Unit 2

Question 1

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients

A) immediately
B) when informed by the Administrator that the representative’s registration is effective
C) within 48 hours
D) when informed by the investment adviser that the representative’s registration is effective

Answer 1

D) when informed by the investment adviser that the representative’s registration is effective

Passing the exams does not automatically give one an effective investment adviser representative’s license. Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm’s procedures, advisory activity may start. The Administrator does not have direct contact with the individual.

Question 2

According to the Uniform Securities Act, which of the following is an investment adviser representative?

I. A clerical employee of the AAA Investment Management Company, an investment advisory firm registered in the state that offers investment portfolio services to the public
II. An employee of AAA Investment Management Company who is properly registered under the USA and supervises analysts who provide research to clients
III. An employee of a federal covered adviser with an office in the state who offers investment advice to the public
IV. An agent of a broker-dealer with strong investment opinions who sells securities only on a commission basis

A) I and IV
B) II and III
C) I and II
D) III and IV

Answer 2

B) II and III

An investment adviser representative means any partner, officer, director, or other individual, except clerical or administrative personnel, who is employed by an investment adviser that is registered or required to be registered. Therefore, unregistered personnel are not investment adviser representatives. An employee who supervises analysts who deal with the public must be an investment adviser representative. The employee of the federal covered adviser with an office in the state is also an investment adviser representative. The agent is an agent of a broker-dealer, not an investment adviser representative.

Question 3

Under the Uniform Securities Act, if the Administrator does not deny an application for registration and no disciplinary proceeding is underway in regard to it, how many days after filing the application as an investment adviser representative does registration generally become effective?

A) 5
B) 10
C) 7
D) 30

Answer 3

D) 30

Registration becomes effective 30 days after the application is filed unless the Administrator begins a proceeding or issues a stop order before that time. The Administrator may specify an earlier date, or if an application must be amended, the Administrator may extend the date to 30 days after the amendment was filed.

Question 4

An investment adviser representative of a federal covered investment adviser registers with

A) the SEC.
B) the Administrator.
C) the NASAA.
D) the FINRA.

Answer 4

B) the Administrator.

Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered.

Question 5

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in

A) States D and M.
B) State P.
C) States P, D, and M.
D) States P and O.

Answer 5

B) State P.

As an IAR for a federal covered investment adviser, Stillman is only required to register in those states in which he (Stillman) has a place of business. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

Question 6

Which of the following individuals employed by an investment adviser would be required to be registered as an IAR?

A) A chief compliance officer (CCO) who has no sales duties
B) The vice president of human resources
C) An intern who receives no compensation whatsoever
D) The night watchman

Answer 6

A) A chief compliance officer (CCO) who has no sales duties

Any individual performing the functions of an investment adviser representative must be so registered. Among those duties is supervisory responsibility, and the CCO has the job of ensuring that the firm and all of its employees follow the rules. Although executive officers are generally automatically registered as IARs, that is only the case when the job function is one involving activities relevant to IARs (and human resources is not one of them).

Question 7

DEF Investment Advisers, organized as a partnership, is currently registered with State Y. Marjorie is one of the partners and is registered as an IAR. If DEF were to register with State Z,

A) Marjorie would be required to complete an application for IAR registration with State Z.
B) Because DEF is a state-registered investment adviser, Marjorie could only register in State Z if she was a resident of the state.
C) Marjorie would automatically be registered as an IAR in State Z.
D) Marjorie’s registration as an IAR in State Z would become effective after passing the Series 65 or Series 66 exam.

Answer 7

C) Marjorie would automatically be registered as an IAR in State Z.

When DEF’s registration becomes effective in State Z, those individuals included in the filing are granted automatic registration – they don’t have to file an individual Form U4. That filing includes the names and other pertinent information about all of the partners, officers, or directors who are already acting as IARs. Please note, it is not any IAR, it is only those listed or, as the rule states, those occupying a similar status, etc., who receive this treatment.

Question 8

As written in the Investment Advisers Act of 1940, a “person associated with an investment adviser” is any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser. Persons associated with an investment adviser whose functions are clerical or ministerial are not included in this definition. Based on that definition, all of the following would be associated persons EXCEPT

A) a silent partner in an advisory firm organized as a general partnership.
B) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser’s research publications.
C) an individual employed by an investment adviser to solicit new advisory clients, compensated at a rate of $500 for each new account.
D) a senior officer of an investment adviser responsible for marketing the adviser’s services as opposed to making investment advisory decisions.

Answer 8

B) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser’s research publications.

Graphic design would be considered a clerical function. All of the other choices describe persons who meet the definition.

Question 9

Jay Cooke is an investment adviser representative with a state-registered investment adviser. Jay operates out of an office in State Y. He would be required to register in State Z if, during the previous 12 months, he had

A) 5 or fewer retail clients who were residents of State Z.
B) 6 or fewer retail clients who were residents of State Z.
C) no more than 5 retail clients who were residents of State Z.
D) fewer than 6 retail clients who were residents of State Z.

Answer 9

B) 6 or fewer retail clients who were residents of State Z.

The de minimis exemption applies when, during the preceding twelve-month period, the IAR has had no more than 5 retail clients. There are 3 ways of stating that:

1. No more than 5
2. Five or fewer
3. Fewer than 6

Question 10

According to the Investment Advisers Act of 1940, which of the following is always a natural person?

A) An investment adviser
B) An investment adviser representative
C) The city of Chicago
D) A broker-dealer

Answer 10

B) An investment adviser representative

Natural persons are human beings. An adviser representative must be an individual. Although there are broker-dealers and investment advisers organized as a sole proprietorship, almost all are structured under some type of business form. A city is never an individual.

Question 11

If a natural person files an initial application for state registration as an investment adviser representative on October 1, the registration will most likely expire

A) on a date set by the Administrator of that state
B) December 31 of that year
C) on the anniversary date of the following year
D) the registration does not expire until the person resigns, retires, or is expelled by the Administrator

Answer 11

B) December 31 of that year

Although the Administrator may change the date, registrations typically expire on December 31 of each year. In this question, the registered person would have to renew his registration in 3 months. Thereafter, renewal would occur every 12 months on December 31.

Question 12

The Uniform Securities Act authorizes the state Administrator to require

I. either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations
II. officers of investment advisers to pass a qualification examination
III. an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in the state
IV. investment adviser representatives to pass a qualification examination

A) I only
B) I, II, III, and IV
C) III and IV
D) I and II

Answer 12

B) I, II, III, and IV

The state Administrator may require qualification examinations for officers of investment advisers, as well as its representatives, and may require them to publish an announcement in one or more newspapers published in the state. The Administrator may also require either an oral or written examination.

Question 13

Under the Uniform Securities Act, all of the following are required to be registered as investment adviser representatives EXCEPT

A) a vice president of ABD Advisers, Inc., who serves on the firm’s advisory committee
B) ABD Advisers, Inc.
C) an employee who solicits new customers for ABD Advisers, Inc.
D) an individual who furnishes investment advice to clients of ABD Advisers, Inc.

Answer 13

B) ABD Advisers, Inc.

The Uniform Securities Act defines an investment adviser representative as anyone who is a partner, officer, director, or other employee or person associated with an investment adviser other than clerical or ministerial personnel who (1) make recommendations or provide advice regarding securities; (2) manage accounts or portfolios of clients; (3) determine which recommendations or advice should be given; (4) solicits, offers, or negotiates for the sale of, or sells, advisory services; or (5) supervises any such persons. An individual or a firm may be registered as an investment adviser, but only an individual can be an investment adviser representative

Question 14

According to the Uniform Securities Act, which of the following would be defined as an investment adviser representative?

I. John, who opens an investment advisory firm where he devotes his time exclusively to management responsibilities as the sole proprietor of the firm
II. Paul, who works for a firm soliciting investment management accounts on behalf of several different investment managers
III. Margaret, who works as a commission sales agent for a broker-dealer
IV. Mark, an employee of AAA Broker-Dealers, who solicits brokerage clients for commissions on the basis of research conducted by his firm’s securities analyst
A) II and III
B) I and IV
C) I and II
D) II and IV

Answer 14

C) I and II

Remember: An IAR works for an IA, not a Broker-Dealer directly! Paul, who works for a firm soliciting investment management accounts for several investment managers, would be defined as an investment adviser representative because he is acting in the capacity of a sales agent for investment advisers. John, as the owner of a sole proprietorship, is both an investment adviser and the firm’s only investment adviser representative. Margaret would not be defined as an investment adviser representative because she functions as a registered agent for a broker-dealer. If she sold investment advice for the broker-dealer’s investment management subsidiary, she then would be defined as an investment adviser representative. An agent of a broker-dealer, earning commissions on security sales, is not an IAR even if his primary selling tool for the brokerage business is the firm’s outstanding research department.

Question 15

Strategic Capital Asset Managers (SCAM) is an investment adviser registered with the SEC. Registration as an investment adviser representative would be required of an employee who

A) presents seminars on the benefits of whole life insurance
B) supervises the activities of clerical staff who file individual clients’ transaction reports
C) cleans the office on weekends
D) provides recommendations on securities to the firm’s bank clients

Answer 15

D) provides recommendations on securities to the firm’s bank clients

Any employee of an investment adviser (SEC or state-registered) who makes recommendations of securities, regardless of the client, must register as an IAR. Supervisors only need to register when those they supervise are IARs, and clerical staff members are generally exempt from registration. Someone who presents a seminar on a nonsecurities product is not an IAR (although the individual would probably need an insurance license).

Question 16

Registration of an investment adviser automatically confers registration on

I. officers, partners, and directors of the firm who are functioning as IARs
II. any employee who is functioning as an IAR
III. clerical employees handling back-office operations
IV. an employee who will be soliciting clients for the adviser
A) I, II, and III
B) I, II, III, and IV
C) I and III
D) I only

Answer 16

D) I only

Note: Need to be on the ADV! Under Section 202(a) of the Uniform Securities Act, registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. This only applies to those individuals who are listed on the firm’s Form ADV Part 1, so we’re limited to officers, partners, directors, or anyone else doing that type of job, regardless of what this IA has chosen to use as the title.

Question 17

Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows:

I. 16 clients in State A
II. 12 clients in State B
III. 6 clients in State C
IV. 4 clients in State D

Fred would have to register as an IAR in

Answer 17

D) States A and D

Note: IAR has to register in any place the have business. In the Investment Advisers Act of 1940, it states that “no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State.” Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).

Question 18

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser?

A) Consent to service of process
B) Renewal notice to the SEC
C) State licensing fee
D) Form U4

Answer 18

C) State licensing fee

All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.

Question 19

Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative?

A) An agent who offers incidental advice on securities whose sole compensation is from commissions on transactions
B) An individual who renders fee-based advice on precious metals
C) A solicitor for an investment advisory firm who is compensated for the service rendered
D) An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser

Answer 19

C) A solicitor for an investment advisory firm who is compensated for the service rendered

A solicitor is considered an investment adviser representative under the Uniform Securities Act. An employee who performs only clerical or administrative functions is not an investment adviser representative. Precious metals are not securities and, therefore, a person advising on them is not considered an investment adviser representative. An agent is a representative of a broker-dealer, and as long as the only form of compensation is sales commissions based upon transactions, registration as an investment adviser representative is not required.

Question 20

Regional Financial Services, LLC, is registered as an investment adviser in States A, B, C, and D. They have just filed an application for registration in State E. Registration of this investment adviser in State E automatically confers registration as an IAR in State E on

A) an employee who will be soliciting clients for the adviser in State E
B) any employee who is functioning as an IAR in State A, B, C, or D
C) clerical employees handling back-office operations
D) officers, partners, and directors of the firm who will be functioning in State E as IARs

Answer 20

D) officers, partners, and directors of the firm who will be functioning in State E as IARs

Under the Uniform Securities Act, registration of an investment adviser in a state automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions.

Question 21

Which of the following persons are required to register in a particular state?

I. An investment adviser who manages client accounts in excess of $100 million in value
II. An investment adviser who manages client accounts and has less than $25 million in total assets under management
III. An adviser to investment companies registered under the Investment Company Act of 1940
IV. An investment adviser representative with a place of business in the state

A) II and IV
B) I and II
C) III and IV
D) I and III

Answer 21

A) II and IV

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, advisers who manage clients with a total of less than $100 million under management are required to register with the state Administrator. Under Dodd-Frank, those who manage client assets of $110 million or more or advise registered investment companies are required to register with the SEC and are exempt from state registration. Those who manage at least $100 million, but not $110 million, have the option of registering with either the state or the SEC. Investment adviser representatives with a place of business in the state register with the state, whether or not their employer is federal covered.

Question 22

Howard Robard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in

A) State P.
B) States P, D, M, and O.
C) States P, D, and M.
D) States D and M.

Answer 22

C) States P, D, and M.

Note: De Minimus applies to IARs. Individuals working as IARs for state-registered investment advisers must register in any state in which they (the IAR) maintain a place of business as well as any other state in which they serve more than 5 retail clients (the de minimis exemption). With an office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded so registration is required there. The fact that the IA’s principal office is in state O has no bearing on Howard and, with only 1 retail client there, he qualifies for the de minimis exemption.

Question 23

An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT

A) the agent would be defined as an investment adviser representative
B) the agent would be defined as an investment adviser
C) the agent would now come under a greater fiduciary responsibility
D) the broker-dealer would have to be registered as an investment adviser

Answer 23

B) the agent would be defined as an investment adviser

Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.

Question 24

Esther Watson has recently been hired by Robinson, Ibbotson, Carlson and Hanson (RICH), an investment adviser registered with the SEC. RICH has offices in 17 states and Esther works in the branch located in State A. If no exemption is available, Esther will have to register as an IAR with

A) the Administrator of State A.
B) the Administrators of each of the 17 states.
C) the FINRA.
D) the SEC because RICH operates in more than 15 states.

Answer 24

A) the Administrator of State A.

Unless qualifying for an exemption, employees of investment advisers must register as an IAR in any state in which they have a place of business. This is a state-level registration so the SEC or FINRA are not involved in any way.

Question 25

Under the Uniform Securities Act, any partner, officer, or director of a registered investment adviser is an investment adviser representative if a function of the position involves

I. offering advice concerning securities
II. managing client accounts or portfolios
III. determining securities recommendations for representatives to disseminate
IV. supervising personnel engaged in advisory activities but not directly dealing with the public

A) I, II, III and IV
B) I only
C) I, II and III
D) I and II

Answer 25

A) I, II, III and IV

The Uniform Securities Act defines persons associated with an investment adviser, who offers advice concerning securities, as an investment adviser representative. This includes any partner, officer, or director. The definition also includes persons who manage client accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities.

Question 26

To transact business in a state as an investment adviser representative, a person must

A) be registered as a representative of an investment adviser and have passed the appropriate NASAA exam for IARs
B) be employed by a commercial bank located in the state
C) be registered as an agent of a brokerage house and have passed the appropriate NASAA exam for IARs
D) have passed the agent’s exam and taken no other exams

Answer 26

A) be registered as a representative of an investment adviser and have passed the appropriate NASAA exam for IARs

To transact business in a state as an investment adviser representative, a person must be registered as a representative of an investment adviser and have passed either the NASAA Series 65 or Series 66 exam. One is not considered a registered investment adviser representative as a result of passing the Series 6 or 7 registered representative exam, or by virtue of employment with a bank.

Question 27

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is (are) true?

I. The investment adviser must notify the Administrator whenever an investment adviser representative is terminated.
II. An investment adviser is not required to notify the Administrator when an investment adviser representative begins employment.
III. The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser.

A) I only
B) I, II, and III
C) I and III
D) III only

Answer 27

C) I and III

Whenever an individual begins or ends association as an IAR with a state-registered investment adviser, the IA must notify the Administrator. An IAR’s registration is only valid while employed by a registered investment adviser.