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Flashcards in Fed and State Reg of Advisers (Financial Requirements for registration) Deck (18):
1

States may require investment advisers who are registered with the SEC to do each of the following EXCEPT

A) pay state fees
B) file a consent to service of process
C) maintain net capital requirements
D) file any documents with the state that are filed with the SEC

C) maintain net capital requirements

The state may require federal covered advisers to pay filing fees, provide a consent to service of process, and submit copies of documents filed with the SEC, but cannot determine net worth or net capital requirements for federal covered IAs. The Administrator can require minimum net worth for state registered advisers, but, under the NSMIA, cannot do so for federal covered ones.

2

A state registered investment adviser suddenly incurs a liability that materially affects its net worth causing it to drop below the required minimum. Which of the following statements is TRUE?

A) The ​investment adviser is not required to file​ ​an amendment to its registration with the Administrator.
B) The ​investment adviser ​must increase its surety bond to make up the deficiency.
C) The investment adviser must notify the Administrator promptly.
D) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​.

D) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​.

Although most notifications involving emergency type situations require prompt notification, when an investment adviser's net worth is below the requirement, the NASAA Model Rule is a bit different. Unless otherwise exempted, as a condition of the right to transact business in the state, every investment adviser registered with the state shall, by the close of business on the next business day, notify the Administrator if such investment adviser’s net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day after that, a report with the Administrator of its financial condition.

3

An investment adviser with $20 million under management exercises investment discretion over client portfolios. If the firm's accounting manager were to discover that the firm's net worth was only $8,500, the USA would require the firm to:

1. cancel all discretionary powers.
2. immediately raise an additional $1,500.
3. send notice to the Administrator before the close of business on the day following discovery.
4. send a financial report to the Administrator before the close of business on the day following the sending of notice.

3. send notice to the Administrator before the close of business on the day following discovery.
4. send a financial report to the Administrator before the close of business on the day following the sending of notice.

State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of $10,000. Any advisory firm whose net worth falls below required minimums is required to send notice to the Administrator no later than the close of business on the day following discovery. This notice must be followed up no later than the next business day with a complete financial report to the Administrator.

4

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) Copyrights.
C) Accounts receivable.
D) Accounts payable.

C) 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.

5

An Administrator can deny an investment adviser's registration for all of the following reasons EXCEPT:

A) filing an incomplete application.
B) failure to pass a written exam.
C) planning to exercise discretion over customer accounts while maintaining a net worth of only $10,000.
D) claiming to be qualified as the result of experience as a broker/dealer.

C) planning to exercise discretion over customer accounts while maintaining a net worth of only $10,000.

The minimum net worth for an IA exercising discretion is $10,000 so this firm cannot be denied because of lack of capital. The Administrator shall consider that an applicant for registration as an investment adviser is not necessarily qualified solely on the basis of experience as a broker/dealer.

6

Under the Uniform Securities Act, investment advisers will generally NOT be required by the Administrator to:

A) renew all investment advisory contracts in writing.
B) promptly file a correcting amendment to any document on file with the Administrator which becomes inaccurate or incomplete in any material respect.
C) meet minimum net worth requirements or post a surety bond if they do not maintain custody or do not have investment discretion over client accounts.
D) furnish or disseminate any information the Administrator finds is necessary to the public interest or for the protection of investors and advisory clients.

C) meet minimum net worth requirements or post a surety bond if they do not maintain custody or do not have investment discretion over client accounts.

The question asks for something that is NOT required by the Administrator. Under most circumstances, minimum net worth or a surety bond is only required of an adviser who either maintains custody of customer funds or securities, or has investment discretion over the account.

7

Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of

A) $5,000
B) $10,000
C) $50,000
D) $35,000

D) $35,000

The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond​ because it doesn't meet the net worth requirement​, ​it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.

8

Under the the NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of:

A) $50,000.00
B) $10,000.00
C) $5,000.00
D) $35,000.00

B) $10,000.00

The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000.

9

An investment adviser who has custody of customer funds and securities discovers that her net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must:

1. notify the Administrator by close of business after the day of discovery.
2. file a report of its financial condition no later than close of business the day after notification.
3. include in the report of financial condition a statement as to the number of client accounts.
4. cease doing business.

1. notify the Administrator by close of business after the day of discovery.
2. file a report of its financial condition no later than close of business the day after notification.
3. include in the report of financial condition a statement as to the number of client accounts.

As a condition of the right to continue business, the adviser must notify the Administrator by close of business after the day of discovery. No later than close of business the day after notification, the adviser must file a report of its financial condition, which must include statements regarding the number of client accounts.

10

With regard to the keeping of records, the Uniform Securities Act states that:

1. broker/dealers must keep records for three years.
2. broker/dealers must keep records for five years.
3. investment advisers must keep records for three years.
4. investment advisers must keep records for five years.

1. broker/dealers must keep records for three years.
4. investment advisers must keep records for five years.

Under the USA, recordkeeping requirements are slightly different for advisers and broker/dealers in that broker/dealers retain records generally for three years, whereas IAs retain them for five years.

11

Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients?

1. An adviser that requires prepayment of $1,000 in fees, nine months in advance, has liabilities that exceed its assets and does not disclose this fact to clients.
2. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients.
3. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients.

2. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients.
3. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients.

An adviser's financial impairment must be disclosed to clients if the adviser has discretion or has custody or requires prepayment of more than $1,200 in fees, six or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past ten years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, six or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure.

12

A federal covered investment adviser files its annual updating amendment with the SEC. The adviser does business in a dozen states. In order to be in compliance with all regulations, the IA must meet the financial requirements of:

A) the SEC.
B) the state with the highest requirement.
C) the state with the lowest requirement.
D) the state in which its principal office is located.

A) the SEC.

As a federal covered adviser registered with the SEC, no state can enforce financial requirements. That is the only way to answer this correctly because, technically, the SEC has no financial requirements for IAs.

13

A state registered investment adviser with discretionary authority over client accounts discovered on Monday, that the firm's net worth is below the required amount. He must notify the administrator and then file a report no later than the:

A) close of business Monday, close of business Friday.
B) close of business Tuesday, close of business Wednesday.
C) close of business Tuesday, close of business Friday.
D) close of business Monday, close of business Wednesday.

B) close of business Tuesday, close of business Wednesday.

Unless otherwise exempted, every investment adviser registered or required to be registered under the Act shall by the close of business on the next business day notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition.

14

An investment adviser (IA) has its primary office in State A. They have branches in states B & C, and they advertise in states D,E,F. What net capital requirements must they meet?

A) Whichever state is the highest.
B) All the states combined.
C) The state where the largest number of their clients reside.
D) Where their principal office is located.

D) Where their principal office is located.

The Administrator of every state, other than State A, follows the rule that every investment adviser that has its principal place of business in a state other than his state need maintain only the minimum capital as required by the state in which the investment adviser maintains its principal place of business, provided the investment adviser is licensed in that state (State A) and is in compliance with that state’s minimum capital requirement.

15

An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included:

1. a sofa in the reception area.
2. the value of the copyright on an investment manual authored by the investment adviser.
3. the reputation of the investment adviser.
4. patents held by the investment adviser on a stock tracking software program.

1. a sofa in the reception area.

For purposes of this Rule, the term "net worth," means an excess of assets over liabilities. But net worth does not include as assets: goodwill, franchise rights, patents, copyrights, marketing rights, all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what’s the deal with the sofa? Since the choice specifically says that it is in the reception area, we must assume that it is not a “home” furnishing, rather one in the office and those are not excluded assets.

16

USAAdvisers is registered in 10 midwestern states. Regarding financial requirements, USAAdvisers must meet those of

A) each state in which it has a place of business
B) the state in which its principal office is located
C) the state with the most stringent financial requirements
D) the SEC

B) the state in which its principal office is located

Unlike broker-dealers, investment advisers register with either the SEC or the state(s), but never both. Therefore, we know this must be a state-registered adviser not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located the other states have no further claim.

17

MidWest Advisory Services has $175 million in assets under management and has offices in 10 midwestern states. Regarding recordkeeping requirements, MidWest must meet those of

A) each state in which it has a place of business
B) the SEC
C) the state in which its principal office is located
D) the state with the most stringent financial requirements

B) the SEC

With $175 million in AUM, MidWest is a federal covered adviser. As such, all financial requirements, bonding, recordkeeping, and so forth requirements are those of the SEC, not any of the states.

18

Which of the following would NASAA consider to be a substantial prepayment of fees?

A) $600 covering the entire contract year
B) $500 covering the next six months
C) $600 covering the next calendar quarter
D) $1,000 covering the next month

A) $600 covering the entire contract year

NASAA defines a substantial prepayment of fees to be MORE than $500, six or more months in advance.

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