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Series 63 > State and Federal Regulations Governing Investment Advisers and IA Representatives > Flashcards

State and Federal Regulations Governing Investment Advisers and IA Representatives Flashcards

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1
Q

Is a certified public accountant who provides tax advice considered an IA under the USA?

A

No, CPAs are excluded from the IA definition.

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2
Q

True or False: A publisher of a financial magazine is considered an IA under the USA.

A

False. Publishers of newspapers/magazines are excluded from the IA definition.

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3
Q

Is an organization that provides ratings of securities and is nationally known considered an IA under the USA?

A

No

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4
Q

Is an attorney who exclusively provides estate planning services considered an IA under the USA?

A

No. Provided the attorney’s advice is incidental to his profession, he is excluded from the IA definition.

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5
Q

True or False: A BD making recommendations about investing in various securities is an IA under the USA.

A

False. Since the BD is not charging a fee for the advice, it is excluded from the IA definition.

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6
Q

True or False: According to the USA, a BD providing asset allocation plans to its clients for a fee is an IA.

A

True. Since the BD is receiving specific compensation for its advice, it is considered an IA.

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7
Q

True or False: The USA defines a bank providing investment recommendations to its clients as an IA.

A

False. Banks are excluded from the IA definition.

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8
Q

True or False: A firm producing investment research for BDs to deliver to clients is considered an IA under the USA.

A

True. Since advice is being provided, as a business, and compensation is received, the ABC test is met.

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9
Q

True or False: The USA classifies an agent of a BD who also manages wrap accounts as an IA.

A

No. IAs are firms, not individuals.

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10
Q

Is an adviser to a mutual fund considered an IA under the USA?

A

No, mutual funds advisers are federally covered and are excluded from the IA definition at the state level.

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11
Q

Is an employee of a securities firm who manages accounts for a fee considered an IAR?

A

Yes

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12
Q

Individuals employed by an IA who only perform ____________________ duties are excluded from registration under the USA.

A

Individuals employed by an IA who only perform clerical/ministerial duties are excluded from registration under the USA.

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13
Q

Is an employee of an IA who answers the telephone and does clerical work considered an IAR?

A

No

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14
Q

What form is used to notify Administrators that an IA is maintaining custody of client assets?

A

Form ADV

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15
Q

Investment advisers with custody must have an annual audit done by a(n) ____________________.

A

Investment advisers with custody must have an annual audit done by a(n) independent CPA.

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16
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.

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17
Q

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?

A

He must register in State B since he has an office in the state. The number of clients is not relevant.

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18
Q

True or False: According to the USA, investment advisers may generally charge performance-based fees.

A

False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.

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19
Q

True or False: An IA that has full discretion over a client’s account at a separate BD is considered to have custody.

A

True

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20
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.

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21
Q

What type of advice may lawyers, accountants, teachers and engineers provide and not be considered an IA?

A

Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost.

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22
Q

May the Administrator set minimum net worth requirements for IAs?

A

Yes, but no state may impose a requirement that exceeds the requirement of the IA’s home state.

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23
Q

According to the USA, all investment advisory contracts must be in __________ form.

A

According to the USA, all investment advisory contracts must be in written form.

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24
Q

If an adviser has check-writing privileges in a client’s account, does this constitute custody?

A

Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.

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25
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.

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26
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.

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27
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.

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28
Q

When an IA has custody, with whom are the assets held?

A

Assets are held by a qualified custodian. Clients must be notified of custodian’s name, address, and manner of holding.

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29
Q

Define “assignment” as it relates to IA contracts.

A

The transfer of ownership of a client’s account from one advisory firm to another. Client consent is required.

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30
Q

What may an investment adviser do with full discretion, but not with limited discretion?

A

Withdraw money from the account

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31
Q

Does the de minimis exemption apply to investment adviser representatives?

A

Yes

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32
Q

Does the de minimis exemption apply to BDs that have no place of business in a state?

A

No. The de minimis exemption only applies to IAs and IARs.

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33
Q

IAs with no place of business in a state, and whose clients are ____________ are not required to register in that state.

A

IAs with no place of business in a state, and whose clients are institutions are not required to register in that state.

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34
Q

List some of the different types of institutional clients. 8

A
  1. IAs,
  2. BDs,
  3. investment,
  4. insurance, or
  5. trust companies,
  6. banks,
  7. savings and loan associations, and
  8. pension plans
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35
Q

What requirements may states impose on IAs that are registered with the SEC? 3

A
  1. File with the state any documents that were filed with SEC,
  2. File Consent to Service of Process,
  3. Pay state fees
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36
Q

If an IA is registered with the SEC, is registration required in any state in which it intends to do business?

A

No. The National Securities Markets Improvement Act (NSMIA) exempts federal covered advisers from state registration.

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37
Q

Regardless of assets under management, IAs must register with the SEC if any client is a ______________________________.

A

Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.

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38
Q

Under the USA, all IA contracts must be __________ and must disclose __________ provided and related ______.

A

Under the USA, all IA contracts must be in writing and must disclose services provided and related fees.

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39
Q

What is required of an IA if the firm goes through a majority change in ownership?

A

The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided.

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40
Q

An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?

A

No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.

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41
Q

Under the USA, are banks and bank holding companies excluded from the IA definition?

A

No. Banks, savings institutions and trust companies are excluded, but bank holding companies are not.

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42
Q

For how long does the registration of a state-registered adviser remain in effect?

A

Until December 31, unless renewed by the adviser

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43
Q

Is there a limit to the amount of net worth the Administrator may require of an IA?

A

Yes. The Administrator may not set a requirement that exceeds the IA’s home state.

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44
Q

Is an IAR who is employed by a federal covered adviser required to register in the state?

A

Yes. IARs of federal covered advisers must register in any state in which they have a place of business.

45
Q

What type of advice may lawyers, accountants, teachers, and engineers provide and not be considered an IA?

A

Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost.

46
Q

If employed by a federal covered IA, is an IAR required to register in all states in which she is conducting business?

A

No. If the IAR has no place of business in the state, no state registration is required.

47
Q

In general, does the USA allow an adviser to charge performance-based fees?

A

No. However, such fee arrangements may be permitted by rule or order of the Administrator.

48
Q

If an adviser exercises full discretionary control over a client’s account, does this constitute custody?

A

Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.

49
Q

An IA has custody if it inadvertently receives client securities and hasn’t returned them within ____ business days.

A

An IA has custody if it inadvertently receives client securities and hasn’t returned them within 3 business days.

50
Q

What type of information will be found in an investment adviser’s ADV Part I? 5

A
  1. Firm name,
  2. # of employees,
  3. nature of business,
  4. history of officers/directors,
  5. legal/disciplinary action in past 10 years
51
Q

Any material changes to Form ADV must be filed ___________.

A

Any material changes to Form ADV must be filed promptly (within 30 days).

52
Q

When are non-material (routine) changes to Form ADV required to be filed?

A

Routine items require an amendment within 90 days after the end of the IA’s fiscal year.

53
Q

When is Form ADV-W filed?

A

When an adviser withdraws its registration

54
Q

With what system do IAs file their registration applications?

A

The Investment Adviser Registration Depository (IARD)

55
Q

ADV Part I is a disclosure document for use by the _____ and the ________________.

A

ADV Part I is a disclosure document for use by the SEC and the Administrator.

56
Q

Identify the acronym: POA

A

Power of Attorney

57
Q

What form do IAs file to register?

A

Form ADV

58
Q

If ABC Advisers has $112 million under management, it must register with ________.

A

If ABC Advisers has $112 million under management, it must register with the SEC.

59
Q

An IA’s brochure must have the same information that appears in what part of Form ADV?

A

Part 2 of Form ADV

60
Q

True or False: If an IA’s clients are institutions (e.g., banks and BDs), it is exempt from registration under the USA.

A

True. However, this is provided that it has no place of business in the state.

61
Q

What is Part 2 of Form ADV?

A

The portion of an IA’s application that may be used to satisfy the Brochure Rule (disclosure requirement)

62
Q

True or False: The manager of an IA’s human resources department is considered an IAR.

A

False. The manager’s responsibilities do not include providing advice about securities or managing accounts.

63
Q

What is required of an IA if there has been a minority change in firm ownership?

A

Provide written notification to clients and the Administrator

64
Q

An investment adviser with more than $___________ under management must register with the SEC.

A

An investment adviser with more than $110 million under management must register with the SEC.

65
Q

What is the purpose of an annual updating amendment.

A

To determine if an IA is eligible for continued SEC registration; it is filed within 90 days of its fiscal year end

66
Q

Is registration with the SEC required of an adviser that manages $87 million of assets?

A

No. An established FCA must register with the state Administrator if the AUM falls below $90 million.

67
Q

Is an employee of a BD who solicits new customers for an IA considered an IAR?

A

Yes. According to the USA, any person who solicits investment advisory service is considered an IAR.

68
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.

69
Q

An IA must register in any state in which its AUM are less than $___________.

A

An IA must register in any state in which its AUM are less than $100 million.

70
Q

True or False: A federal covered adviser is excluded from the definition of an IA under the USA.

A

True

71
Q

According to NASAA, an IA that has custody of client assets is required to maintain a net worth of $______.

A

According to NASAA, an IA that has custody of client assets is required to maintain a net worth of $35,000.

72
Q

According to NASAA, an IA that only has discretionary authorization is required to maintain a net worth of $______.

A

According to NASAA, an IA that only has discretionary authorization is required to maintain a net worth of $10,000.

73
Q

An IA’s brochure is not required to be provided when a contract is entered into with what type of client?

A

A registered investment company

74
Q

True or False: An IA must provide clients with a brochure at least 48 hours prior to the signing of the contract.

A

True. If it is provided at least 48 hours before the contract is signed, it cannot cancelled without a penalty.

75
Q

Is an IA always required to include a balance sheet in Part 2 of its Form ADV?

A

No. A balance sheet is required if the IA collects prepaid fees or has discretion.

76
Q

If an IA is in possession of checks drawn by its client and made payable to third parties, how may custody be avoided?

A

By ensuring that it forwards the check within three business days

77
Q

List the four categories of professionals who are excluded from the IA definition.

A
  1. Lawyers,
  2. accountants,
  3. teachers, and
  4. engineers
    (remember L, A, T, E)
78
Q

True or False: An adviser to a mutual fund must register in the state in which the fund is domiciled.

A

False. A federal covered adviser must be registered with the SEC, not a state.

79
Q

True or False: The CEO of an advisory firm who establishes investment policy for the firm must register as an IA.

A

False. The CEO is considered an IAR, not an IA.

80
Q

True or False: An agent of a BD who solicits client trades is not considered an IAR under the USA.

A

True. There is no indication that the agent is managing accounts and charging a fee.

81
Q

An individual employed by an IA to manage the research department is required to register as an ____ under the USA.

A

An individual employed by an IA to manage the research department is required to register as an IAR under the USA.

82
Q

IA records must be kept for at least ____ years.

A

IA records must be kept for at least five years.

83
Q

An IAR has no place of business in State A, but has six or more individual clients in State A. Where must she register?

A

She must register in any state in which she has six or more individual clients (even if she has no office in the state).

84
Q

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?

A

No. IARs of federal covered advisers are only required to register in states in which they have an office.

85
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.

86
Q

When does the de minimis exemption from registration apply for an IA that has no place of business in a state?

A

When an IA has no more than five non-institutional clients who are residents of the state (measured over 12 months)

87
Q

Under the USA, the de minimis exemption limits an IA to no more than ____ clients within the previous ___ months.

A

Under the USA, the de minimis exemption limits an IA to no more than five clients within the previous 12 months.

88
Q

If an IA meets the IA definition in a state, when is it exempt from registration under the USA?

A

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

89
Q

Is there a registration exemption for IARs doing business in a state if employed by an IA registered in another state?

A

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.

90
Q

An IA must maintain its books and records for a minimum of ____ years.

A

An IA must maintain its books and records for a minimum of five years.

91
Q

True or False: An IA with fewer than 15 retail clients in the past 12 months is exempt from registering under the USA.

A

False. The USA de minimis exemption for advisers is five or fewer individual clients.

92
Q

What types of changes are considered material changes that require prompt amendment of an adviser’s Form ADV?

A

Significant items, such as a name or location change

93
Q

What types of changes are considered significant changes for an adviser’s Form ADV? 4

A
  1. Change in fees,
    2 custody, and
    3.the name or
  2. location of adviser
94
Q

For how long must an IA maintain records?

A

FIve years

95
Q

Under the USA, when must an IA provide a balance sheet to a client?

A

A balance sheet must be provided if the IA collects prepaid fees of $500 or more, six months or more in advance.

96
Q

True or False: An IA with five or fewer retail clients in the state in the past 12 months must register under the USA.

A

False. No registration is required as long as the IA has no place of business in the state.

97
Q

True or False: A BD that promotes wrap accounts to its clients must register as an IA under the USA.

A

True. Since the wrap account involves a fee for advice, the BD must register as an IA.

98
Q

What document will an IA regularly provide to clients to notify them of the location of their securities?

A

The client’s account statement

99
Q

If an IA has custody or discretion, it must include a ________ ______ with its Form ADV and brochure.

A

If an IA has custody or discretion, it must include a balance sheet with its Form ADV and brochure.

100
Q

Before an IA may assign a client’s contract to another advisory firm, it must obtain the ________ ________.

A

Before an IA may assign a client’s contract to another advisory firm, it must obtain the client’s consent.

101
Q

An IA inadvertently receives client funds/securities and doesn’t return them within three business days. Is this custody?

A

Yes

102
Q

Define the term custody.

A

The legal responsibility for, or control over, another person’s assets

103
Q

An IAR may exercise discretion over a client’s account based on the client’s oral authorization for up to ___ days.

A

An IAR may exercise discretion over a client’s account based on the client’s oral authorization for up to 10 days.

104
Q

The rule governing the disclosure requirement of an IA to its clients is referred to as the __________ Rule.

A

The rule governing the disclosure requirement of an IA to its clients is referred to as the Brochure Rule.

105
Q

How are advisory fees most commonly charged?

A

As a percentage of assets under management over a specific period

106
Q

What must be stated in an investment advisory contract? 3

A
  1. The adviser will not be compensated on the basis of a share of the capital appreciation of the account.
  2. The adviser may not assign client contracts without the consent of the client.
  3. If the adviser is a partnership, clients will be notified of changes in the partnership within a reasonable period of time.
107
Q

According to the Uniform Securities Act Rule 203, an investment adviser must give a client or prospective client a disclosure document (usually Form ADV Part 2) either 48 hours before or at the time of opening the account. Exceptions to this rule include what? 2

A
  1. An adviser whose clients are only investment companies or
  2. where the contract is for impersonal services for which the client pays a fee of less than $500.
108
Q

In order for an IA to maintain custody of funds and securities, what is required in regards to the Administrator?

A

The IA must notify the Administrator and there must be no rule against custody.

Series 63 (7 decks)

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