Unit 9 | Regulation Of Investment Advisors Including State-Registered And Federal Covered Flashcards
Which of the following is included in the definition of a person?
A. A minor
B. The National Hockey League
C. A deceased person
D. A person whom the courts have declared to be mentally incompetent
B. Odd to think of the NHL as a person, but they would be included in the USA’s definition. Such questions are much easier if you remember the three nonpersons.
A person giving advice on which of the following investments would be deemed to be giving advice on securities?
A. Gold
B. Common stock
C. Rental real estate
D. Rare stamps
B. Common stock is a security; the others are considered nonsecurities.
Which of the following investment advisers would be permitted to use the term investment counsel?
A. A Certified Financial Planner (CFP®), offering a wide range of services to her clients, including tax planning, estate planning, and insurance planning, as well as investment advice
B. A professional providing a market timing service with an annual subscription fee of $495 (this service attempts to maximize profits by suggesting entry and exit points for over 100 listed stocks)
C. A firm whose exclusive business is placing their client’s assets into model portfolios which are monitored on a daily basis
D. All of these
C. In order for an individual or an entity to be referred to as an investment counsel, they should fulfill two fundamental criteria. Firstly, the primary focus of the business must be to offer investment advice, and secondly, the adviser must provide investment supervisory services. To meet both these requirements, the adviser can run model portfolios for clients with daily monitoring.
A financial planner, on the other hand, may not be considered primarily an investment adviser, since her services encompass a wide range of offerings, of which investment advice forms only a part. The wording of the exam is frequently used to indicate that investment advice is not the principal activity.
In contrast, although the market timing publisher may offer investment advice as its primary business activity, the description does not indicate whether the publisher monitors individual client accounts. Therefore, it cannot be categorized as an investment counsel unless it provides investment supervisory services.
Under SEC Release IA-1092, which of the following is most likely to meet the definition of an investment adviser?
A. A person who sells long-term care insurance
B. A person who advises businesses on the best locations for their stores
C. A person who assists pension plans in the selection of portfolio managers
D. A person who manages portfolios of investment-grade coins
C | This is the role of a pension consultant. Unless the insurance has a securities aspect, selling it would not be considered investment advice.
Real estate and coins are not securities.
LO 9.a
Under the Uniform Securities Act, the term person would not refer to which of the following?
A. A deceased individual
B. A subdivision of a government
C. An unincorporated amateur athletic club
D. A nonprofit, charitable corporation
A | There are three specific “nonpersons” on this exam. They are (1) a deceased individual,
(2) an individual declared mentally incompetent, and (3) a minor. A person can be almost any entity, including a corporation, a partnership, an unincorporated association, a subdivision of a government, a trust that issues shares of ownership (such as a unit investment trust), or a natural person (an individual).
LO 9.a
The Uniform Securities Act excludes certain persons from the definition of an investment adviser if their performance of advisory services is solely incidental to their professions. This exclusion would apply to all of the following except
A. an accountant.
B. an economist.
C. an electrical engineer.
D. a college professor teaching an economics course.
B. As long as the activity is incidental to the professional practice, and no separate fee for the advice is charged, the act excludes accountants, lawyers, professional engineers (aeronautical, civil, mechanical, or other), and teachers. Economists are not included in this listing (most economists are not teachers).
Who of the following would not seek an exemption from registration under the Investment Advisers Act of 1940?
A. A person whose only advisory clients are insurance companies
B. A person whose only offices are in a single state, whose only clients are residents of that state, and who does not render advice on securities traded on a national exchange
C. A person who only advises venture capital funds
D. An accountant whose advice is incidental to her accounting business and for which no separate fee is charged
Answer: exemptions described above.
D. This is tricky (as is the exam). The accountant is excluded from the definition. Therefore, there is no reason for her to look for an exemption. Anyone who is excluded is automatically exempt from registration. The other three choices meet the definition of investment advisers and qualify for one of the abovementioned exemptions.
A state-registered investment adviser would not qualify for the de minimis exemption if, over 12 months, it had
A. five retail clients.
B. five or fewer retail clients.
C. fewer than six retail clients.
D. six or fewer retail clients.
D | Because the maximum is five retail clients in 12 months, the choice with six clients or fewer is over the limit. Notice that “fewer than six” and “five or fewer” mean the same thing.
LO 9.b
Section 402 of the Dodd-Frank Act defines a private fund as “an issuer that would be an investment company, as defined in Section 3 of the Investment Company Act of 1940, but for Section 3(c)(1) or 3(c) (7) of that Act.” Section 3(c)(1) places a limit on beneficial ownership of shares to not more than
A. 10 persons.
B. 35 persons.
C. 100 persons.
D. 500 persons.
C | Section 3(c) (1) limits the number of investors to a maximum of 100. Section 3(c) (7) does not have a numerical limit on investors, but it does have more stringent financial requirements.
LO 9.c
If a prospective client wanted to know what type of investment strategies are employed by an investment adviser, the information would be found in the adviser’s
A. Form ADV Part 1A.
B. Form ADV Part 1B.
C. Form ADV Part 2A.
D. Form ADV Part 2B.
C. Form ADV Part 2A contains information of most use to clients, such as the type of strategies employed by the adviser. Part 1A contains information needed by the regulators; Part 1B is only for state-registered IAs; Part 2B contains information dealing with those individuals in the firm who manage accounts.
Without any other possible exemption, registration with the SEC would be prohibited for which of the following investment advisers?
A. A pension consultant managing $150 million
B. The investment adviser under contract to an open-end investment company with $18 million in assets
C. An investment adviser whose assets under management are $103 million
D. An investment adviser who would be required to register in 17 states
A | Dodd-Frank removed the prohibition against registering with the SEC for those who would otherwise be required to register in 15 or more states. It does the same for pension consultants advising more than $200 million, not $150 million. With AUM between $100 million and just under $110 million, an IA can register with the SEC or the states. Any investment adviser under contract to an investment company registered under the Investment Company Act of 1940 is considered a federally covered IA and must register with the SEC.
LO 9.d
In which of the following cases is it necessary to submit a new Form ADV rather than an amended one?
A. A successor firm
B. A change to the location of the firm’s principal office
C. A change in the structure of the firm from a partnership to a corporation
D. The firm changes its fee structure
A | In almost every instance, changes require the filing of an amended ADV. When the change is material, the filing is done promptly. In other cases, it is done within 90 days of the end of the adviser’s fiscal year. When there is a successor firm, it is treated as a new entity requiring a new Form ADV Part 1 and Part 2.
LO 9.e
Which of the following would NASAA consider a substantial prepayment of fees?
A. $500 covering the next six months
B. $800 covering the entire contract year
C. $800 covering the next calendar quarter
D. $5,000 covering the following month
B. NASAA (state law) defines a substantial prepayment of fees to be more than $500 six or more months in advance. While $800 and $5,000 are certainly more than $500, they cover a shorter period than six months.
Mammon Money Managers (MMM) has its principal office in State A and is registered in States B, C, and D. MMM exercises discretion in client accounts. As a result, MMM would have to meet the net worth or bonding requirements of
A. the SEC.
B. State A.
C. the state with the highest requirement.
D. each state.
B. A state-registered investment adviser need only meet the financial requirements of the state where its principal office is located. SEC requirements are meaningless here because this is a state-registered firm.
Under the Investment Advisers Act of 1940, all of the following are true regarding adviser recordkeeping except
A. the lA must keep records of transactions made for its account and the account of investment adviser representatives to lessen the likelihood of scalping.
B. computer-generated records may be stored in that format.
C. client account records must be maintained, including a list of recommendations.
D. records must be maintained for two years from the end of the fiscal year in which the last entry was made.
D. This is the exception because the records must be kept for five years. Nothing in the question asked about the two-year requirement in the office. The five-year requirement is that records be easily accessible, whether in the office or not
