Regulation of IA and IARs Flashcards
(189 cards)
1
Q
May the Administrator revoke the registration of a federally covered adviser?
A
No. However, she may require the IA to notice file
2
Q
An IAR of a state-registered IA has no office in NJ, but has six clients who live in NJ. Must she register in NJ?
A
Yes. IARs of state-regulated IAs register where they have an office and where they have six or more individual clients
3
Q
Is the publisher of a newspaper required to register as an investment adviser?
A
No. Publishers are excluded from the IA definition if the newspaper has general circulation and gives impersonal advice
4
Q
What is the federal law that governs investment advisers?
A
The Investment Advisers Act of 1940
5
Q
If a registrant wishes to withdraw her registration, when does the withdrawal become effective?
A
If no action is pending, it is effective 30 days after filing the withdrawal request with the Administrator
6
Q
Is an employee of an IA who answers the telephone and does clerical work considered an IAR?
A
No
7
Q
List some of the different types of institutional clients
A
IAs, BDs, investment, insurance, or trust companies, banks, savings and loan associations, and pension plans
8
Q
What are the justifiable reasons for denying an individual’s registration?
A
Conviction for any felony or securities-related misdemeanor within the last 10 years
9
Q
Does the de minimis exemption apply to investment adviser representatives?
A
Yes
10
Q
An IA directs transactions to a BD who rebates 15% of the commissions to the IA for the business. Is this acceptable
A
Yes, provided the IA provides written disclosure (often in Form ADV) to clients
11
Q
An IAR has an office in State A and has 4 clients who reside in the state. Is the IAR required to register in State A?
A
Yes, since the IAR has an office in State A. The client number is not relevant because of the office location
12
Q
Does an IA need written consent before executing each agency cross trade with an advisory client?
A
No, the client must provide written consent initially, but not for every trade
13
Q
If an IA maintains custody of a client’s funds or securities, how often must account statements be provided to clients?
A
Statements must be sent quarterly
14
Q
When should routine changes to an adviser’s ADV be filed?
A
Within 90 days of the end of the adviser’s fiscal year
15
Q
True or False: Bank holding companies are not considered IAs under the Investment Advisers Act of 1940.
A
True
16
Q
If ABC Advisers has $112 million under management, it must register with ________
A
the SEC
17
Q
True or False: A successor advisory firm must pay a new filing fee, but need not file a new application
A
False. The successor firm must update its application, but not pay a new filing fee.
18
Q
Under the IA Act of 1940, an IA may charge performance fees to clients with at least $_________ under managemen
A
$1.1 million
19
Q
As it applies to a BD or IA, what does the term “exclusion” mean in the USA?
A
Exclusion signifies that a person does not meet the definition of a BD or IA in the state
20
Q
When does state registration become effective?
A
At noon on the 30th day after filing an application, provided there are no proceedings pending
21
Q
For how long does the Administrator maintain jurisdiction over a registrant after a withdrawal of registration?
A
1 year
22
Q
If an IA maintains custody of client funds, are unannounced audits required?
A
Yes. IAs must arrange for unannounced audits on an annual basis
23
Q
Is an organization that provides ratings of securities and is nationally known considered an IA under the USA?
A
No
24
Q
True or False: An IA maintaining custody of client assets need not notify the Administrator
A
False. The Administrator must be notified in writing using Form ADV
25
Investment advisers with custody must have an annual audit done by a(n) ____________________
independent CPA
26
If an adviser exercises full discretionary control over a client's account, does this constitute custody?
Yes. Full discretionary control (having the ability to remove funds from the client's account) is considered custody
27
A person subject to an order by an Administrator may appeal the order to the state court within _____ days
60 days
28
What is a client's right if an IA does not deliver the required brochure 48 hours prior to the signing of the contract?
terminate the contract without penalty within five business days from the signing of the contract
29
If an IA contract stipulates cancellation penalties, a brochure must be provided ____ hours before the contract signing
48 hours
30
IAs have greater responsibility to their clients than BDs. This is referred to as the IA's ___________ responsibility
fiduciary
31
May an IAR recommend that a client meet/speak with another financial professional?
Yes. If an IAR lacks expertise in a certain area (e.g., insurance), it is acceptable to recommend outside assistance
32
Before an IA may assign a client's contract to another advisory firm, it must obtain the ________ ________
client's consent
33
What forms of soft-dollar compensation are NOT acceptable?
Rent, travel expense reimbursement, hardware, furniture, entertainment, meals
34
True or False: The manager of an IA's human resources department is considered an IAR
False. The manager's responsibilities do not include providing advice about securities or managing accounts
35
When does the de minimis exemption from registration apply for an IA that has no place of business in a state?
When an IA has no more than five non-institutional clients who are residents of the state (measured over 12 months)
36
Define "assignment" as it relates to IA contracts
The transfer of ownership of a client's account from one advisory firm to another. Client consent is required
37
Must the Consent to Service of Process be renewed each year?
No. It is only required at initial registration
38
What is the purpose of an annual updating amendment?
To determine if an IA is eligible for continued SEC registration; it is filed within 90 days of its fiscal year end
39
True or False: Bank holding companies are excluded from the IA definition under the USA
False
40
May a solicitor receive compensation from an IA?
Yes, if the IA is registered, a written agreement exists, and a court has not limited the solicitor’s activities
41
Who must sign a Consent to Service of Process?
Any issuer, BD, IA, IAR, or agent initially registering to engage in business within a state
42
In lieu of an IA-prepared brochure, what document may be delivered to IA clients?
Part 2 of Form ADV
43
How are advisory fees most commonly charged?
As a % of AUM
44
What is the minimum educational requirements for any person who renders investment advice?
There is no minimum; however, the SEC and Administrator may require disclosure of educational backgrounds
45
For how long does the registration of an adviser that is registered with the SEC remain in effect?
Until it has been withdrawn, cancelled, or revoked by the SEC
46
The application for withdrawal of registration of an agent or IAR becomes effective in _____ days
30 days
47
Under the USA, all IA contracts must be __________ and must disclose __________ provided and related ______
in writing and must disclose services provided and related fees
48
If an IA is in possession of checks drawn by its client and made payable to third parties, how may custody be avoided?
By ensuring that it forwards the check within three business days
49
Regardless of assets under management, IAs must register with the SEC if any client is a ______________________________.
registered investment company
50
Is there a registration exemption for IARs doing business in a state if employed by an IA registered in another state?
Yes, if the IAR has no office in the state and has five or fewer retail clients in the state in the past 12 months
51
If an IA is registered with the SEC, is registration required in any state in which it intends to do business?
No. The National Securities Markets Improvement Act (NSMIA) exempts federal covered advisers from state registration
52
True or False: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions
True
53
Is an attorney who exclusively provides estate planning services considered an IA under the USA?
No. Provided the attorney's advice is incidental to his profession, he is excluded from the IA definition
54
What are some of the examples of items that cannot be covered by a soft-dollar arrangement?
Advertising, travel expense reimbursement, meals and entertainment, and computers
55
When an adviser files Form ADV with the SEC, when does registration become effective?
Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings
56
True or False: An IA firm that is acquired by a competitor must pay a new filing fee
False. The purchasing firm must update its application, but paying a new filing fee is not required
57
Is being charged with a felony or securities-related misdemeanor grounds for statutory disqualification?
No. Statutory disqualification is due to conviction for any felony or securities-related misdemeanor in the past 10 yrs
58
True or False: A person being compensated for providing clients with advice about securities is a broker-dealer
False. This person is considered an investment adviser
59
What forms of soft-dollar compensation are acceptable?
Research reports, seminars, software used to provide analysis
60
What step must an IA complete when faced with a conflict of interest?
The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action
61
An IA manages more than $110 million in assets and has only insurance companies as clients. Is SEC registration required?
No. An SEC exemption is provided to IAs whose only clients are insurance companies
62
A _________ bond is posted to cover the potential costs of legal action taken against certain persons
surety bond
63
True or False: If an IA's clients are institutions (e.g., banks and BDs), it is exempt from registration under the USA
True. However, this is provided that it has no place of business in the state
64
An IA has custody if it inadvertently receives client securities and hasn't returned them within ____ business days
3
65
If an IA's office is in State A, but its only clients are insurance companies, with whom must it register?
With the Administrator in State A. IAs whose only clients are insurance companies are exempt from SEC registration
66
True or False: The USA defines a bank providing investment recommendations to its clients as an IA
False. Banks are excluded from the IA definition
67
An IAR of a federal covered adviser has no office in NY, but has six clients who live in NY. Must he register in NY?
No. IARs of federal covered advisers are only required to register in states in which they have an office
68
An IA is established as a partnership and two of its five partners retire. Is this considered an assignment?
An IA is established as a partnership and two of its five partners retire. Is this considered an assignment?
69
An ___________________________________ is to an investment adviser what an ________ is to a BD.
IAR, agent
70
True or False: A firm producing investment research for BDs to deliver to clients is considered an IA under the USA.
True. Since advice is being provided, as a business, and compensation is received, the ABC test is met
71
If a pension consultant advises a plan regarding the law firm it should hire, must the consultant register as an IA?
No. IA registration is not required since the consultant is providing incidental advice that is not securities-related
72
True or False: A publisher of a financial magazine is considered an IA under the USA
False. Publishers of newspapers/magazines are excluded from the IA definition
73
True or False: A Consent to Service of Process must be filed by BDs, but not their agents
False. A Consent to Service of Process is required of all registrants
74
IA records must be kept for at least ____ years
5 years
75
Where do IAs send their registration forms?
Investment Adviser Registration Depository (IARD)
76
True or False: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the U.S
True
77
The application for registration of an agent or IAR becomes effective in _____ days
30 days
78
When an IA has custody, with whom are the assets held?
Assets are held by a qualified custodian. Clients must be notified of custodian's name, address, and manner of holding
79
What is required of an IA if there has been a minority change in firm ownership?
Provide written notification to clients and the Administrator
80
What must a federal covered adviser do if its assets under management fall below $90 million?
Withdraw its federal registration and register with a state Administrator(s)
81
An adviser is registered with the SEC under the Investment Advisers Act of 1940. What is the firm considered?
A federal covered adviser
82
If the Administrator requires an IA, BD, or agent to post a bond, is a deposit of cash or securities acceptable?
Yes. However, the Administrator determines the amount and types of securities that are appropriate
83
Is an employee of a BD who solicits new customers for an IA considered an IAR?
Yes. According to the USA, any person who solicits investment advisory service is considered an IAR
84
What is the general definition of an investment adviser?
A firm that provides advice/analyses regarding securities, as part of a business, and for compensation
85
An individual employed by an IA to manage the research department is required to register as an ____ under the USA
IAR
86
Any material changes to Form ADV must be filed ___________
promptly (within 30 days)
87
IAs with no place of business in a state, and whose clients are ____________ are not required to register in that state
institutions
88
True or False: An IA must physically deliver its brochure to clients at least annually
False. At a minimum, the IA must (in writing) offer to deliver its brochure annually
89
True or False: Bank holding companies are not considered IAs under the USA
False. They are excluded from the definition under the IA Act of 1940, not under the USA
90
True or False: A BD making recommendations about investing in various securities is an IA under the USA
False. Since the BD is not charging a fee for the advice, it is excluded from the IA definition
91
Is an IAR who is employed by a federal covered adviser required to register in the state?
Yes. IARs of federal covered advisers must register in any state in which they have a place of business
92
Under the USA, when must an IA provide a balance sheet to a client?
A balance sheet must be provided if the IA collects prepaid fees of $500 or more, six months or more in advance
93
Under the IA Act of 1940, when must a balance sheet be provided to a client?
A balance sheet must be provided if the IA collects prepaid fees of $1,200 or more, six months or more in advance.
94
If an adviser has check-writing privileges in a client's account, does this constitute custody?
Yes. Full discretionary control (having the ability to remove funds from the client's account) is considered custody
95
What is needed for an investment adviser to exercise discretion over a client's funds?
An adviser may exercise discretion for 10 days with the client's oral authorization as long as it is followed up in writing
96
True or False: If an adviser's only clients are insurance companies, it is exempt from SEC registration
True
97
For how long does the registration of a state-registered adviser remain in effect?
Until December 31, unless renewed by the adviser
98
Define the local exemption from SEC registration for an IA
The IA's clients reside in the state in which its office is located and its advice is not related to exchange-listed securities
99
An IAR with no place of business in a state must register in the state if he has more than ____ retail clients there
five
100
Is an employee of a securities firm who manages accounts for a fee considered an IAR?
Yes
101
Under the USA, the de minimis exemption limits an IA to no more than ____ clients within the previous ___ months
five clients within the previous 12 months
102
ADV Part I is a disclosure document for use by the _____ and the ________________
SEC and the Administrator
103
May the books and records of a federal covered adviser be subject to inspection by an Administrator?
Yes
104
Is registration with the SEC required of an adviser that manages $87 million of assets?
No. An established FCA must register with the state Administrator if the AUM falls below $90 million
105
How may the failure to pay the proper filing fee be corrected?
By paying the appropriate amount
106
To be allowed, a soft-dollar arrangement must benefit ____________
the client
107
Is an adviser required to register in a state in which it has no office, but has accredited investors who reside there?
Yes. Since the USA does not recognize accredited investors as institutional investors, IA registration is required
108
What type of advice may lawyers, accountants, teachers, and engineers provide and not be considered an IA?
Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost
109
When does an Administrator require an adviser to include its balance sheet in its ADV Part 2?
If the firm has custody of a client's funds or collects prepaid fees of $500 or more, six months or more in advance
110
True or False: If a new IA's registration became effective on April 1, it must renew on April 1 of the following year
False. State registrations expire annually on December 31 and then must be renewed
111
An IAR has no place of business in State A, but has six or more individual clients in State A. Where must she register?
She must register in any state in which she has six or more individual clients (even if she has no office in the state)
112
True or False: A pension consultant being paid to create an asset allocation program for a plan must register as an IA
True. The consultant must register as an IA since it is providing securities-related advice for compensation
113
The publisher of a financial publication that provides personalized advice is considered a(n) __________________
investment adviser
114
True or False: A BD that promotes wrap accounts to its clients must register as an IA under the USA
True. Since the wrap account involves a fee for advice, the BD must register as an IA
115
Is an accountant defined as an IA?
No. Accountants are excluded from the IA definition if their advice is incidental to their business
116
What form is used to notify Administrators that an IA is maintaining custody of client assets?
Form ADV
117
Is an exculpatory provision in an advisory contract permitted?
No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited
118
True or False: An IA with fewer than 15 retail clients in the past 12 months is exempt from registering under the USA
False. The USA de minimis exemption for advisers is five or fewer individual clients
119
True or False: An adviser to a mutual fund must register in the state in which the fund is domiciled
False. A federal covered adviser must be registered with the SEC, not a state
120
The IA Act of 1940 considers any communication that is directed to more than ___ person(s) to be advertising
one person
121
An investment adviser with more than $___________ under management must register with the SEC
$110 million
122
Under the Investment Advisers Act of 1940, when must an IA renew its registration?
Within 90 days from the IA's fiscal year-end
123
When an IA initially registers, who is automatically considered registered?
The officers and directors of the advisory firm
124
If an IA meets the IA definition in a state, when is it exempt from registration under the USA?
If it has no office in the state and it has institutional clients only OR five or fewer retail clients in the last 12 months
125
What document will an IA regularly provide to clients to notify them of the location of their securities?
The client's account statement
126
Identify some non-material (routine) changes to Form ADV
A change in the number of discretionary accounts or a change in the dollar amount under management by the adviser
127
An IA must maintain its books and records for a minimum of ____ years
5 years
128
An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?
No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment
129
Is an adviser to a mutual fund considered an IA under the USA?
No, mutual funds advisers are federally covered and are excluded from the IA definition at the state level
130
True or False: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts
False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500
131
If a BD or an IA ceases operations, how long must it maintain a surety bond?
Surety bonds must be maintained for three years after the firm ceases operations
132
An newly hired investment adviser representative wants to put the initials "IAR" on her business card. Is this allowed?
No. However, she may spell out "Investment Adviser Representative."
133
Under the USA, are banks and bank holding companies excluded from the IA definition?
No. Banks, savings institutions and trust companies are excluded, but bank holding companies are not
134
True or False: An agent of a BD who solicits client trades is not considered an IAR under the USA
True. There is no indication that the agent is managing accounts and charging a fee
135
True or False: Registration may be denied due to ANY misdemeanor convictions
False. Registration may be denied for ANY felony conviction or securities-related misdemeanor conviction
136
What is soft-dollar compensation?
Non cash compensation paid by a BD to an IA for directing securities transactions
137
Is there a limit to the amount of net worth the Administrator may require of an IA?
Yes. The Administrator may not set a requirement that exceeds the IA's home state
138
The rule governing the disclosure requirement of an IA to its clients is referred to as the __________ Rule.
the Brochure Rule
139
If an IA is no longer eligible for SEC registration, it has ____ days to file ADV-W and register at the state level.
180 days
140
True or False: The CEO of an advisory firm who establishes investment policy for the firm must register as an IA
False. The CEO is considered an IAR, not an IA
141
Is an IA permitted to use testimonials in its promotional material?
Yes. Provided the testimonial is not misleading and certain disclosures are made
142
BD records must be kept for at least _____ years
3 years
143
True or False: According to the USA, a BD providing asset allocation plans to its clients for a fee is an IA
True. Since the BD is receiving specific compensation for its advice, it is considered an IA
144
May an IAR solicit both sides of an agency cross transaction?
No, one side must be unsolicited
145
True or False: An IA with five or fewer retail clients in the state in the past 12 months must register under the USA
False. No registration is required as long as the IA has no place of business in the state
146
May an IAR and a client share in an account?
No. However, an agent may share in a client's account
147
True or False: The USA classifies an agent of a BD who also manages wrap accounts as an IA
No. IAs are firms, not individuals
148
What type of information will be found in an investment adviser's ADV Part I?
Firm name, # of employees, nature of business, history of officers/directors, legal/disciplinary action in past 10 years
149
When is a pension consultant required to register as an investment adviser?
When it is being paid to provide securities-related investment advice
150
In what type of arrangement may an IA acquire research reports without paying for them directly?
soft dollar arrangement
151
Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $____________
$2.2 million
152
When must a federal adviser file an updating amendment to determine continued eligibility for SEC registration?
Within 90 days of the end of the adviser's fiscal year
153
What are the three components that must be met for a firm to be defined as an IA?
1) Provide advice regarding securities, 2) Do so as a business 3) Receive specific compensation (the ABC test)
154
May the Administrator set minimum net worth requirements for IAs?
Yes, but no state may impose a requirement that exceeds the requirement of the IA's home state
155
If a firm provides advice solely based on U.S. government securities, is it required to register as an IA with the SEC?
No. U.S. government securities advisers are excluded from the IA definition under the IA Act of 1940.
156
What is updated at the annual renewal of an IA's registration?
Assets under management, the number of accounts, clients, employees, and IA representatives
157
If an IA has custody or discretion, it must include a ________ ______ with its Form ADV and brochure
If an IA has custody or discretion, it must include a balance sheet with its Form ADV and brochure
158
What record must an investment adviser maintain regarding its IARs?
The initial application for each IAR
159
What types of changes are considered significant changes for an adviser's Form ADV?
Change in fees, custody, and the name or location of adviser
160
True or False: A pension consultant that advises a plan regarding the accountant it should hire must register as an IA
False. IA registration is not required if a consultant provides incidental advice that is not securities-related
161
When may the Administrator cancel a registrant's registration?
If the registrant has died, ceased doing business, been declared mentally incompetent or cannot be located
162
When is Form ADV-W filed?
When an adviser withdraws its registration
163
Who manages accounts, solicits services, or makes recommendations on behalf of a registered investment adviser?
An investment adviser representative (IAR)
164
Does an IA that only accepts clients with at least $1 million under management need to register?
Yes. There is no exemption on the state or federal level if all of an IA's clients have $1 milllion under management
165
For financial professionals, state registration expires annually on ______________
For financial professionals, state registration expires annually on December 31.
166
When are non-material (routine) changes to Form ADV required to be filed?
Routine items require an amendment within 90 days after the end of the IA's fiscal year
167
An IA is required to deliver the brochure to its clients by no later than the __________ of the contract
An IA is required to deliver the brochure to its clients by no later than the signing of the contract
168
True or False: A Consent to Service of Process is an example of an exculpatory clause
False. Exculpatory clauses are waivers absolving agents from wrongdoing. The waivers are null and void under the USA
169
Describe a soft-dollar arrangement between an IA and a BD
An IA directs client transactions to a specific BD in return for research and brokerage services
170
What types of changes are considered material changes that require prompt amendment of an adviser's Form ADV?
Significant items, such as a name or location change
171
What is required of an IA if the firm goes through a majority change in ownership?
The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided
172
When and by whom is Form ADV-E filed?
It is filed within 120 days from the completion of an audit of the IA's books; filed by the auditor.
173
An IAR of a federal covered adviser has an office in State B with 4 clients who live in State B. Where must he register?
He must register in State B since he has an office in the state. The number of clients is not relevant
174
Is an IA always required to include a balance sheet in Part 2 of its Form ADV?
No. A balance sheet is required if the IA collects prepaid fees or has discretion
175
Part 2 of Form ADV may be used as the disclosure document that is provided to the IA's ________
clients
176
What form do IAs file to register?
Form ADV
177
What requirements may states impose on IAs that are registered with the SEC?
1. File with the state any documents that were filed with SEC
2. File Consent to Service of Process
3. Pay state fees
178
What duties does an IAR have according to the "know your customer" rules?
Make a reasonable inquiry into a customer's background and provide suitable advice based on known information
179
A client has just learned that his account will now be handled by another IAR. Is this considered an assignment?
No. Control of the account has not changed simply based on an IAR leaving the firm
180
An IA's brochure must have the same information that appears in what part of Form ADV?
Part 2 of Form ADV
181
When does the SEC require an adviser to include its balance sheet in its ADV Part 2?
If the firm has custody of a client's funds or collects prepaid fees of $1,200 or more, six months or more in advance
182
The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to ____________________
more than one person
183
A surety bond may be required if an investment adviser has _____________ or __________ of client assets
discretion or custody of client assets
184
What is the purpose of a Consent to Service of Process?
To appoint the Administrator as the applicant's attorney to receive and process any non-criminal legal complaints
185
If an IA has $20 million under management and advises an investment company, with whom must it register
Any IA that advises an investment company must register with the SEC (regardless of its AUM)
186
What document is required for an IAR to be authorized to pay his client's bills?
A full power of attorney
187
In place of a surety bond, the Administrator will accept a deposit of _______ or _____________
cash or securities
188
List the four categories of professionals who are excluded from the IA definition
Lawyers, accountants, teachers, and engineers (remember L, A, T, E)
189
List some of the records that must be retained by an IA for five years
Journals, blotters, ledgers, position records, and trade confirmations
