Fed and State Reg of Advisers (Cash Referral Fees) Flashcards Preview

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Flashcards in Fed and State Reg of Advisers (Cash Referral Fees) Deck (19):
1

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan and, after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral

A) she would have to obtain Mary's permission first
B) both Susan and Mary would have to disclose the cash payment to Amanda
C) only Susan would have to make disclosure to Amanda
D) she would be engaging in an prohibited practice

D) she would be engaging in an prohibited practice

Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. A formal written agreement must be in effect, not just a one-time reward.

2

An IAR has received several referrals from a prominent estate-planning attorney. Under the USA, the IAR would be permitted to:

A) send a thank you note and nothing else.
B) compensate the attorney with a fee based on the assets placed under management as a result of these referrals.
C) refer advisory clients who need estate planning to this attorney.
D) open a managed account for the attorney and offer a discounted fee structure based on the frequency of referrals.

C) refer advisory clients who need estate planning to this attorney.

We can show our appreciation for the referrals by referring our clients to qualified professionals. A flat fee may be paid to other professionals for their referrals, but must be disclosed to the client.

3

An investment adviser wishes to engage the services of a third party to solicit new clients for the firm. To be in compliance with the Investment Advisers Act of 1940:

1. the solicitor must be registered as an IAR.
2. compensation may not be sales related.
3. the solicitor must not be subject to statutory disqualification.
4. disclosure of the solicitation arrangement must be made to clients upon request.

2. compensation may not be sales related.
3. the solicitor must not be subject to statutory disqualification.

Third-party solicitors are not required to be registered as IARs and therefore may not receive sales-related compensation. However, they must not be subject to statutory disqualification that would prevent them from becoming registered. Disclosure is necessary whether or not it is requested.

4

A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if:

A) the friend is a client of the adviser's firm.
B) There are no exceptions.
C) the solicitations are for impersonal advisory services.
D) the friend is an employee of the advisory firm.

C) the solicitations are for impersonal advisory services.

Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.

5

If a client solicitor acts on behalf of an investment adviser, which of the following conditions is NOT required by the Investment Advisers Act of 1940 for the adviser to pay the solicitor a fee for this service?

A) There can be no outstanding SEC order barring the solicitor's activities.
B) There must be a written agreement between the solicitor and the investment adviser.
C) The solicitor must be registered as an investment adviser.
D) The adviser must be registered as an investment adviser.

C) The solicitor must be registered as an investment adviser.

A client solicitor is usually not required to register as an investment adviser under the Investment Advisers Act of 1940. The solicitor is not under the control of the SEC. There must be a written agreement between the solicitor and the investment adviser for whom he solicits clients. The solicitor cannot have a disciplinary item in his background that would prohibit that solicitor from registering as an adviser or adviser representative.

6

Matt, a registered investment adviser, operates an office down the hall from Jane, a CPA. Because Jane has no interest in portfolio management, she frequently refers her clients to Matt for investment advice. When one of Jane's client signs a letter of engagement with Matt, Matt sends Jane a $200 referral fee. This occurred 5 times in the previous year. This situation is:

A) permitted if the referral fee is disclosed to the appropriate clients.
B) prohibited.
C) permitted without restriction.
D) permitted because there were fewer than six occurrences involving referral fees.

A) permitted if the referral fee is disclosed to the appropriate clients.

Although neither the Investment Advisers Act nor the Uniform Securities Act specifically prohibits investment advisers from paying referral fees, both acts require that such fees be appropriately disclosed.

7

Alice is a financial planner who is properly registered as an investment adviser and occasionally meets with clients with negative cash flow and substantial indebtedness. Alice refers such clients to Norman, a bankruptcy attorney. Likewise, when Norman encounters clients who need help managing their assets, he refers them to Alice. This activity is:

A) permissible without disclosure if it occurs on an incidental basis.
B) prohibited.
C) permissible if the referral arrangement is disclosed to clients.
D) permissible without restriction.

C) permissible if the referral arrangement is disclosed to clients.

Referrals to other professionals may be made as long as the reciprocal nature of the arrangement is disclosed.

8

If a party is acting as a solicitor for a federal covered investment adviser, which of the following statements are TRUE?

1. If the solicitation is for impersonal services, a solicitor is required to provide a disclosure statement to the client.
2. If the solicitation is for other than impersonal services, then the solicitor must give the client a disclosure document.
3. If the solicitation is for impersonal services, the solicitor must receive a signed statement from the client that the investment adviser's brochure and the disclosure document have been received.
4. If the solicitation is for other than impersonal services, the solicitor must receive a signed statement from the client that the investment adviser's brochure and the disclosure document have been received.

2. If the solicitation is for other than impersonal services, then the solicitor must give the client a disclosure document.
4. If the solicitation is for other than impersonal services, the solicitor must receive a signed statement from the client that the investment adviser's brochure and the disclosure document have been received.

If a solicitation is made for something other than impersonal advisory services, the solicitor must receive a signed statement from the client verifying receipt of both the adviser's brochure and solicitor's disclosure document at the time of, or before, entering into a contract and ascertain whether the solicitor has complied with the agreement.

9

If a federal covered investment adviser intends to pay a third party solicitor to solicit clients for investment advisory services, which of the following must be TRUE?

1. The solicitor must be a registered investment adviser representative with the state.
2. The registered investment adviser must be properly registered as an investment adviser under the Investment Advisers Act of 1940.
3. There must be a separate written agreement between the solicitor and the registered investment adviser.
4. The agreement between the solicitor and the registered investment adviser is contained as part of the investment adviser's brochure.

2. The registered investment adviser must be properly registered as an investment adviser under the Investment Advisers Act of 1940.
3. There must be a separate written agreement between the solicitor and the registered investment adviser.

Under federal regulations, if an investment adviser intends to pay a third party (non-employee) solicitor to solicit clients for investment advisory services, the adviser must be properly registered, there must be a written agreement between the adviser and the solicitor, and there can be no outstanding or pending orders or disciplinary actions against the solicitor involving finance or dishonesty. The solicitor does not have to be registered as a registered investment adviser representative because he is not representing the registered investment adviser in the giving of investment advice, in the management of accounts, or in the supervision of anyone else working for the registered investment adviser in these areas. The solicitor is being paid a fee for the solicitation of business for the registered investment adviser with a requirement of full disclosure to the client of the relationship with the adviser.

10

A federal covered investment adviser employs the services of a third-party solicitor. The Investment Advisers Act of 1940 would require the solicitor to deliver:

1. a copy of the IA's brochure.
2. a copy of the solicitor's brochure.
3. a copy of the solicitor's script.
4. a copy of the IA's Form ADV Part 1.

1. a copy of the IA's brochure.
2. a copy of the solicitor's brochure.

Third-party solicitors must provide a copy of the investment adviser's brochure (Form ADV Part 2A), as well as a copy of the solicitor's brochure. The solicitor's script must be approved by the IA, and only the SEC receives a copy of the Form ADV Part 1.

11

Under the Investment Advisers Act of 1940, cash payment to a broker/dealer from an investment adviser in return for client referrals is

A) permitted with no restrictions.
B) permitted if the investment adviser makes certain disclosures to the clients and meets other requirements.
C) not permitted under any circumstances.
D) permitted if the investment adviser and broker/dealer are affiliated.

B) permitted if the investment adviser makes certain disclosures to the clients and meets other requirements.

Cash payments for referrals are permitted. All such compensation must be disclosed to affected clients.

12

Under the Investment Advisers Act of 1940, a cash referral fee may be paid by an IA:

A) with no restrictions.
B) when a written agreement providing certain disclosures has been entered into between the IA and the third party.
C) under no circumstances.
D) only if the referring party is registered as an IAR.

B) when a written agreement providing certain disclosures has been entered into between the IA and the third party.
C) under no circumstances.

Please note that the question refers to the Investment Advises Act of 1940; this answer would not be appropriate under the Uniform Securities Act. A cash referral fee may be paid under the terms of a written agreement spelling out the terms and conditions of the arrangement and making the required disclosures.

13

Malcolm Munger CLU, is an insurance agent catering to highly successful business executives. During a routine servicing call, one of those clients asks Malcolm if he knows anyone who is sharp enough to handle his $50 million investment portfolio. Malcolm refers the client to Superb Asset Managers Company (SAMCO), an investment adviser doing business in this state. The CEO of SAMCO meets with Malcolm's client and an advisory contract is signed. To show their appreciation, Malcolm receives a $500 finder's fee from Superb Asset Management Company (SAMCO). Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers:

A) the finders fee would be disallowed if the IA did not have an insurance license.
B) SAMCO must disclose the existence and circumstances of the finder's fee to the client.
C) SAMCO must make sure that Malcolm discloses the fee to his client.
D) no disclosure is necessary unless it will result in the IA's fee being higher than it would have been without the finder's fee.

B) SAMCO must disclose the existence and circumstances of the finder's fee to the client.

Finder's fees are permitted, but it is the obligation of the IA to make full disclosure to the client. Since nothing here indicates that Mr. Munger is registered, he does not have any responsibility under NASAA regulations to make disclosure to his client. There really is a lot more required here, but there are no alternative choices (and it may be like that on the exam).

14

When an investment adviser chooses to use a solicitor, the Investment Advisers Act of 1940 requires all of the following conditions EXCEPT:

A) either the solicitor or the adviser must disclose to the customer any additional costs of providing advisory services due to solicitor involvement.
B) the solicitor must provide the customer with a copy of the investment adviser's brochure.
C) the solicitor must register with the SEC as an investment adviser.
D) the solicitor must not be subject to disciplinary actions involving finance or dishonesty.

C) the solicitor must register with the SEC as an investment adviser.

There must be a written agreement between a solicitor and an adviser. The solicitor is required to provide the customer with a copy of the adviser's brochure as well as the solicitor brochure. The adviser or solicitor must disclose any additional costs that the customer will pay due to the use of the solicitor. The solicitor cannot be subject to disciplinary actions involving finance or dishonesty. Although the investment adviser must register, there is no requirement for a solicitor to register with the SEC.

15

An IAR with a state covered adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, all of the following must be complied with EXCEPT:

A) the solicitor must be registered as an IAR in order to receive compensation based upon advice.
B) the client must sign the contract at the same time as he receives the IA brochure and the solicitor disclosure document.
C) the terms of the compensation must be spelled out.
D) disclosure of the arrangement must be made to the client.

B) the client must sign the contract at the same time as he receives the IA brochure and the solicitor disclosure document.

There are no requirements under the USA that the contract be signed at the same time as receipt of the brochure. There is a requirement that the brochure, or, as in this case, brochures, be received no later than entering into the contract, but, in most cases it is delivered at least 48 hours prior to the signing.

16

An investment adviser (IA) has a number of clients who need high-quality estate planning. These clients are referred to the Rox Law Firm and, in exchange, Mr. Rox sends those of his clients needing investment advice to the IA. The IA pays a referral fee to Mr. Rox of $300 for each referral who becomes a client. Under the NASAA Model Rule on Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers:

A) this is permissible, but does not need to be disclosed to clients because Mr. Rox is an attorney and this would be a violation of attorney/client privilege.
B) this is permissible, but only if disclosed to the Administrator.
C) this type of arrangement is never permitted.
D) this is permissible, but only if disclosed to clients.

D) this is permissible, but only if disclosed to clients.

Actually, NASAA doesn’t say anything at all about referral fees, but you have to pick an answer. It is the Investment Advisers Act of 1940 that deals with the topic and permits them as long as proper disclosures are made and the fee is not related to the size of the account. Since it is a flat $300, it would be the same for a $100,000 account as a $10 million account.

17

It would not be considered a prohibited or unethical business practice for an investment adviser to

A) charge a performance-based fee to an individual who meets the SEC’s accredited investor standard detailed in Rule 501 of Regulation D
B) use a testimonial from a bona fide client with the proper caveat that this individual’s results may not be typical and it is possible they may not be reproduced in the future
C) pay a nominal fixed fee to certain professionals as a form of thanking them for client referrals
D) pay a nominal fee, based on account size, to certain professionals as a form of thanking them for client referrals

C) pay a nominal fixed fee to certain professionals as a form of thanking them for client referrals

Referral fees (not cash fees for full time soliciting) may be paid to certain professionals (lawyers, accountants, insurance agents, and so forth) as long as the fee is both a nominal amount (up to several hundred dollars) and is the same amount for any referral. That is, it is not based on the size of the account. In order to charge a performance-based fee, investors must have a net worth in excess of $2 million while they can meet the accredited investor standard when their net worth exceeds only $1 million. Finally, under both state and federal law, investment advisers may never use testimonials from clients, even with disclaimers.

18

An IA hires a third-party solicitor to recruit new clients. Which of the following records is the IA required to keep?

A) A copy of the written agreement between the IA and the solicitor, signed by the client
B) Copies of all investment recommendations made by the solicitor
C) A statement, signed by the client, that both the IA’s and solicitor’s brochures were received.
D) A receipt for any fee charged by the solicitor, signed by the client

C) A statement, signed by the client, that both the IA’s and solicitor’s brochures were received.

When a third party solicitor engaged by an investment adviser makes contact with a potential client, that client must acknowledge, in writing, the receipt of the brochures of both the adviser and the solicitor. There must be a written agreement between the adviser and the solicitor, but the client has nothing to do with that. Solicitors don’t recommend investments.

19

Greater Wealth Managers, (GWM) is an investment adviser registered in States A, B, C, and D. They have recently hired an individual to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act,

A) no registration is required, because this individual is not rendering investment advice and is being closely supervised
B) registration as an investment adviser representative is required for this individual
C) registration as an investment adviser representative and as an agent is required for this individual
D) no registration is required, because this individual is not rendering investment advice

B) registration as an investment adviser representative is required for this individual

Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs.

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