Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

53 Cards in this Set

  • Front
  • Back

What is the objective of the Investment Advisers Act (IAA) of 1940?

a) to protect the public and investors against malpractice by persons paid for advising others about securities

b) to require disclosure, prohibit illegal profit sharing arrangements, etc.
Why is SEC Release IA-770 important to financial planners?
1) It is the SEC’s interpretation of how the IAA relates to financial planners.

2) It indicates how the SEC will enforce the Act. Most financial planners are investment advisers under the Act and must comply (unless they can rely on an exemption or exception).
What conclusions can you draw from the definition of “security” in the IAA?
1) The definition of security is very broad.

2) It includes just about everything; few potential investments escape it.
Three tests are used to determine if an individual will be considered to be an investment adviser under the IAA:
(1) providing advice,
(2) the business standard, and
(3) receiving compensation.
What is meant by “advice?”
1) giving advice

2) issuing reports

3) making recommendations
Does advice have to be specific in nature to be considered advice for the IAA?
No, it need not be about a certain security. Merely suggesting a type of security (instead of an investment vehicle not considered a security) is considered advice.
List the three guidelines used to determine if an individual is in the business of providing investment advice within the context of the IAA.
1) Is the investment advice solely incidental to a non-investment advisory principal business of the person giving advice?

2)How specific is the advice?
(The more specific, the more likely the person is in the business of giving investment advice.)

3. Is special compensation received for providing investment advice?
In determining if an individual is to be classified as an investment adviser, does compensation have to be in the form of a separate fee charged for investment advisory activities for this test to be met?
No, it can be a fee relating to total services, a commission, etc. The issue is one of receipt of economic benefit.
Name the six categories of exceptions under the definition of investment adviser.*
1) a bank or bank holding company as defined by law

2) a lawyer, accountant, engineer, or teacher whose performance of advisory services is solely incidental to the practice of his or her profession

3) a broker or dealer whose performance of advisory services is solely incidental to his or her conduct as broker or dealer, and who receives no special compensation for the advice

4) a publisher of a bona fide newspaper or financial publication of general and regular circulation

5) a person whose advice is limited to securities issued and guaranteed by the U.S. government

6) other persons designated by the SEC (no others are
currently named)
There are three primary types of investment advisers who are exempted from registration even though they fall within the definition.
1) an intrastate adviser in unlisted securities: adviser whose clients are all residents of a single state (that of adviser’s principal business office), and who does not furnish advice on securities listed on national exchanges

2) an adviser whose only clients are insurance companies

3) a private adviser who
1. during the previous 12 months had fewer than 15 clients
2. does not hold himself or herself out generally to the public as an adviser AND
3. does not act as such for a registered investment company
Additionally, certain charitable organizations may be exempt.
Briefly describe situations in which the broker-dealer exception is not available to a brokerage firm representative.
- The representative provides advice independent of his or her employer by establishing an independent planning service.

- The representative provides advice without the knowledge and approval of his or her employer.
Under current rules, how does an investment adviser register with the SEC?
- by filing Form ADV with the SEC

- after acceptance of initial registration, by filing Form ADV Part I and Form U–4 annually (if an investment adviser representative)
David Willamette states that he is a financial planner. A recent plan he prepared for a wealthy client included a summary of assets, an asset allocation plan, an estate plan, life insurance suggestions, and a recommendation that the client purchase stock in AMON
DIVERSIFIED. The report cost the client $2,800. Should David register as an investment adviser? Why or why not, and if so, where?
David should register.

He advertises as a planner, holding himself out as an adviser. He gives advice, and he is paid for that advice. There is no indication that David manages the client’s funds, so he should register with his state.
Carol Basker, who has sold life insurance for years, has decided to tell clients that she now does comprehensive financial planning. Her compensation is based totally on commissions. Her work does result in plans for clients that cover many areas: insurance, estate planning business planning, and investments. She makes specific recommendations in the areas of insurance and investments, where she earns her commissions. She has no desire to manage her client’s funds.

Should Carol register as an investment adviser? Why or why
not, and if so, where?
Yes, she should register with her state. She holds herself out to be an adviser, she gives specific recommendations, and she is compensated for her work. There is o requirement that
compensation be in the form of fees. Additionally, she does not manage client funds.
Armando Cortez gives advice about mutual funds in addition to his full-time job in corporate computer sales. Last year he had eight clients, all of whom lived in his state.

Should Armando register as an investment adviser? Why or why not, and if so, where?
No, Armando does not have to register anywhere. However, he is still required to comply with the antifraud provisions of the law.
Coreen Markson has done very well in the stock market. In fact, she has done so well that she quit her job as an administrative assistant and began counseling others about their investments.

Most of her 135 clients have her manage their investments.

She currently manages $68 million for an average fee of one-half of 1% of the assets under management. Should Coreen register as an investment adviser?

Why or why not, and if so, where?
Yes, Coreen must register with the SEC.

She clearly holds herself out as an adviser, she manages well over $30 million of client investments, she gives advice through her actions, and she is compensated for her work.
Form ADV: Part I
Provides clients and prospects with generalized information, such as:
- name
- location
- fiscal year of business
- form of business
- background of applicant
- others associated with applicant
- types of clients
Form ADV: Part II
Provides clients and prospects with detailed information, such as:
- specific types of services provided
- fee structure
- method of business operation
- business associates
- balance sheet used for initial registration
Form U–4
Must be submitted on behalf of every IAR seeking to be employed by the IA.
Form ADV–W
Submitted when registered investment adviser ceases operations and withdraws his or her registration
What is permitted, according to the SEC, concerning performance based
An adviser can charge a fee based on a share of capital gains or appreciation of client funds if the adviser is managing at least $750,000 of client’s assets or client has net worth over $1.5 million;

- fee must be an arm’s-length arrangement;

- client must understand risks involved. (An arm’s-length agreement is one that would be reached by unrelated parties, each acting on his or her own behalf. It is considered reasonable and acceptable to everyone involved.)
What restriction or prohibition exists under the IAA of 1940 concerning Assignment of advisory contract ?
Cannot assign unless client expressly consents to the transfer.
What restriction or prohibition exists under the IAA of 1940 concerning The term investment counsel ?
Unlawful for any person registered as an investment adviser to represent himself or herself as investment counsel or use that name to describe his or her business unless:
- principal business consists of acting as investment adviser AND

-a substantial part of the business consists of rendering investment supervisory services
What restriction or prohibition exists under the IAA of 1940 concerning The acronym RIA ?
Cannot be used after the name of an individual or business; must use “registered investment adviser”
What is the general purpose of the rule?
To provide each and every client (both existing and prospective) with written disclosure.
In what form may the disclosure statement be presented to the client?
A narrative statement containing the information from all entries in ADV Part II.
What timing restrictions apply to the delivery of the brochure to the client?
- Not less than 48 hours prior to entering into investment advisory contract (or at the time the contract is entered into if client can terminate the contract within five days)

- Updated brochure delivered each year or an offer in writing to do so
Briefly describe the categories of
information that must be disclosed in the brochure.
- advisory services and fees

- types of clients and securities

- methods of analysis, sources of information, and investment strategies

-education and business standards and background

-other business activities

- other securities industry activities/affiliations

- participation or interest in securities transactions

- conditions for managing and reviewing accounts

- investment/brokerage discretion

- balance sheet (under specific circumstances)

- summary of material changes

- assets under management (AUM)

- brokerage and custody fees and expenses

- performance fees and side-by-side management (this refers to similar client portfolios that have different structures, fee arrangements, or other characteristics; e.g., some with performance-based fees and others without such fees)

- disciplinary history

- code of ethics summary and offer of delivery

- trade aggregation practices

- referrals of clients from broker dealers

- custody

- voting client securities
Identify general categories of information that must be retained.
- copies of client’s acknowledgement of brochure and statement from adviser about location of client funds

- records of dates the adviser gave the client or prospective client all documents required by the brochure rules

- journals and ledgers reflecting asset, liability,reserve, capital, income, and expense accounts

- Written communications to client regarding recommendations; advice; receipt, disbursement, or delivery of funds or securities, etc.

- memos or orders for purchase and/or sale of client securities

- all client’s instructions regarding purchase, etc., of securities

- written agreements with client
For how long must records be kept?
- for not less than five years from end of fiscal year of the last recorded entry
What is the general intent of the antifraud portion of the IAA of 1940?
- to protect clients from potential conflict of interest situations

- to hold advisers to a high standard of fiduciary responsibility

- to make it unlawful for adviser to engage in fraudulent conduct
- not a government agency

- it is a self-regulatory agency registered with the SEC as a securities membership association

- Financial planning professionals who wish to sell certain equity-based products to clients must register with FINRA and pass one or more examinations.
Briefly describe the initial registration process.
- the individual associates with a broker-dealer firm prior to registering as a representative

- the individual registers with FINRA through broker-dealer on Form U–4

- the individual takes and passes appropriate examinations (may need to take at least two)

- Central Registration Depository (CRD) System makes registration with FINRA uniform throughout the states
FINRA examinations
Series 6
Series 7
Series 22
Series 62
Series 63
Series 65
Series 66
Series 6
Investment Company/Variable Contracts Limited Representative—mutual funds, unit investment trusts, variable life insurance and annuities.
Series 7
General Securities Registered Representative— stocks, bonds, tax shelters, government and municipal bonds, REITs, mutual funds, variable contracts; everything xcept commodities and certain options.

If Series 7 is passed, there is no need to take Series 6 and/or 22
Series 22
Direct Participation Programs Limited Representative—oil and gas syndications, real estate syndications, other tax shelter programs.
Series 62
Allows a registered representative who did not take the full Series 7 evaluation to take a limited examination; covers most securities, except options.
Series 63
Uniform Securities Agent State Law Exam (USASLE)—meets requirements of most individual states;

- adviser usually takes Series 7 (or Series 6 and 22) plus Series 63, if required by individual state (blue sky laws).
Series 65
Tests knowledge of financial services professionals in the legal and regulatory context
Series 66
Combines the Series 63 and Series 65 exams.
If an individual is otherwise required to register as an investment adviser, what guidelines would be used to determine whether state or SEC registration is appropriate?
- An adviser who has less than $25 million under management would register with the state, unless the adviser’s state does not have registration requirements. In that case, the adviser would register with
the SEC. Any adviser who manages $30 million or more for clients must register with the SEC.

However, an adviser who has between $25 million and $30 million under management may have some discretion between registering with the SEC and his or her state.

-This is to minimize the possibility of having to switch regulators frequently if assets fluctuate above and below $25 million over short periods of time.

- Certain others are permitted to register with the SEC.
The SEC has proposed the following changes to the registration rules to take effect by July 21, 2011:
- An adviser who manages $150 million or more must register with the SEC. Hedge fund managers with $150 million or more in assets under management (AUM) must register with the SEC.

- An adviser who manages between $100 million and $150 million may have some flexibility as to registration with the SEC or the state. Additionally, private hedge fund managers with less than $150 million AUM qualify for a filing exemption.

- If the adviser manages less than $100 million, then he or she must
register with the state unless:
1) The state has no registration process.
2) The adviser falls under one of the exceptions.

A CFP certificant is trying to sell a real estate limited partnership to a client. The client has told the CFP certificant that she is very conservative, is getting ready to retire in two years, and wants increased income. Is the CFP certificant functioning in a fiduciary capacity if he convinces the client to purchase the partnership units?
No, he is not functioning as a fiduciary. The fiduciary relationship is based on trust, which in turn is based on an individual’s belief that the recipient of the trust possesses the special skills and knowledge needed to perform the tasks at hand. The professional being relied upon has the obligation to act in the client’s (best) interest.
Duty to Disclose
- The duty to disclose is part of treating a client fairly.

- If conflicts of interest cannot be eliminated fully, as is the case when a financial planner wears several hats

- the planner needs to fully disclose to a client all relevant information as required by regulations and ethical guidelines.

- An obvious example is when the planner will receive a commission from a recommended product.

- Another example requiring disclosure is when the client is considering investing in a company in which the planner holds an ownership interest.

- Also essential is the disclosure of the risk involved in specific investments, especially those promising high returns.
Duty To Diagnose
The duty to diagnose is fundamental to the financial planning process.

Recommending investments without knowing all essential information about the client goes against regulatory mandates and ethical guidelines.

Knowing the client, along with putting the client’s interests first, requires adequate diagnosis.his duty includes a diagnosis and understanding of
products/strategies already in place.
Duty To Consult
- The duty to consult requires that a planner seek out an expert whenever the planner feels uncertain about an issue or realizes the situation has gone beyond his or her level of expertise.

- For example, in discussing municipal bonds, a planner may need to consult a tax expert to clarify whether a particular issue is taxable; or in discussing an estate plan, a planner should consult with an attorney or advise the client to seek the advice of an attorney.
Duty To keep current
The duty to “keep current” is fundamental to competency.

For example, in the area of investments, planners need to keep up to date on new investments in the marketplace, tax law changes, and economic predictions. Professional organizations usually
have continuing education requirements to encourage members
to expand their understanding of relevant fields.
List the seven Principles of the Code of Ethics and Professional Responsibility enforced by CFP Board.
Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, and Diligence
One of your clients has come to you for advice. She has just been denied credit and wants to know her options. What can you tell her?
The following protections are provided by the Fair Credit Reporting Act:

- If a consumer is denied credit, he or she has the right to receive a copy of the credit report provided by the credit bureau free of charge.
If there are errors in the report, the bureau must correct them and submit the corrected report to any recipient of the report in the past six months. If the consumer and credit bureau do not agree regarding the facts contained in the report, the consumer has the right to include his or her version of the facts in the report.

- The consumer is given the right to review his or her record at anytime for a nominal fee.

-The bureau must delete obsolete information from the consumer’s report. Most adverse credit information may be disclosed for a seven-year period only.

- Only those who have a legitimate need may receive a consumer’s credit report.
What protections are provided by the Consumer Credit Protection Act, also known as Truth in Lending?
- Credit terms must be disclosed to facilitate evaluation.

- Interest must be reported in terms of annual percentage rate (APR).

- Advertisement of credit terms is regulated.

- Credit card companies may not issue cards that the consumer has
not requested.

- Protection is provided for unauthorized credit card use. (The cardholder is liable for only $50 in unauthorized charges if he or she reports the card as being lost or stolen.) (Does not apply to debit cards.)
What are the provisions of a Chapter 7 bankruptcy?
Under Chapter 7 bankruptcy, debts, with a few exceptions, are discharged completely.

The individual is permitted to keep certain assets, but all others are relinquished. Either federal law or state law determines which assets may be retained.

- Payments received that typically are not given up by the debtor to satisfy expenses or debts include pension payments, alimony, and Social Security benefits.

- Some debts may not be discharged, including alimony payable, child support, and loans for education. A debtor may not file again for bankruptcy for eight years (formerly, the waiting period was six years)
What are the provisions of a Chapter 13 bankruptcy?
Under Chapter 13 bankruptcy, a repayment plan is worked out whereby the debtor repays at least a portion of his or her debts over a specified period of time. Although debt payments are typically reduced, creditors are not permitted to demand additional payment as long as the terms of repayment are fulfilled. Under this form of bankruptcy, the debtor typically is not required to relinquish assets. However, high net worth individuals may be required to relinquish certain assets, depending on the asset class and the value of the asset (e.g., retirement assets in excess of $1 million may not be protected).