Unit 1

Question 1

The powers of the Administrator include the ability to determine:

A) minimum net worth requirements for investment advisers
B) maximum net capital requirements for broker-dealers
C) minimum net worth requirements for agents who exercise discretion
D) surety bond requirements for investment advisers who do not exercise discretion or maintain custody

Answer 1

A) minimum net worth requirements for investment advisers

The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

Question 2

A federal covered registered investment adviser who receives compensation for advice and whose business is primarily as an investment adviser may describe its business as investment counsel if:

A) it receives SEC approval to use the definition
B) a substantial part of his business is providing investment supervisory services
C) it maintains custody of customer funds and/or securities
D) it maintains its registration by filing an updating amendment to its Form ADV annually

Answer 2

B) a substantial part of his business is providing investment supervisory services

The Investment Advisers Act of 1940 prohibits the use of the term “investment counsel,” unless the principal business of the person is as an investment adviser and a substantial part of the business is providing investment supervisory services (i.e., continuous advice for individual client portfolios).

Question 3

John Law is the owner of Mississippi Advisory Services (MAS), an independent financial planning organization. Law is registered as an investment adviser representative of SSC Securities and Investments, registered as a broker-dealer, and an investment adviser with the SEC. Supervision over Law’s advisory activities is the responsibility of

A) SSC’s CCO.
B) the SEC.
C) John Law.
D) MAS’s CCO.

Answer 3

A) SSC’s CCO, the broker-dealer

It is common for independent financial planners to establish their own business entity and “hang” their registration as an IAR with another firm (as is the case in this question). The rules emphasize that these independent contractors are under the supervision of the carrying firm’s CCO in the same way that inhouse IARs are.

Question 4

Credible Investment Specialists (CIS) is a state-registered investment adviser with its only offices in State A. In which state(s) would registration be required?

I. State A where the only clients are large pension plans
II. State B where the only clients are banks
III. State C where the only clients are insurance companies
IV. State D where there are 6 or fewer retail clients over any 12 month period

A) IV only
B) II and III
C) I and IV
D) I only

Answer 4

C) I and IV

For those investment advisers who are not federal covered, registration is always required in any state in which the firm maintains a place of business, regardless of the nature of its clientele. If there is not a place of business in the state, registration is not required when the clientele is limited to institutions, such as banks, insurance companies, and large employee benefit plans (at least $1 million in assets). Once the adviser has more than 5 retail clients in a state over a 12-month period, the de minimis exemption is lost and registration is required.

Question 5

MidWest Advisory Services has $175 million in assets under management and has offices in 10 Midwest states. Regarding recordkeeping requirements, MidWest 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

Answer 5

D) 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.

Question 6

Long-Term Financial Solutions, Inc. (LTFSI), an investment adviser registered in five states, files a Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct?

A) As the successor firm, Gold and Sylver Advisers must keep copies of the LTFSI corporate charter for at least three years after LTFSI’s acquisition.
B) Gold and Sylver will not have to amend their Form ADV Part 1 until the filing of their annual updating amendment.
C) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition.
D) Gold and Sylver must notify all clients of LTFSI that their advisory contracts have been assigned.

Answer 6

C) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition.

When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to the Form ADV Part 1.

Question 7

Which of the following is NOT a person as defined by the Uniform Securities Act?

A) XYZ Dry Cleaners, Inc., whose shareholders all work on the premises and also offer financial advice to customers who request it.
B) Guelph, a small city outside of Toronto, Ontario, that maintains an investment account at a brokerage house to invest surplus funds.
C) A child prodigy for whom his mother, as custodian, opened an account at a major securities firm.
D) A small unincorporated investment club.

Answer 7

C) A child prodigy for whom his mother, as custodian, opened an account at a major securities firm.

Under the Uniform Securities Act, the term “person” has a specific meaning. “Person” refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government. A minor child, is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children.

Question 8

Under the Uniform Securities Act, which of the following is (are) excluded from the definition of an investment adviser when providing investment advice solely incidental to the business?

I. Lawyer
II. Accountant
III. Engineer
IV. Teacher

A) II and IV
B) I and III
C) I, II, III, and IV
D) I, II, and IV

Answer 8

C) I, II, III, and IV

Certain professionals are excluded from the definition of an investment adviser if the advice provided is incidental to the practice of their profession and no additional compensation is charged for the advice. Lawyers, accountants, teachers, and engineers are excluded. This is best remembered through the acronym LATE. An Administrator has the power to exclude any person from the definition.

Question 9

Which of the following statements are TRUE?

I. The Uniform Securities Act is not the actual law of any state or territory of the United States.
II. The National Securities Markets Improvement Act of 1996 requires states and the federal government to have identical registration requirements.
III. The state securities Administrator has responsibility for the enforcement and administration of a state’s securities law.

A) II and III
B) I and II
C) I, II, and III
D) I and III

Answer 9

D) I and III

The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The NSMIA’s purpose is to eliminate dual registration, not to require identical laws.

Question 10

Under the Uniform Securities Act, which of the following investment advisers with no place of business in the state must register with the state as an investment adviser?

A) An adviser managing more than $110 million in assets
B) An adviser rendering advice to no more than 10 individual clients within a 12-month period
C) An adviser rendering advice solely to broker-dealers
D) An adviser rendering advice to employee benefit plans with at least $1 million in assets

Answer 10

B) An adviser rendering advice to no more than 10 individual clients within a 12-month period

An investment adviser with no office in the state would be exempt from registration in the state if the adviser renders advice to no more than 5 noninstitutional clients (not 10) in a 12-month period. If an investment adviser has no office in the state, and renders advice solely to broker-dealers, insurance companies, banks, investment companies, governmental agencies, or employee benefit plans with assets of $1 million or more, the adviser is exempt from registration with the state. If the adviser manages assets of $110 million or more, the adviser would be required to register with the SEC, not the state.

Question 11

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

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

Answer 11

B) 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.

Question 12

When filing the consent to service of process, which of the following is TRUE?

A) It must be filed annually on the dates specified by the Administrator.
B) It is supplied with the initial registration and remains on file permanently.
C) It is not required of investment adviser representatives, only investment advisers.
D) It expires simultaneously with the registration on December 31.

Answer 12

B) It is supplied with the initial registration and remains on file permanently.

The consent to service of process is supplied with the initial registration and remains on file permanently.

Question 13

Which of the following would NOT be considered to be in the business of an investment adviser?

A) A person who provides investment advice but is compensated only through commissions on the sale of stock
B) A person compensated for investment advice, although this service is not a primary part of the business
C) An accountant who provides occasional investment advice but receives no separate fee for the service
D) A person compensated for investment advice, but who provides the advice only to institutions

Answer 13

C) An accountant who provides occasional investment advice but receives no separate fee for the service

In applying the business standard, the following criteria are used: (1) Does the person hold himself out as an investment adviser, or does he provide investment advice on a frequent or regular basis? (2) Does the person receive any compensation, regardless of whether it is paid separately or included in any other compensation? (3) If the person engages in other financial service activities in connection with the advice, it cannot be used to avoid the business standard. In looking at these criteria, it would appear that all choices listed are considered investment advisers. However, under exclusions from the definition, accountants who give advice solely incidental to the conduct of their profession and who receive no special compensation for this advice are excluded from the definition along with lawyers, engineers, teachers, and broker-dealers.

Question 14

Under the Uniform Securities Act, all of the following persons may provide investment advice incidental to their normal business without requiring registration as an investment adviser EXCEPT

A) a lawyer
B) an engineer
C) a teacher
D) an economist

Answer 14

The Uniform Securities Act does not grant an economist exemption from registration, but it does offer an exemption to teachers, lawyers, and engineers if the investment advice is incidental to their business; thus the acronym LATE for lawyers, accountants, teachers, and engineers.

Question 15

Platinum Investment in Growth Group, Inc. (PIGGI) is registered in and has its principal office in State W. PIGGI has near-term plans to open offices in State A and B. In an effort to test the waters, PIGGI mails several hundred flyers to prospects in those 2 states. Under the Uniform Securities Act,

A) as long as PIGGI did not maintain an office in either of these states, the flyers could be mailed
B) these flyers could be mailed, but no accounts can be opened until PIGGI is registered in States A and B
C) these flyers could not be mailed until PIGGI was registered in States A and B
D) as a federal covered investment adviser, the flyers would need filing with the SEC

Answer 15

C) these flyers could not be mailed until PIGGI was registered in States A and B

Any attempt to hold oneself out as offering investment advice as part of a business would require the person to be registered in the state, unless that person qualifies for an exclusion or exemption. Nothing in this question implies that an exclusion or an exemption applies. We know that PIGGI is not a federal covered investment adviser (and therefore does not need to file its flyers with the SEC) because we are told it is registered in State W—federal covered advisers don’t register in any state.

Question 16

Under the Uniform Securities Act, who must register as an investment adviser?

A) A registered broker-dealer who receives compensation for providing investment advice
B) A financial planner with no place of business in a state and who advises only trust companies
C) An accountant who provides advice solely incidental to the business
D) A bank that provides investment advice

Answer 16

A) A registered broker-dealer who receives compensation for providing investment advice

Registered broker-dealers that provide advice only incidentally to their business are exempt from the definition if they do not receive compensation. However, a broker-dealer that receives compensation for investment advice must register. A financial planner with no place of business in a state and who advises only trust companies is exempt from registration. Out-of-state advisers (with no office in the state) are not defined as investment advisers within a state if their only clients within the state are other investment advisers or broker-dealers, financial institutions, or institutional investors. Banks are excluded from the definition of investment adviser, as are accountants who provide advice only incidentally to their business.

Question 17

Which of the following is an investment adviser?

A) A columnist for a major news magazine who writes on the business and economic functions of banking institutions
B) A lawyer with sophisticated investment experience who gratuitously offers his clients advice on the value of securities
C) A retired mechanical engineer who offers investment advice in his areas of expertise to a small number of clients for a fee
D) A bank that purchases securities on behalf of its custodial accounts

Answer 17

C) A retired mechanical engineer who offers investment advice in his areas of expertise to a small

Even though an engineer is part of the acronym LATE, a retired or active mechanical engineer who offers investment advice to clients for a fee falls within the definition of investment adviser under the Uniform Securities Act. The LATE exclusion only applies to incidental advice given in the practice of a profession.

Question 18

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

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

A) I only
B) Both I and II
C) II only
D) Neither I nor II

Answer 18

D) Neither I nor II

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.

Question 19

Which of the following parties is most likely to be considered an investment adviser under the Investment Advisers Act of 1940?

A) The trust department of Citibank, which handles billions of dollars in trust assets
B) A CPA who manages investment accounts for 50 clients and charges hourly fees for the service
C) An expert in fixed-income securities whose only clients are individuals and whose only recommendations deal with securities issued or guaranteed by the U.S. Treasury
D) Dow Jones, Inc., publisher of The Wall Street Journal

Answer 19

B) A CPA who manages investment accounts for 50 clients and charges hourly fees for the service

The Investment Advisers Act of 1940 excludes accountants providing investment advice from the definition of investment adviser only when the advice is given on an incidental basis and with no specific compensation. A publisher of periodicals of general circulation, whether or not the publication covers financial matters, is excluded from the definition, as is an adviser whose advice is exclusively limited to U.S. government securities. Banks are also excluded from the definition of investment adviser under the act.

Question 20

A foreign private adviser is defined in the Dodd-Frank Act as any investment adviser that

I. has no place of business in the United States.
II. has, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser.
III. has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million.
IV. holds itself out to the public in the United States as an investment adviser or acts as an investment adviser to an investment company registered under the Investment Company Act of 1940.
A) IV only
B) I and IV
C) I, II, and III
D) II and III

Answer 20

C) I, II, and III

There are 4 requirements to be considered a foreign private adviser. Choices I, II, and III are all included, and, if choice IV said – does not hold…, it would have been the fourth requirement. By holding itself out to the public, it can’t be a private adviser

Question 21

The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of

A) each investment adviser representative’s immediate supervisor.
B) the Administrator.
C) the chief compliance officer.
D) the managing principal.

Answer 21

C) the chief compliance officer.

It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the “first-line” responsibility, but the “buck stops” with the CCO.

Question 22

Under the Investment Advisers Act of 1940, which of the following is TRUE about the use of the term “investment counsel” by investment advisers?

A) Advisers may use the term only if they are attorneys.
B) Advisers may use the term only if their principal business is acting as an investment adviser and a substantial part of their business consists of providing continuous advice based on a client’s individual needs.
C) Advisers may use the term without restriction as long as they are registered.
D) The use of the term is prohibited under any circumstances.

Answer 22

B) Advisers may use the term only if their principal business is acting as an investment adviser and a substantial part of their business consists of providing continuous advice based on a client’s individual needs.

Advisers may use the term “investment counsel” only if two conditions are met: rendering investment advice must be their principal business and a substantial part of that business must be providing investment supervisory services—that is, continuous advice based on the individual needs of each client.

Question 23

Under the USA, a person who is in the business of providing advice on trading futures contracts in addition to advising clients on securities issued or guaranteed by the U.S. government is

A) required to be a registered investment adviser in the state
B) required to be a registered agent in the state
C) required to be a registered investment adviser representative in the state
D) not required to be a registered investment adviser in the state

Answer 23

D) not required to be a registered investment adviser in the state

This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of “investment adviser” a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser.

Question 24

Perpetual Prosperity Advisers (PPI), a state-registered investment adviser, files an application to withdraw its registration as a registered investment adviser. Records pertaining to client accounts must be

A) sent to the Administrator of the state in which the client was a resident.
B) destroyed once the withdrawal has become effective.
C) sent to the Administrator of the state in which PPI maintained its principal office.
D) retained for the time period specified in the NASAA Model Rule on record keeping.

Answer 24

D) retained for the time period specified in the NASAA Model Rule on record keeping.

The NASAA Model Rule on record keeping requires that records relating to an investment adviser’s clients be retained for a period of 5 years from the end of the fiscal year in which the record was made. Those records must be retained even though the firm is no longer in business.

Question 25

Which of the following is specifically excluded from the definition of investment adviser under the Investment Advisers Act of 1940, when that person’s investment advice is solely incidental to the practice of their profession?

A) Aeronautical engineer
B) Pension consultant
C) Financial planner
D) Athlete’s financial manager

Answer 25

A) Aeronautical engineer

Lawyers, accountants, engineers, teachers, and broker-dealers who do not charge a separate fee for investment-related advice, when such advice is solely incidental to the practice of their profession, are excluded from the definition.

Question 26

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

A) 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) must be registered both with the SEC and the state
C) is exempt from state registration under the Uniform Securities Act but must be federal registered under the Investment Advisers Act of 1940
D) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements

Answer 26

D) 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 U.S. 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.

Question 27

An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term

A) pension consultant
B) financial planner
C) investment counsel
D) senior adviser

Answer 27

C) investment counsel

The term investment counsel may only be used by those advisers whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts.

Question 28

Based on the Investment Advisers Act of 1940, which of the following would be excluded from the definition of investment adviser?

I. A lawyer who advertises financial planning services
Persons whose advice relates solely to government securities
II. An accountant who receives separate fees for providing investment advice

A) I and III
B) II and III
C) I only
D) II only

Answer 28

D) II only

Lawyers and accountants may not claim the exclusion if they advertise their investment advisory or financial planning services, or if they charge a separate fee for such services. Broker-dealers may not claim the exception if they provide investment advice beyond the scope of the brokerage business or if they charge a separate fee for advice.

Question 29

The Uniform Securities Act’s definition of investment adviser would include

A) A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities
B) A temporary employee hired to assist in administrative responsibilities of an advisory firm
C) Any person who is a federal covered investment adviser
D) An investment adviser representative of an advisory firm who makes securities recommendations on a regular basis for compensation

Answer 29

A ) A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities

A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities meets the 3-prong test as an investment adviser.

Question 30

Which of the following is NOT considered to be in the business of investment advising?

A) Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only
B) A person who prepares reports about securities in general
C) A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance
D) An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business

Answer 30

A) Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only

Please note that this question is not asking “who is an investment adviser?” It is asking about one of the 3 prongs – being in the “business”. The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person’s principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.

Question 31

A registered broker-dealer offers investment advice as an incidental part of its commission business. One of its agents charges for investment advice as a freelance investment adviser outside the scope of his employment at the firm. Which of the following statements are TRUE?

I. The broker-dealer must register as an investment adviser.
II. The agent must register as an investment adviser.
III. The agent need not register as an investment adviser.
IV. The broker-dealer need not register as an investment adviser.

A) II and IV
B) III and IV
C) I and II
D) I and III

Answer 31

A) II and IV

Broker-dealers who offer advice as an incidental part of their commission business are not required to register as investment advisers. However, if an agent provides investment advice outside the scope of employment at the broker-dealer, he must be registered.

Question 32

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

A) Investment advisers with a place of business in the state and less than $100 million in assets under management
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 without an office in the state whose clients are exclusively insurance companies

Answer 32

A) 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.

Question 33

The Investment Advisers Act of 1940 lists several specific exclusions from the definition of investment adviser. Which of the following are included in that listing?

A) Pension consultants
B) Sports or entertainment representatives
C) Attorneys for whom providing investment advice is incidental to the practice of their profession
D) Publishers of investment newsletters distributed based on market events.

Answer 33

C) Attorneys for whom providing investment advice is incidental to the practice of their profession

Attorneys qualify for a professional exclusion if the advice they render is solely incidental to the practice of their profession. They are part of the L.A.T.E. group exclusion. To qualify for the publisher exclusion, the publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry. Sports or entertainment representatives and pension consultants were added to the definition of investment adviser through Release IA-1092 in 1987.

Question 34

A federal covered investment adviser registered with the SEC that has offices in 5 states must do which of the following?

I. Pay state filing fees if required by the Administrator
II. Notify the Administrator within 1 business day if net worth falls below the required minimum
III. Notice file in any of those states where required by the Administrator
IV. Become licensed as a broker-dealer

A) II and IV
B) I and III
C) II and III
D) I and II

Answer 34

B) I and III

Although exempt from state registration, federal registered investment advisers must notice file and pay state filing fees (if required by the Administrator) to practice within a given state. Federal covered advisers do not come under the financial or recordkeeping requirements of the state, only the SEC

Question 35

Which of the following persons is NOT excluded from the definition of investment adviser if their advice given is incidental to the individual’s profession?

A) Lawyer
B) Engineer
C) Teacher
D) Economist

Answer 35

D) Economist

The exclusion applies to lawyers, accountants, engineers, and teachers, provided there is no separate fee for their investment-related advice. Economists are not specifically named in the exclusion.

Question 36

Both the Investment Advisers Act of 1940 and SEC Release IA-1092 specifically exclude from the definition of “investment adviser” certain persons who provide investment advice solely incidental to the practice of their profession. Which of the following would NOT by definition qualify for this exclusion?

I. An accountant who provides high-tax-bracket clients with a useful chart showing them how to compute the tax-equivalent yield for municipal bonds
II. A divorce attorney who, after obtaining settlements for clients, provides them with a list of suggested investment alternatives encouraging them to be prudent with their newfound wealth
III. A university professor who provides investment advice for a substantial fee to fewer than 15 clients during any consecutive 12-month period, none of whom is an investment company
IV. An economist who consults with very large corporate employee benefit plans on how to best invest their funds

A) III and IV
B) I and II
C) I and IV
D) II and III

Answer 36

A) III and IV

The university professor loses the exclusion as soon as the advice is no longer incidental to the practice of the profession (which it clearly is here, regardless of the number of clients). The list of professions qualifying for the exclusion does not include an economist, who in this case would be included in the definition as a pension consultant. The key to remember is the acronym “LATE”—lawyer, accountant, teacher, and engineer.

Question 37

An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify,

A) the private fund adviser must have less than $110 million in private fund assets under management
B) neither the private fund adviser nor any of its advisory affiliates have been convicted of a felony within the past 12 years
C) every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million
D) the fund’s outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are individuals with at least $5 million in investments

Answer 37

C) every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million

The 100 or less investors is technically known as advising a 3(c)(1) issuer. In that case, all the investors must be qualified by meeting the net worth or assets managed by the adviser as stated. The $5 million is the requirement under federal law for an adviser seeking the federal exemption for a 3(c)(7) fund, which is not limited to 100 investors. Conviction of a felony within the past 10 years, not 12, will generally make one a “bad actor” and cause the exemption to be forfeited. Private fund advisers must keep the AUM under $150 million, not $110 million.

Question 38

Which of the following statements concerning the books and records of a state-registered investment adviser under the Uniform Securities Act is (are) true?

I. Books and records must be maintained in the principal office of the adviser for the first two years from the origination date.
II. Books and records must be maintained in an easily accessible place for no less than five years from the end of the last fiscal year in which an entry was made.
III. Copies of all investment letters, advertisements, or communications to two or more persons must be preserved for five years from the end of the fiscal year of the publication date.
IV. An adviser who ceases business continues to be responsible for the maintenance and preservation of certain records, such as corporate charters and minute books, for three years after termination of the enterprise.

A) II only
B) I only
C) I, II, and III
D) I, II, III, and IV

Answer 38

D) I, II, III, and IV

All books and records required to be maintained by actively registered investment advisers—including investment letters, advertisements, or other communications to two or more persons (10 if the question dealt with federal law)—must be preserved in a readily accessible place for five years from the end of the fiscal year in which they were created or communicated. For the first two years, they must be maintained in the appropriate office of the adviser. The adviser remains responsible for the preservation of certain records, such as corporate charters and minute books or partnership agreements if operated in that business form, for three years after ceasing business.

Question 39

Which of the following are required for an initial application for registration as an investment adviser?

I. A consent to service of process
II. A fee
III. Disclosure as to whether the applicant will have discretionary powers over client funds and/or securities
IV. Disclosure as to whether the applicant will have custody of client funds or securities

A) I, II, III, and IV
B) I, II, and IV
C) I and II
D) II only

Answer 39

A) I, II, III, and IV

An initial application must contain a consent to service of process and a fee, and it must disclose whether the applicant will have discretionary powers over, or custody of, client funds and/or securities.