Unit 1 Flashcards
(39 cards)
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
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.
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
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).
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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
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.
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.
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.
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.
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
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.
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.
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.
