Fed and State Reg of Advisers (Registration Requirements Under Adviser Act 1940) Flashcards Preview

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Flashcards in Fed and State Reg of Advisers (Registration Requirements Under Adviser Act 1940) Deck (30):
1

Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT

A) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM
B) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states
C) Grand Visions Advisers, a sole proprietorship with $104 million in AUM
D) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board

D) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board

Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for:
pension consultants once their AUM reach $200 million;
small and mid-size advisers who would be required to register in 15 or more states; and
those advisers with at least $100 million in AUM, but not $110 million in AUM
Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.

2

Which of the following is required to register as an investment adviser with the state securities Administrator?

A) The author of a book on money and banking that was sold to residents of the state in which it is published.
B) A person with no office in the state whose only advisory clients are investment companies and banks in the state.
C) A newly formed investment advisory firm with $145 million in assets under management.
D) An investment advisory firm that opens an office in the state with less than $100 million in assets under management.

D) An investment advisory firm that opens an office in the state with less than $100 million in assets under management.

An investment adviser must register in a state if it manages less than $100 million in assets. Publishers of general circulation books are exempt from state registration, as are advisers with no offices in the state whose only customers are institutions, such as banks and investment companies, in the state. Investment advisers with $110 million or more in assets under management must register with the SEC, not the state Administrator.

3

Under the Investment Advisers Act of 1940, which of the following are exempt from the requirements for registration?

1. Foreign investment advisers with fewer than 15 clients per year who do not hold themselves out as investment advisers to the public and have less than $25 million in AUM in the United States.
2. Investment advisers who conduct all of their business in 1 state and who do not provide advice on securities listed on an exchange and have no private funds as clients.
3. Investment advisers whose only clients are banks.

1. Foreign investment advisers with fewer than 15 clients per year who do not hold themselves out as investment advisers to the public and have less than $25 million in AUM in the United States.
2. Investment advisers who conduct all of their business in 1 state and who do not provide advice on securities listed on an exchange and have no private funds as clients.

Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the U.S. There is no exclusion for advisers whose only clients are banks.

4

Under the Investment Advisers Act of 1940, an investment adviser that operates in only one state has no private funds as clients, and restricts advice only to securities not listed on a national stock exchange:

A) is exempt from both state and federal registration.
B) must file as an associate under the act.
C) is exempt from registration with the SEC under the act.
D) must register under the act.

C) is exempt from registration with the SEC under the act.

While not excluded from the definition of investment adviser, some advisers are exempt from the requirement to register with the SEC. These include investment advisers whose clients are all residents of the state in which the adviser maintains its principal office and that confine their advice to securities not listed with a national exchange or that enjoy unlisted trading privileges on a national exchange; investment advisers whose clients are limited to insurance companies; and as long as none of their clients are private funds.

5

Which of the following firms would be a federal covered adviser?

A) GHI Consultants, a sole proprietorship managing $15 million belonging to high net worth individuals.
B) XYZ Broker/Dealer with custody over $50 million of clients' invested assets.
C) ABC Money Managers, a partnership with $112 million under management.
D) DEF Fund Managers, a corporation managing an unregistered hedge fund with $20 million in assets.

C) ABC Money Managers, a partnership with $112 million under management.

The structure of the adviser is irrelevant; if assets under management equal $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered regardless of size. The hedge fund is an unregistered fund, so the rule does not apply. A broker/dealer is excluded from the definition of investment adviser if investment advice is incidental to its business. Custody has nothing to do with giving advice.

6

Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser?

A) JKL Pension Consultants, a management firm providing services to employee benefit plans, and currently has $179 million under management.
B) ABC Money Managers, a partnership with $115 million under management.
C) DEF Fund managers, a corporation managing an unregistered hedge fund with $10 million in assets.
D) GHI Consultants, a sole proprietorship, managing $82 million belonging to high net worth individuals.

B) ABC Money Managers, a partnership with $115 million under management.

It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered regardless of size. The Hedge Fund is an unregistered fund so the rule does not apply to it. Pension consultants are not eligible for SEC registration until their AUM reaches $200 million.

7

The National Securities Markets Improvement Act of 1996 (NSMIA):

A) overcame the restrictions of selling securities in interstate commerce.
B) created a national market system.
C) defined the term "federal covered adviser".
D) created the concept of fraud, as used in the Uniform Securities Act.

C) defined the term "federal covered adviser".

The NSMIA defined the term "federal covered adviser", referring to advisers who must register with the SEC or who are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. Fraud is a legal concept which is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent provided the antifraud provisions securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975.

8

Under the NSMIA, the term "federal covered adviser" includes a person:

1. registered with the SEC under the Investment Advisers Act of 1940.
2. registered as an investment adviser in two or more states.
3. excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.
4. required to register with the state Administrator.

Under the NSMIA, the term "federal covered adviser" includes a person:

1. registered with the SEC under the Investment Advisers Act of 1940.
3. excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.

The NSMIA defines a "federal covered adviser" as a person who is either required to register with the SEC under the Investment Advisers Act of 1940 or who is specifically excluded from the definition of investment adviser under that act. Registration with the state Administrator is not required of a federal covered adviser. If an investment adviser who otherwise would not qualify for SEC registration would be required to register in 15 or more states, the Dodd-Frank Act makes that adviser eligible for federal registration.

9

Which of the following statements are TRUE?

1. A federal covered adviser sells federal covered securities only.
2. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers.
3. A federal covered security is exempt from registration with the SEC.
4. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940.

2. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers.
4. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940.

A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.

10

Under the Uniform Securities Act, Paul must register as a state registered investment adviser if he:

A) opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $90 million in AUM within 120 days of opening.
B) opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $100 million in AUM within 120 days of opening.
C) becomes a full-time employee of AAA Investment Advisers, Inc., where he will advise clients whose assets under his discretion will exceed $200 million.
D) sells registered securities on a commission basis for a registered broker/dealer.

A) opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $90 million in AUM within 120 days of opening.

Being in the business of advising individual clients on the advisability of investing in securities requires one to register as an investment adviser, either with the state or the SEC. The key is the assets under management. If a new IA reasonably believes that he will have AUM of at least $100 million within the first 120 days of registering, he is permitted to register with the SEC. Of course, if it reaches $110 million, then SEC registration is required. Reaching $90 million is not enough and, therefore, registration with the state would be the only option here. As a full-time employee of AAA Investment Advisers, Inc., he would have to register as a registered investment adviser representative and will not be a registered investment adviser (the firm). Selling registered securities under the supervision of a broker/dealer would require an agent registration with the state and the SEC.

11

Under the Investment Advisers Act of 1940, which of the following investment advisers are exempt from federal registration?

1. All of John's clients reside in his home state, and John offers no advice on any exchange-listed securities. He manages $50 million in assets and none of his clients are private funds.
2. All of Paula's clients are private funds and she has total assets under management of $200 million with less than $25 million of that belonging to foreign investors.
3. Marie Legard maintains her only office in Paris, France, deals with fewer than 15 clients (none of whom is a registered investment company) in private funds advised by Ms. Legard, has AUM in the U.S. of less than $25 million, and does not hold herself out as an investment adviser in the United States.

1. All of John's clients reside in his home state, and John offers no advice on any exchange-listed securities. He manages $50 million in assets and none of his clients are private funds.
3. Marie Legard maintains her only office in Paris, France, deals with fewer than 15 clients (none of whom is a registered investment company) in private funds advised by Ms. Legard, has AUM in the U.S. of less than $25 million, and does not hold herself out as an investment adviser in the United States.

The exemptions from the SEC registration requirement under the Advisers Act include advisers who render no advice on any exchange-listed security and whose clients are all in one state and certain foreign advisers who do not hold themselves out as investment advisers and have fewer than 15 clients per year. In order to qualify for the private fund adviser exemption, total AUM must be less than $150 million.

12

A person who renders investment advice solely with respect to securities issued by the U.S. government:

A) must be registered both with the SEC and the state.
B) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements.
C) is exempt from state registration under the Uniform Securities Act but must be federal registered under the Investment Advisers Act of 1940.
D) need not be federal registered under the Investment Advisers Act of 1940 but must register in any state in which it has an office.

B) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements.

A person who renders advice solely with respect to securities issued or guaranteed by the US government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996.

13

According to the Investment Advisers Act of 1940, which of the following statements regarding registration of investment advisers is TRUE?

1. State registration is a requirement for federal registration.
2. An investment adviser must be registered with the SEC to be registered at the state level.

Neither A nor B
1. State registration is a requirement for federal registration.
2.An investment adviser must be registered with the SEC to be registered at the state level.

A critical point to remember about investment advisers is that, if required to register, they register with either the state or the SEC, never with both. This is unlike broker/dealers who invariably register with both the SEC and the state(s) in which they do business.

14

All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 EXCEPT:

A) an adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities.
B) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million.
C) investment advisers with $110 million or more in assets under management.
D) investment advisers whose only clients are insurance companies.

C) investment advisers with $110 million or more in assets under management.

Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act. Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the U.S. reaches $150 million.

15

Which of the following persons is required to register with the SEC as a federal covered adviser?

A) An adviser that manages assets of $20 million or more.
B) A publisher that gives incidental investment advice only.
C) An adviser who gives advice only related to U.S. government securities.
D) An adviser that gives advice to registered investment companies only.

D) An adviser that gives advice to registered investment companies only.

Investment advisers that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC.

16

Under the Investment Advisers Act of 1940, an adviser is required to be registered with the SEC if:

A) the adviser's advice relates solely to securities issued or guaranteed by the U.S. government.
B) the adviser's clients are investment companies registered under the Investment Company Act of 1940.
C) the adviser's clientele is exclusively federal credit unions and the adviser has less than $100 million in assets under management.
D) the adviser is the publisher of a news magazine of general and regular circulation.

B) the adviser's clients are investment companies registered under the Investment Company Act of 1940.

Advisers to registered investment companies are required to be SEC registered. Under the Advisers Act, as modified by the Dodd-Frank Act, advisers are exempt from SEC registration if they manage less than $100 million in assets and have no investment company clients. Persons are excluded from the Advisers Act definition of investment adviser if they are publishers of news or business/financial publications of general and regular circulation or if their advice relates solely to U.S. government securities.

17

A federal covered investment adviser is a person:

A) exempt from regulation under the Securities Exchange Act of 1934.
B) registered under the Uniform Securities Act.
C) registered with North American Securities Administrators Association (NASAA).
D) registered, or excluded from the definition, under the Investment Advisers Act of 1940.

D) registered, or excluded from the definition, under the Investment Advisers Act of 1940.

A federal covered investment adviser refers to a natural person or firm registered under the Investment Advisers Act of 1940 or excluded from the definition of investment adviser under that act. A person registered under the Investment Advisers Act of 1940 is exempt from state registration or licensing requirements of state securities Administrators under the Uniform Securities Act. Federal covered investment advisers are not exempt from the antifraud provisions of the USA. Investment advisers, whether state or federal registered, do not register with NASAA.

18

A pension fund manager who manages a $135 million dollar account must register with which of the following?

A) SEC.
B) Either the state or the SEC.
C) Both the state and the SEC.
D) The state.

D) The state.

Under the Dodd-Frank Bill, until a pension fund manager has at least $200 million in AUM, registration with the states is required. Once the $200 million level is reached, SEC registration becomes an option.

19

Emmet opened an investment advisory service 3 years ago and raised $50 million in capital from family, friends, and contacts and then closed to new investors. If Emmet's stock picks expanded assets under management to $110 million, Emmet:

A) must register for the first time with the state Administrator.
B) is not required to take any action.
C) must register with the SEC.
D) must update his registration with the state Administrator.

C) must register with the SEC.

When the annual updating amendment filed by a state-registered investment advisory firm indicates that the $110 million threshold has been reached, the firm has 90 days to register with the SEC.

20

Registration with the state as an investment adviser would be required for a person with an office in this state who:

A) only gives advice on securities issued by or guaranteed by the government of the United States.
B) manages $13 million in assets for 4 clients.
C) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets.
D) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million.

B) manages $13 million in assets for 4 clients.

Under the Dodd-Frank Bill, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with $200 million or more in AUM, the person has the option of registering with the SEC. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.

21

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following is (are) required to register as investment adviser in a particular state?

1. An adviser who manages client accounts in excess of $100 million in value.
2. An adviser who manages client accounts with less than $100 million in value.
3. An adviser to investment companies registered under the Investment Company Act of 1940.
4. An adviser who acts as pension consultant to employee benefit plans with assets of $200 million or more.

2. An adviser who manages client accounts with less than $100 million in value.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, only advisers who manage client assets that total less than $100 million are required to register with the state Administrators. Those who manage client assets of at least $110 million, advise registered investment companies, or act as pension consultants to large pension funds (at least $200 million in assets) are required (optional in the case of the pension consultant) to register with the SEC and are exempted from state registration. (There is a corridor between $100 and $110 million in which the adviser has a choice of state or federal registration.)

22

Gibraltar Investment Advisers opened for business last week. Because of the clients brought over from previous affiliations of their IARs, they have started with $94 million under management for various individual and corporate clients. They also signed a contract to manage an additional $10 million for a wealthy individual. Gibraltar will begin managing that individual's portfolio at the beginning of the next calendar quarter. Which of the following best describes Gibraltar's investment adviser registration requirements?

A) Gibraltar need not register as an investment adviser because it will manage funds for an institutional investor.
B) Gibraltar would be eligible to register at the federal level.
C) Gibraltar's only option is to register at the state level because it currently manages less than $100 million in client funds.
D) Gibraltar must register with the state(s) and then, within 90 days of the receipt of the additional $10 million, must register with the SEC.

B) Gibraltar would be eligible to register at the federal level.

If an investment adviser anticipates having at least $100 million under management within its first 120 days, it is eligible to become a federal covered adviser by registering with the SEC. Even though Gibraltar will have AUM in excess of $100 million by the beginning of the next quarter, registration with the SEC is not mandatory until AUM reach $110 million. That the advisory will manage some institutional funds does not exempt the organization from investment adviser registration.

23

Which of the following investment advisers would be required to register with the state?

A) An IA whose annual updating amendment showed a drop in AUM from $141 million to $99 million.
B) An IA who expects to have $132 million in AUM within 120 days.
C) An IA who is under contract to manage a registered investment company.
D) An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million.

D) An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million.

No IA can remain registered with the SEC with assets under management (AUM) of less than $90 million (except those who manage registered investment companies). It takes $100 million in AUM to be able to initially register with the SEC, thereafter, the IA must maintain at least $90 million to remain SEC registered.

24

Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey- based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers?

A) Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities.
B) Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities.
C) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.
D) Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities.

C) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.

Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act investment advisers with $110 million or more in assets under management more must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million of assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.

25

Under the Uniform Securities Act, which of the following must register with the state securities Administrator?

A) Investment advisers without an office in the state whose clients are exclusively insurance companies.
B) Investment advisers to an investment company registered under the Investment Company Act of 1940.
C) Investment advisers who have $100 million or more under management.
D) Investment advisers with a place of business in the state and less than $100 million in assets under management.

D) Investment advisers with a place of business in the state and less than $100 million in assets under management.

Under the USA, an investment adviser with a place of business in the state must register with the state securities Administrator, regardless of who the clients are, unless they are federal covered advisers. Advisers without an office in the state, or whose clients are exclusively insurance companies, are not defined as investment advisers in that state under the USA. An adviser who manages an investment company that is registered under the Investment Company Act of 1940 or who has $100 million or more under management, are federal covered investment advisers that do not register with the states. Once the $100 million level is reached, the adviser has the choice of state or SEC registration until hitting $110 million.

26

Investment advisers who manage investment portfolios that total less than $100 million must register with:

A) both a state and the SEC.
B) neither the SEC nor a state.
C) a state only.
D) the SEC only.

C) a state only.

Investment advisers who manage less than $100 million of investment assets are prohibited from registering with the SEC and are required to register with a state Administrator unless exempt under the laws of that state. Please do not confuse this with an SEC registered IA whose AUM may drop to as low as $90 million with continued SEC registration allowed. Any question about that rule will state that AUM has "dropped".

27

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an adviser must register with the SEC if he has

A) $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management
B) discretion over securities and funds of its clients
C) his only place of business outside of the U.S., deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the U.S.
D) limited his clients to insurance companies only

A) $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management

An adviser with $110 million or more in assets under management, regardless of the asset class, must register with the SEC. Advisers whose only clients are insurance companies are exempt from registration with the SEC. There is an exemption for foreign advisers who have fewer than 15 clients in the U.S., and their AUM in the U.S. is less than $25 million. Discretion over securities or funds does not determine whether or not an investment adviser must register with the SEC.

28

On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions are required for Alpha?

A) Do nothing and continue as a federal covered adviser.
B) Withdraw from SEC registration immediately.
C) Withdraw from SEC registration within 90 days of the adviser's fiscal year-end.
D) Withdraw from SEC registration within 180 days of the adviser's fiscal year-end.

D) Withdraw from SEC registration within 180 days of the adviser's fiscal year-end.

If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements.

29

An investment adviser is eligible to register with the SEC if it

A) has more than 100 investment adviser representatives
B) has rendered advice to more than 15 clients during the most recent 12-month period
C) anticipates acquiring at least $100 million in assets under management within the next 120 days
D) is registered in at least 10 different states

C) anticipates acquiring at least $100 million in assets under management within the next 120 days

IAs must have at least $100 million in AUM in order to register with the SEC. If it is reasonable to expect reaching that level within the next 120 days, SEC registration is allowable now. One of the exceptions that would permit small and mid-size advisers to register with the SEC is if they would have to register in at least 15 states, not 10.

30

Which of the following would meet the USA's definition of federal covered adviser? An investment adviser who:

A) limits the advice given to securities issued or guaranteed by the U.S. government.
B) gives advice on federal covered securities.
C) is registered with the SEC.
D) does business on an interstate basis.

C) is registered with the SEC.

All investment advisers registered with the SEC are federal covered advisers, but not all federal covered advisers are registered with the SEC. What makes this question tricky is that IA’s who limit their advice to securities issued or guaranteed by the U.S. government are, under the Investment Advisers Act of 1940, excluded from the definition of investment advisers. Under the NSMIA, that exclusion makes them federal covered. However, the USA does not have that exclusion so, although poorly worded, you have to go with our choice to get the question correct on the exam.

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