of client funds or securities. A bond guarantees that funds are available so that legal fees and fines can be met, if assessed against a broker-dealer or investment adviser. The bond is waived if the investment adviser meets certain minimum financial requirements, determined by the Administrator.
Broker-dealers often have custody of client assets (although this is not universal). Broker-dealers who have custody or discretion over client accounts may also be required to post a bond. Generally, most broker-dealers have custody of client funds. Again, the Administrator may waive this bonding requirement if the broker-dealer’s net capital exceeds a specified amount, which is determined by the Administrator. (75574)
An investment adviser’s compensation could be based on:
A share of capital gains
Any agreement that the client and investment adviser mutually sign
A percentage of capital appreciation of the net assets in the client’s account
A percentage of the value of the fund averaged over a prescribed period
D.
An investment adviser’s compensation could be based on a percentage of the value of the fund averaged over a prescribed period. An investment adviser may not receive compensation on the basis of sharing in capital gains or a percentage of the appreciation in the account, even if the client signed an agreement to do so. (75631)
Which of the following persons would NOT be considered an investment adviser representative under the Uniform Securities Act?
A person who makes recommendations about municipal securities at an investment advisory firm
A person who solicits advisory services and private offerings for accredited investors
An accountant who offers a separate service for securities advice based on his clients’ tax situation
A person who assists clients and enters orders for securities transactions
D.
A person who assists clients and enters orders for securities transactions is an agent of a broker-dealer, not an investment adviser representative. A person providing advice at an advisory firm is an investment adviser representative, even if that advice is about exempt securities, e.g., municipal securities. A person who solicits advisory services is an investment adviser representative. An accountant offering a separate service for giving securities advice would most likely need to register as an investment adviser representative. Though choice (c) does not specifically mention compensation, this could be inferred since the advice is a separate service. When comparing choices (c) and (d), choice (d) is the best answer. (89639
Paul is an investment adviser representative for Bruce Asset Management, a federal covered investment adviser. Although Paul’s office is located in State A, he conducts business with clients from State A, State B, and State C. Which of the following choices
reflect(s) the state registration requirements in this situation?
Bruce Asset Management must be registered in State A
Paul must be registered in State A
Paul must be registered in State B and State C.
Bruce Asset Management must be registered in State B and State C
I and IV only
II only
I, II, and III only
I, II, III, and IV
B.
A federal covered adviser is an investment adviser that is required to register with the SEC. It is exempt from state registration in any state in which it transacts business although it is required to notify the states in which it is conducting business. This is why Bruce Asset Management does not need to register in any state. This rules out choices (I) and (IV). An investment adviser representative (IAR) of a federal covered adviser must be registered in the state in which the IAR maintains an office. Paul’s office is in State A, the only state he needs to register in. Because he does not have an office in States B or C he does not need to register in either of them. (89536)
According to the NASAA Model Rule on the Ethical Business Practices of Investment Advisers, which of the following statements is TRUE regarding investment advisory fees charged to customers?
There is no limit on the size of the fee that may be charged as long as the customer understands and agrees to the method of computation and the method is disclosed in writing to the client
Investment advisory fees may not exceed an annual rate equivalent to 5% of the total assets under management at the end of the computation period
Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services
Fees charged by an investment adviser on an annual basis may not exceed the gains in the portfolio during the same period
C.
Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reasonable fees is used to compare fees charged by various advisers. Fees that are obviously out of line with those charged for similar services are considered unethical. (75664)
According to the Uniform Securities Act, which of the following statements is/are NOT TRUE concerning a broker-dealer or investment adviser filing an application for registration as a successor firm?
The successor firm must be in existence prior to the filing of the application for registration
The successor firm’s registration will be effective for the unexpired portion of the year
The successor firm must submit a filing fee with the application for registration
II only
III only
I and II only
I and III only
D.
When you encounter a question that is asking you to find a statement that is NOT TRUE, the question is asking you to identify the statement that is FALSE. Since this is a Roman Numeral style question, it is possible that there are more than one FALSE statement. In this question, there are two.
If a registered broker-dealer’s or investment adviser’s ownership structure is changed (from a partnership to a corporation, for example), or is bought or sold by another person, it is permitted to file an application for registration as a successor firm. According to the Act, this can be accomplished whether or not the successor firm was in existence prior to the filing and is effective for the unexpired portion of the year. A filing fee is not required when the application is submitted. (89545)
A licensed insurance agent and an investment adviser have offices next door to each other. The insurance agent refers clients to the investment adviser, who pays the agent a referral fee plus a percentage of the management fee for each client who opens an account with the adviser. The insurance agent:
Is exempt from registration
May be required to register as an investment adviser representative
Would be considered a captive agent
Would need to disclose the arrangement on Form ADV
b
Under the Uniform Securities Act, an investment adviser representative includes anyone who “solicits, offers, or negotiates for the sale of or sells investment advisory services.” Therefore, the states often require solicitors to register. Note that some states, however, have special registration provisions for solicitors. The adviser, not the insurance agent, would need to disclose this arrangement on Form ADV, which is the reason that choice (d) is not the correct answer. (75676)
You are the chief financial officer of Colfax Advisers, LLC, a registered investment adviser located in Dallas, Texas. Your firm manages portfolios and has safekeeping services for its clients. The state of Texas requires that all registered advisers who have custody of client assets, maintain a minimum net worth of $35,000. In reviewing the month-end financials for the firm, you calculate the current net worth at $32,875. What would your best course of action be considering these circumstances?
Increase net worth to $35,000 and notify the Administrator of the increase
Notify the Administrator and post a $35,000 bond
Cease operations in the state and file a notice of withdrawal
Notify the Administrator within one business day and file a statement of financial condition
D.
If the investment adviser’s net worth drops below the required minimum (as set by the Administrator), the adviser must file a deficiency notice with the Administrator within one business day and also file a report on its financial condition. (75549)
