Unit 1: Regulation of Investment Advisers, Including State-Registered and Federal Covered Advisers Flashcards
U1LO1: Define investment adviser.
Which of the following is included in the definition of person?
A. A minor
B. The National Basketball Association
C. A deceased person
D. A person whom the courts have declared to be mentally incompetent
U1LO1: Define investment adviser.
Which of the following is included in the definition of person?
A. A minor
B. The National Basketball Association
Answer: B. Odd to think of the NBA as a person, but, they would be included in the USA’s definition. That is why questions are much easier if you just remember the 3 things that are not a person.
C. A deceased person
D. A person whom the courts have declared to be mentally incompetent
U1LO1: Define investment adviser.
A person giving advice on which of the following investments would be deemed to be giving advice on securities?
A. Gold
B. Common stock
C. Rental real estate
D. Rare stamps
U1LO1: Define investment adviser.
A person giving advice on which of the following investments would be deemed to be giving advice on securities?
A. Gold
B. Common stock
Answer: B. Common stock is a security; the others are considered non-securities.
C. Rental real estate
D. Rare stamps
U1LO1: Define investment adviser.
Which of the following investment advisers would be permitted to use the term investment counsel?
A. A financial planner offering a wide range of services to his clients, including tax planning, estate planning, and insurance planning, as well as investment advice
B. A professional providing a market timing service with an annual subscription fee of $495 (this service attempts to maximize profits by suggesting entry and exit points for over 100 listed stocks)
C. A firm whose exclusive business is placing their client’s assets into model portfolios that are monitored on a daily basis
D. All of these
U1LO1: Define investment adviser.
Which of the following investment advisers would be permitted to use the term investment counsel?
A. A financial planner offering a wide range of services to his clients, including tax planning, estate planning, and insurance planning, as well as investment advice
B. A professional providing a market timing service with an annual subscription fee of $495 (this service attempts to maximize profits by suggesting entry and exit points for over 100 listed stocks)
Answer: C. To use the term investment counsel, two criteria must be met—the principal business must be giving investment advice and the adviser must provide investment supervisory services. Running model portfolios for clients with daily monitoring would meet both requirements. The financial planner is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only one part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the market timing publisher’s principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored.
C. A firm whose exclusive business is placing their client’s assets into model portfolios that are monitored on a daily basis
D. All of these
U1LO1: Define investment adviser.
Define Investment Adviser
U1LO1: Define investment adviser.
Define Investment Adviser
Answer: Investment adviser means “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities.”
U1LO1: Define investment adviser.
Define Person
U1LO1: Define investment adviser.
Define Person
Answer: ‘Person’ means an individual, (a natural person), a corporation, a partnership, an association, a joint-stock company, a trust where the interests of the beneficiaries are evidenced by a security, an unincorporated organization, a government, or a political subdivision of a government. For test purposes, it is easiest to remember the three non-persons. They are, (1) a minor, (2) a deceased individual, and (3) an individual declared mentally incompetent by the courts.
U1LO1: Define investment adviser.
Define Non-Securities
U1LO1: Define investment adviser.
Define Non-Securities
- *Answer: Some of the specifically mentioned non-securities investments include:**
- *- commodities;**
- *- collectibles, such as coins or stamps;**
- *- precious metals, such as gold and silver; and**
- *- real estate.**
U1LO1: Define investment adviser.
Define Three-Prong Test
U1LO1: Define investment adviser.
Define Three-Prong Test
- *Answer: The definition of investment adviser is sometimes referred to as the three-prong test. That is, as long as the person involved:**
- *- gives advice to others on securities;**
- *- does so as part of a regular business activity; and**
- *- receives compensation for performing this activity.**
U1LO2: Explain the impact of SEC Release IA-1092 on the definition of investment advisers and their activities.
Under SEC Release IA-1092, which of the following is most likely to meet the definition of an investment adviser?
A. A person who sells long-term care insurance
B. A person who advises businesses on the best location for their stores
C. A person who assists pension plans in the selection of portfolio managers
D. A person who manages portfolios of investment grade coins
U1LO2: Explain the impact of SEC Release IA-1092 on the definition of investment advisers and their activities.
Under SEC Release IA-1092, which of the following is most likely to meet the definition of an investment adviser?
A. A person who sells long-term care insurance
B. A person who advises businesses on the best location for their stores
C. A person who assists pension plans in the selection of portfolio managers
Answer: C. This is the role of a pension consultant. Unless the insurance has a securities aspect, selling it would not be considered investment advice. Real estate and coins are not securities.
D. A person who manages portfolios of investment grade coins
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
Define Exclusion
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
Define Exclusion
Answer: Exclusion means excluded from, or not included in, a definition. For example, if a person is excluded from the definition of an investment adviser, that person is not subject to provisions of state or federal law that refer to investment advisers.
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
Define Exemption
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
Define Exemption
Exemption means not being subject to the registration provisions of the acts even though that person meets the definition. For example, a person defined as an investment adviser can be exempt from state registration requirements as an investment adviser because that person enjoys an exemption from state registration under federal law, such as in the case of a federal covered adviser.
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
The Uniform Securities Act excludes certain persons from the definition of an investment adviser if their performance of advisory services is solely incidental to their professions. This exclusion would apply to all of the following EXCEPT
A. an accountant
B. an economist
C. an electrical engineer
D. a college professor teaching a course on economics
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
The Uniform Securities Act excludes certain persons from the definition of an investment adviser if their performance of advisory services is solely incidental to their professions. This exclusion would apply to all of the following EXCEPT
A. an accountant
B. an economist
Answer: B. As long as the activity is incidental to the professional practice, and no separate fee for the advice is charged, the act specifically excludes accountants, lawyers, any professional engineer (aeronautical, civil, mechanical, or others), and teachers. Economists are not included in this listing (most economists are not teachers).
C. an electrical engineer
D. a college professor teaching a course on economics
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act?
A. The publisher of a weekly magazine, sold on newsstands, that contains at least 5 stock recommendations per issue
B. A broker-dealer making a separate charge for investment advice
C. A civil damages attorney who advertises that she is available to assist clients in suggesting appropriate investments for their successful claim
D. A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price
U1LO3: Identify exclusions and exemptions under the Investment Advisers Act of 1940 and the Uniform Securities Act.
Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act?
A. The publisher of a weekly magazine, sold on newsstands, that contains at least 5 stock recommendations per issue
Answer: A. Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser, especially because the entire publication is devoted to impersonal investment advice. An important key here is that it is published regularly, not upon market events. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds herself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice as would appear to be the case here. On this examination, the term comprehensive (or total) financial planning always includes securities advice.
B. A broker-dealer making a separate charge for investment advice
C. A civil damages attorney who advertises that she is available to assist clients in suggesting appropriate investments for their successful claim
D. A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price
U1LO4: Identify the exempt reporting adviser and private fund adviser exemptions.
Who of the following would NOT qualify for an exemption from registration under the Investment Advisers Act of 1940?
A. A person whose only advisory clients are insurance companies
B. A person whose only offices are in a single state, whose only clients are residents of that state, and who does not render advice on securities traded on a national exchange
C. A person who only gives advice to venture capital funds
D. An accountant whose advice is incidental to her accounting business and for which no separate fee is charged.
U1LO4: Identify the exempt reporting adviser and private fund adviser exemptions.
Who of the following would NOT qualify for an exemption from registration under the Investment Advisers Act of 1940?
A. A person whose only advisory clients are insurance companies
B. A person whose only offices are in a single state, whose only clients are residents of that state, and who does not render advice on securities traded on a national exchange
C. A person who only gives advice to venture capital funds
D. An accountant whose advice is incidental to her accounting business and for which no separate fee is charged.
Answer: D. This is tricky (as is the exam). The accountant is excluded from the definition. Therefore, there is no reason for her to be exempt. The other three choices are investment advisers who qualify for one of the exemptions described previously.
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
If a prospective client wanted to know what type of investment strategies are employed by an investment adviser, that information would be found in the adviser’s
A. Form ADV Part 1A
B. Form ADV Part 1B
C. Form ADV Part 2A
D. Form ADV Part 2B
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
If a prospective client wanted to know what type of investment strategies are employed by an investment adviser, that information would be found in the adviser’s
A. Form ADV Part 1A
B. Form ADV Part 1B
C. Form ADV Part 2A
Answer: C. The Form ADV Part 2A contains information of most use to clients, such as the type of strategies employed by the adviser. Part 1A contains information needed by the regulators; Part 1B is only for state-registered IAs; Part 2B contains information dealing with those individuals in the firm who manage accounts.
D. Form ADV Part 2B
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
Which of the following would an Administrator consider to be a substantial prepayment of fees?
A. $500 covering the next six months
B. $800 covering the entire contract year
C. $800 covering the next calendar quarter
D. $5,000 covering the next month
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
Which of the following would an Administrator consider to be a substantial prepayment of fees?
A. $500 covering the next six months
B. $800 covering the entire contract year
Answer: B. NASAA (state law) defines a substantial prepayment of fees to be more than $500, 6 or more months in advance. While $800 and $5,000 are certainly more than $500, they cover a shorter period than 6 months.
C. $800 covering the next calendar quarter
D. $5,000 covering the next month
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
Mammon Money Managers (MMM) has its principal office in State A and is also registered in States B, C, and D. MMM exercises discretion in client accounts. As a result, MMM would have to meet the net worth or bonding requirements of
A. the SEC
B. State A
C. the state with the highest requirement
D. each state
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
Mammon Money Managers (MMM) has its principal office in State A and is also registered in States B, C, and D. MMM exercises discretion in client accounts. As a result, MMM would have to meet the net worth or bonding requirements of
A. the SEC
B. State A
Answer: B. A state-registered investment adviser need only meet the financial requirements of the state in which its principal office is located. SEC requirements are meaningless here because this is a state-registered firm.
C. the state with the highest requirement
D. each state
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
Under the Investment Advisers Act of 1940, all of the following are true regarding adviser recordkeeping EXCEPT
A. the IA must keep records of transactions made for its own account as well as the account of investment adviser representatives to lessen the likelihood of scalping
B. computer-generated records may be stored in that format
C. client account records must be maintained, including a list of recommendations made
D. records must be maintained for a period of 2 years from the end of the fiscal year in which the last entry was made
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
Under the Investment Advisers Act of 1940, all of the following are true regarding adviser recordkeeping EXCEPT
A. the IA must keep records of transactions made for its own account as well as the account of investment adviser representatives to lessen the likelihood of scalping
B. computer-generated records may be stored in that format
C. client account records must be maintained, including a list of recommendations made
D. records must be maintained for a period of 2 years from the end of the fiscal year in which the last entry was made
Answer: D. This is the exception because the records must be kept for 5 years. Nothing in the question asked about the 2-year requirement in the office. The 5-year requirement is that records be easily accessible whether in the office or not.
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
An investment adviser registered in State G is obligated to maintain certain books and records as specified by the Uniform Securities Act. Which of the following statements regarding adviser recordkeeping is NOT true?
A. Records originally created on computer may be stored in electronic media.
B. Records are subject to surprise audits by the State G Administrator.
C. Written records may be reduced to microfilm.
D. Records must be kept for six years.
U1LO5: Describe the investment adviser registration process, required post-registration filings, and business activities.
An investment adviser registered in State G is obligated to maintain certain books and records as specified by the Uniform Securities Act. Which of the following statements regarding adviser recordkeeping is NOT true?
A. Records originally created on computer may be stored in electronic media.
B. Records are subject to surprise audits by the State G Administrator.
C. Written records may be reduced to microfilm.
D. Records must be kept for six years.
Answer: D. Records of an investment adviser must be maintained for five years. Records are subject to surprise audits by the state Administrator, written records may be reduced to microfilm, and records originally created on a company’s computer may be stored in electronic media.
