Unit 6 (11)

Question 1

An investment advisory contract is considered assigned if an advisor formed as:

1. A Corp with 2 officers adds 5 officers
2. A partnership with 2 partners adds 5 partners
3. A partnership with 5 partners adds 2 partners
4. A Corp with 5 officers adds 2 officers

Answer 1

2 a partnership with 2 partners adds 5 partners. If an advisory firm is formed as a partnership and there is a change in the majority of partners, it’s considered an involuntary assignment and client approval is required.

Question 2

Is there anything wrong with an IA registered in 3 states announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year?

Answer 2

No. This is not considered discrimination because the discount applies equally to all if they are among the first 50.

Question 3

An IA plans to sell securities out of its own investment account to an advisory client. In order to do so, which of the following is required

1. A reduction in the fee equivalent to the profit made on the trade
2. Consent of the client before completion of the trade
3. Written disclosure of the advisor’s capacity before completion of the trade
4. Notification to the administrator of the advisors plan to act as a principal

Answer 3

2 and 3. In order to act as a principal or agent in a trade with an advisory client, there are 2 requirements
- the client receives full written disclosure of the capacity the adviser is acting in
- consent of the client
Both are required before the completion of the transaction

Question 4

Would you have to file advertisements with the SEC?

Answer 4

No, advertisements are never filed with the SEC

Question 5

Is an IAs website considered advertising?

Answer 5

Yes. The IA Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons. You must update every time the website is updated. These records stay for three years.

Question 6

What are the two primary services in a wrap account?

Answer 6

Investment advice and brokerage transactions

Question 7

Remember in an agency cross transaction you are acting as

Answer 7

An agent, not a principal

Question 8

If you are purchasing shares directly from one of your advisory clients, you must disclose in writing that you are acting in a principal capacity

Answer 8

No later than the completion of the transaction

Question 9

When is a “like” on a Facebook post considered a testimonial?

Answer 9

If the person liked your post and also left a comment on your good service. If they are just liking a photo, etc, with no additional comment, it’s fine.

Question 10

You are discussing index annuity options with a client. One of the options that is suitable for the client offers you a trip as a bonus for reaching sales goals. Can you sell this to your Client?

Answer 10

Yes. As long as you clearly disclose the conflict of interest to the client beforehand

Question 11

An investment advisory contract is considered assigned if

1. A corporation with 2 officers adds 5 officers
2. Partnership with 2 partners adds five partners
3. Partnership with 5 partners adds 2 partners
4. Corporation with 5 officers adds 2 officers

Answer 11

2. If an advisory firm formed as a partnership has a change representing a majority of the partners, that is considered an involuntary assignment to the new partnership and approval is required

Question 12

Under the USA, which of the following is prohibited for an IA?

1. Use of testimonials
2. Reference only to specific past recommendations
3. Untrue statements

Answer 12

All of these are prohibited.

Question 13

If your recommendations to a customer are inconsistent with your own, what do you do?

Answer 13

You must make written disclosure to the client. It is not prohibited but written disclosure is required.

Question 14

If the advisor is employed by a broker dealer but provides investment advisory services outside the scope of his employment what needs to happen?

Answer 14

He must make written disclosure to the clients

Question 15

Does an IA need to disclose that he intends to recommend the use of a broker dealer to whom he is affiliated?

Answer 15

No. It is a potential conflict of interest but it’s not prohibited

Question 16

What is used for filing ADV parts 1 and 2?

Answer 16

IARD - investment adviser registration depository. Electronic system that facilitates adviser registration

Question 17

Does the brochure have to be delivered to all clients?

Answer 17

No, if your client is purchasing impersonal advice for less than $500 they don’t need a brochure. Investment cos also do not need a brochure under federal law

Question 18

If there have been no material changes, do you need to update your brochure?

Answer 18

No

Question 19

Can a BD make a list of “approved” list of securities?

Answer 19

Yes. Approved is only prohibited when referring to an SRO

Question 20

A federal covered IA decides they are going to increase fees and charge commissions for trades, however only for new clients. Who must be notified?

Answer 20

Because this will only affect new clients, the brochure, form ADV part 2A must be amended and made available promptly to the affected clients and the SEC. It cannot be a part of the year end amendments.

Question 21

If you engage in a practice not expressly prohibited by the USA, but defined as unethical by the administrator in a rule, are you violating the USA?

Answer 21

No. If the act itself does not prohibit the practice, what you are doing is not violating the act itself.

Question 22

If you are a BD and you provide investment advice or discretionary portfolio management, and you recommend to your clients a product that you sell or your affiliated companies issue, what needs to happen?

Answer 22

The potential conflict of interest where the firm has discretion but purchases securities for that account that are issued by the firm or an affiliated company. It must be disclosed.

Question 23

If you have a charting system that has a high degree of success, any advertisement about the system must include

Answer 23

A statement about limitations and difficulties of using the system

Question 24

Fee schedules should be easy to access

Answer 24

They shouldn’t require logging in or a password to access. Paper copies should always be available

Question 25

If there anything wrong with an IAR acting as an agent and receiving commissions on a trade if he didn’t disclose it to the customer?

Answer 25

Yes. You must disclose the capacity in which you are acting so the client can make an informed decision

Question 26

A client of an an IAR of a state registered IA wishes to place an encomium on the IARs LinkedIn page. This action

Answer 26

Would be considered a testimonial and therefore prohibited. Testimonials are prohibited under state and federal law. Encomium means a recommendation

Question 27

Under federal and state law, which of the following requires a disclosure?

1. IA intends to rec. the use of a BD to whom he is affiliated
2. Transactions recommended are inconsistent with the IAs own account
3. The IA intends to sell the client an insurance policy recommended for his financial plan
4. IA is employed by a BD but provides IA services outside his employment with the BD

Answer 27

All of these involve some type of conflict of interest and must be disclosed. They are not prohibited but proper disclosure is needed.

Question 28

3 brokerage expenses not included in the fee disclosure doc

Answer 28

1. Commissions
2. Markups and markdowns
3. Advisory fees for firms that are also IAs

Question 29

Can you be an IAR of an IA and also be an agent of an unrelated broker dealer?

Answer 29

Yes

Question 30

Under the brochure rule of the advisers act of 1940, when must the disclosure statement be delivered?

Answer 30

No later than the time of agreement

Question 31

Do IA contracts need to be reviewed on an annual basis?

Answer 31

No. They can be written for any length of time agreed upon.

Question 32

2 things included in an advisory contract

Answer 32

Must include that contract cannot be assigned without client consent, and that any prepaid fees must be returned upon termination of the contract

Question 33

What is the one thing you can’t do in an agency cross transaction?

Answer 33

You can’t recommend the trade to both sides

Question 34

An IA compensated for a clients participation in a wrap fee program must provide the client with a written disclosure statement containing

Answer 34

At least the information in appendix 1 of ADV part 2A, but duplicates are not required if the documents have already been provided by another advisor

Question 35

If you are selling out of the IAs account as a principal transaction, when must disclosure be made to the client?

Answer 35

Prior to the completion of the transaction

Question 36

If you have custody, discretion, or have prepayment, what needs to be disclosed

Answer 36

Any condition that might affect its ability to carry out contractual obligations to its clients. Any adviser is also required to disclose almost any legal or disciplinary proceeding that would involve its integrity

Question 37

How do material conflicts of interest need to be disclosed. Orally or in writing?

Answer 37

In writing

Question 38

What is a material conflict of interest?

Answer 38

Any compensation to be received regarding recommendations to the client from other sources in addition to the advisory fee charged and affiliations between the adviser and suppliers of related services or other investment products

Question 39

A federal covered adviser employers a third party solicitor. The IA act of 1940 requires the delivery of

Answer 39

A copy of the IAs brochure and a copy of the solicitors brochure

Question 40

If the administrator deems something is unethical, is that the same as if the USA says it’s prohibited?

Answer 40

Yes. The administrator and the USA are basically equal in determining if things are prohibited

Question 41

If the customer hasn’t signed the form stating they have received a copy of the advisor’s brochure, can you still open the account?

Answer 41

Yes but you need to make a supervisor aware