Unit 1 QBank Flashcards
Under certain conditions, the Uniform Securities Act provides that an Administrator may require a minimum net worth standard be met by an investment adviser. Which of the following would be an allowable asset in the computation of an investment adviser’s net worth?
A) Advances or loans to partners in the case of an IA organized as a partnership
B) Accounts receivable
C) Copyrights
D) Accounts payable
B) Accounts receivable
(For purposes of the USA, the term “net worth” means an excess of assets over liabilities, as determined by generally accepted accounting principles. Accounts receivable are a current asset, while accounts payable are a current liability. The USA specifically disallows intangibles, such as copyrights and goodwill, and advances or loans to partners (or officers if a corporation) are excluded as well.)
An investment adviser sends a notice offering a research report she has recently prepared to a group of 25 new members of the local Lions Club. Under the NASAA Model Rule on recordkeeping for investment advisers, the firm must keep a copy of the notice along with
A) the names of those members to whom the report was sent
B) the date the Administrator approved the research report
C) a memorandum describing the list and its source
D) a copy of the full roster of the local chapter
C) a memorandum describing the list and its source
(If an investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent, except if the notice, circular, or advertisement is distributed to persons named on any list, then the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.)
When, if ever, would a broker-dealer be required to register as an investment adviser?
If it charges distinct fees for investment advice or management
(Although broker-dealers are generally exempt from having to register as investment advisers, the exemption is not available if the broker-dealer imposes a separate fee for account management or advice.)
Which of the following is required to register in a state under the Uniform Securities Act?
A) ABC State Bank, which provides investment advice in its branches throughout the state
B) A broker-dealer who has no place of business in the state and whose only clients in the state are limited to insurance companies, banks, and broker-dealers
C) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers
D) An investment adviser who has no place of business in the state and communicates with only 5 advisory clients in the state for the year
C) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers
(Because the investment adviser has a place of business within the state and is acting as investment adviser in the state, it must register, regardless of the fact that the only clients are financial institutions. Notice that the state registration rules are different for broker-dealers and investment advisers. Banks are exempt from registration as broker-dealers or as investment advisers, as are investment advisers with no place of business in the state and fewer than 6 clients in the state in a 12-month period (de minimis standard).)
In which of the following cases could revocation of the registration of an IAR lead to disciplinary action against the investment adviser employing that individual?
A) The IAR was found guilty of first degree murder.
B) The firm supplied the IAR with a copy of its Code of Ethics and administered regular training on its contents.
C) The IAR failed to make full disclosure of a previous felony conviction on the Form U4.
D) The firm was found guilty of failure to supervise.
D) The firm was found guilty of failure to supervise.
(In most cases, disciplinary action against an investment adviser representative (unless the individual is filling an executive position) will not have a direct impact on the investment advisory firm. The major exception is when the IAR’s actions leading to the revocation can be shown to have be aided by the firm’s failure to supervise.)
Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of
A) $1,000 for the next year’s advisory service.
B) $500 for the next 3 months of advisory service.
C) $1,000 for the next 3 months of advisory service.
D) $500 for the next 6 months of advisory service.
A) $1,000 for the next year’s advisory service.
(State-registered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $500, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn’t $500 or more, it is more than $500 and it must be for at least 6 months of service to count.)
All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 EXCEPT
A) investment advisers with $110 million or more in assets under management
B) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million
C) an adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities
D) investment advisers whose only clients are insurance companies
A) investment advisers with $110 million or more in assets under management
(Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act. Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the U.S. reaches $150 million.)
Which of the following are NOT investment advisers under the Uniform Securities Act?
l. Joe advises customers regarding the value of gold and silver coins.
II. The trust department of ABC Bank provides investment advice to its clients.
III. Tammy writes a newspaper column in which she analyzes and recommends securities.
IV. Jack is an investment adviser representative.
All answers apply.
(Joe’s advice does not concern securities. Banks are exempt from the definition. Tammy’s advice is neither specific nor based on the situation of each client (impersonal advice). An adviser representative is specifically excluded from the definition of an investment adviser.)
There are a number of exclusions from the definition of investment adviser. Which of the following would NOT qualify for an exclusion under the Uniform Securities Act?
A) A financial planner who conducts seminars for the local PTA, where he presents the benefits of term life insurance
B) A teacher at the local high school who receives nominal compensation for giving investment advice to engineers
C) A lawyer who charges an hourly fee for preparing trust documents for individuals referred to her by an investment adviser
D) An accountant who conducts seminars on the tax benefits of contributing to IRAs, both traditional and Roth
B) A teacher at the local high school who receives nominal compensation for giving investment advice to engineers
(The LATE exclusion applies when advice is given by one of the listed professionals on an incidental basis. When a teacher (or any of the others) is compensated specifically for giving advice, regardless of the amount, the exclusion is lost. To be defined as an investment adviser, one must give advice on securities; term life insurance is not a security. Similarly, preparing trust documents is not securities advice, even if the clients are referred by an investment adviser. Finally, one of the roles of an accountant is giving tax advice, and IRAs are not securities.)
Under the Investment Advisers Act of 1940, which of the following criteria are considered in determining whether a person is in the business of rendering investment advice?
I. The person regularly gives advice on securities.
II. The person derives his earnings from executing transactions on recommended securities.
III. The person receives compensation from rendering advice on securities.
I and III
(To be in the business of rendering investment advice, a person must regularly provide advice about securities and must be compensated for giving such advice. Those whose earnings are based on securities transactions are broker-dealers and/or agents.)
Registration with the SEC as an investment adviser would be required for a person who
A) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940
B) limits the advice offered strictly to securities issued or guaranteed by the U.S. government
C) limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE)
D) acts as the investment adviser to an investment company registered under the Investment Advisers Act of 1940
A) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940
(If a person acts under contract to an investment company registered under the Investment Company Act of 1940 (investment companies do not register under the Advisers Act; only advisers do) is required to register with the SEC. Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.)
Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act?
I. Broker-dealers must maintain customer ledgers for 3 years.
II. Investment advisers must keep partnership records for 3 years after the partnership is terminated.
III. Agents must keep customer records for 3 years.
IV. Investment adviser representatives must maintain records for 5 years.
I and II
(Recordkeeping requirements for broker-dealers are 3 years, and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs.)
A person who renders investment advice solely with respect to securities issued by the U.S. government…
is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements
(A person who renders advice solely with respect to securities issued or guaranteed by the U.S. government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996.)
Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT
A) checks made out to CIA are deposited within 3 business days
B) CIA has a power of attorney granting authority to withdraw funds from the custodian
C) checks made out to 3rd parties are forwarded within 3 business days
D) CIA’s advisory contract calls for the automatic deduction of advisory fees
C) checks made out to 3rd parties are forwarded within 3 business days
(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 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 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.)
Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092?
A) A retired chief investment officer of a well-known investment management company, without compensation, writes a column in a general circulation newspaper commenting on the value of investing in equity securities; many readers find his advice useful and become clients of his former investment management company.
B) The secretary of the U.S. Treasury, as part of his official duties, comments on conditions in the financial markets and their future investment implications.
C) A wealthy college professor gives free lectures on sound investment practices and makes specific securities recommendations based on a quantitative model he has developed.
D) A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space.
D) A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space.
(If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all 3 elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice.)
Which of the following statements is NOT true of investment advisers under the Uniform Securities Act?
A) Only written advice concerning investments is covered by the act.
B) Compensation is a key factor in determining whether a person is required to register as investment adviser.
C) A natural person may register as an investment adviser.
D) Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell.
A) Only written advice concerning investments is covered by the act.
(Investment advice may be written or oral, and both are covered under the Uniform Securities Act. Any person, as defined in the USA, may register as an investment adviser. Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is a key factor in determining whether a person is required to register as investment adviser.)
A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation
A) for 3 years after the termination of the enterprise.
B) for 5 years after the end of the fiscal year in which the most recent entry was made.
C) for 3 years after the end of the fiscal year in which the most recent entry was made.
D) easily accessible for 2 years in the firm’s principal office.
A) for 3 years after the termination of the enterprise.
(NASAA’s Model Rule on record keeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, to be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.)
The term “private fund”, as defined under federal and state law, would not apply to
A) a hedge fund.
B) a leveraged ETF.
C) a venture capital fund.
D) an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act.
B) a leveraged ETF.
(ETFs are publicly traded. Hedge funds and venture capital funds meet the definition of a private fund which is, “an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act.”)
A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would
A) send a detailed financial report to the Administrator by the close of business Friday
B) send a detailed financial report to the Administrator by the close of business Monday
C) do nothing, as their net worth is far in excess of the minimum requirement of $10,000
D) need to increase the amount of their surety bond
B) send a detailed financial report to the Administrator by the close of business Monday
(A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a bond of the same amount (not both). If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator. The firm would need to increase their net worth, not the bond.)
Which of the following situations would require registration as an investment adviser?
I. A broker-dealer provided investment research services to a customer and charged a fee for the service.
II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission.
III. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions.
IV. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed.
I and III
(Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.)
An investment adviser registered with the SEC could use the term investment counsel if
I. its principal business consists of rendering investment advice
II. a substantial portion of its business involves investment supervisory services
III. it maintains full investment discretion
I and II
(These are the 2 requirements for use of the term investment counsel. Although it can be a factor, exercising discretion is not a requirement of the definition. Many investment advisers exercise discretionary power over client accounts, but do not meet the two principal requirements for use of the term, investment counsel.)
One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that
A) their advisers are exempt from filing reports on Form ADV
B) they have assets of less than $150 million
C) they have no more than 100 investors
D) they are not registered as investment companies
D) they are not registered as investment companies
(Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.)
Both the Investment Advisers Act of 1940 and SEC Release IA-1092 specifically exclude from the definition of “investment adviser” certain persons who provide investment advice solely incidental to the practice of their profession. Which of the following would NOT by definition qualify for this exclusion?
I. An accountant who provides high-tax-bracket clients with a useful chart showing them how to compute the tax-equivalent yield for municipal bonds
II. A divorce attorney who, after obtaining settlements for clients, provides them with a list of suggested investment alternatives encouraging them to be prudent with their newfound wealth
III. A university professor who provides investment advice for a substantial fee to fewer than 15 clients during any consecutive 12-month period, none of whom is an investment company
IV. An economist who consults with very large corporate employee benefit plans on how to best invest their funds
III and IV
(The university professor loses the exclusion as soon as the advice is no longer incidental to the practice of the profession (which it clearly is here, regardless of the number of clients). The list of professions qualifying for the exclusion does not include an economist, who in this case would be included in the definition as a pension consultant. The key to remember is the acronym “LATE”—lawyer, accountant, teacher, and engineer.)
Long-Term Financial Solutions, Inc. (LTFSI), a federal covered registered investment adviser, files a Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct?
A) Gold and Sylver must notify all clients of LTFSI that their advisory contracts have been assigned.
B) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least 3 years after the acquisition.
C) Gold and Sylver will not have to amend their Form ADV Part 1 until the filing of their annual updating amendment.
D) As the successor firm, Gold and Sylver Advisers must keep copies of the LTFSI corporate charter for at least 3 years after LTFSI’s acquisition.
B) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least 3 years after the acquisition.
(When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least 3 years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to the Form ADV Part 1.)
The powers of the Administrator include the ability to determine
A) surety bond requirements for investment advisers who do not exercise discretion or maintain custody
B) maximum net capital requirements for broker-dealers
C) minimum net worth requirements for agents who exercise discretion
D) minimum net worth requirements for investment advisers
D) minimum net worth requirements for investment advisers
(The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.)
A person who renders investment advice solely with respect to securities issued by the U.S. government
A) must be registered both with the SEC and the state
B) need not be federal registered under the Investment Advisers Act of 1940 but must register in any state in which it has an office
C) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements
D) is exempt from state registration under the Uniform Securities Act but must be federal registered under the Investment Advisers Act of 1940
C) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements
(A person who renders advice solely with respect to securities issued or guaranteed by the U.S. government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996.)
If a federal covered adviser’s fiscal year ends on November 30, 2017, it must file its annual updating amendment to its Form ADV no later than
A) January 18, 2018
B) March 30, 2018
C) December 31, 2017
D) February 28, 2018
D) February 28, 2018
The annual updating amendment to Form ADV must be filed within 90 days of the adviser’s fiscal-year end.
A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid 1 year in advance instead of quarterly. The firm would
A) be in violation of the law that prohibits pre-payments more than 6 months in advance
B) now come under the requirement to include a balance sheet as part of its brochure
C) need SEC permission to make this change
D) continue doing business as before because the firm was already charging more than $1,200 per year
B) now come under the requirement to include a balance sheet as part of its brochure
(For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its ADV Part 2 (and brochure). Previously, even though the firm’s fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered IA, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for 6 months or more in advance.)
To register a sole proprietorship as an investment adviser in a state, the application for initial registration (Form ADV) must be filed with the appropriate party. This application must include all of the following EXCEPT
A) a consent to service of process.
B) any information to be furnished or disseminated to any client or prospective client.
C) a copy of the articles of incorporation for the business.
D) the appropriate fees.
C) a copy of the articles of incorporation for the business.
(Articles of incorporation only apply to corporations. Sole proprietorships are not incorporated. To register as an investment adviser in a state, Form ADV is filed with the Administrator or with a central registration depository designated by the Administrator. The application must include, among other things, a consent to service of process, appropriate fees, and the brochure or any other information that will be used to solicit clients. Sole proprietorships are not incorporated.)
Which of the following investment advisers, with no place of business in the state, does not qualify for the de minimis exemption?
A) An investment adviser who, during the preceding twelve-month period, has had no more than 5 retail clients.
B) An investment adviser who, during the preceding twelve-month period, has had no more than 6 retail clients.
C) An investment adviser who, during the preceding twelve-month period, has had 5 or fewer retail clients.
D) An investment adviser who, during the preceding twelve-month period, has had fewer than 6 retail clients.
B) An investment adviser who, during the preceding twelve-month period, has had no more than 6 retail clients.
The de minimis exemption limits the number of retail clients to a maximum of 5 during the preceding 12 months. There are 3 ways to say that:
- Fewer than 6.
- Five or fewer.
- No more than 5.
The Securities Act of 1933 covers all of the following EXCEPT
A) liabilities for misleading filings
B) full and fair disclosure
C) prospectus requirements
D) blue-sky laws
D) blue-sky laws
The purpose of the Securities Act of 1933 is to provide investors with full disclosure about a new securities issue. The act is federal in scope, whereas blue-sky laws refer to state securities regulations.
