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13 Cards in this Set
- Front
- Back
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All of the following provisions would be found in an advisory contract EXCEPT:
A. the term of the contract B. the requirement for customer approval if the contract is to be assigned to someone else C. an exculpatory clause holding the adviser harmless for gross negligence or rule violations D. notification to customers if there is a change in the composition of the advisory partnership |
The best answer is C. Investment advisory contracts must be in writing under the Investment Advisers Act of 1940; must detail the advisory fee; must provide for customer approval if the account is assigned to another investment adviser; and must provide for notice to the customer is there is a change in the composition of the advisory partnership (for those advisers that are partnerships). An "exculpatory" clause is legal language that the adviser cannot be held liable for negligence or rule violations, and such a "hedge" clause is not legally enforceable and is prohibited. |
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Which of the following may be required by the Administrator to be filed by a broker-dealer to maintain registration? I Financial reports II Registration renewal fees III Sales literature IV Renewal consent to service of process |
I, II, III. The best answer is C. Consent to service of process is only filed with initial registration applications; it is not required for renewals. The Administrator can require the filing of financial reports, advertising and sales literature, and the payment of renewal fees. |
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To satisfy the requirements of the NASAA brochure delivery rule, customers who wish to buy advisory services must receive a copy of the brochure:
A. at least 48 hours prior to entering into an advisory contract B. at, or prior to, entering into an advisory contract C. within 48 hours of entering into an advisory contract D. within 10 days of entering into an advisory contract |
The best answer is A. NASAA obligates an investment adviser to give a potential customer the disclosure document (Parts 2A and 2B of Form ADV) at least 48 hours prior to entering into a written or oral contract to provide advisory services. Alternatively, if the "2 Day Free Look" is not given, a contract may be signed, as long as it provides for a 5 day right of termination without cause by the customer.
Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract! |
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Under the Uniform Securities Act, an agent that sells securities to a customer in a transaction that is not recorded on the books and records of his or her broker-dealer: A. can only do so if the securities involved, or the transactions, are exempt B. can only do so if the transactions are unsolicited C. will cause the agent's registration to be revoked D. will cause the agent to become a statutory broker-dealer |
The best answer is D. Agents are prohibited from effecting securities transactions for customers unless the trades are known to the broker-dealer; are supervised by the broker-dealer; and are recorded on the books and records of the broker-dealer. This agent is "selling away" from his firm and is executing trades for customers that are not being recorded by the broker-dealer. He or she becomes a "statutory broker-dealer" under the Uniform Securities Act and is required to register in the State as such. |
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Joe Jones, the proprietor of Joe Jones Financial Planning Inc., which is registered as an investment adviser in New York State, has decided that he can expand his business by setting up an Internet website. He includes a questionnaire that solicits individuals to transmit information about their investment objective, financial situation, financial needs, risk tolerance level and investment time horizon, which he will use to create a financial model and plan for a fee. Which statement is TRUE?
A. Joe Jones Financial Planning Inc. must register with the SEC as an investment adviser, but is not required to register as an investment adviser in each State where customers complete the questionnaire B. Joe Jones Financial Planning Inc. is not required to register with the SEC as an investment adviser, but the firm is required to register as an investment adviser in each State where customers complete the questionnaire C. Joe Jones Financial Planning Inc. is required to register with the SEC as an investment adviser, and the firm is required to register as an investment adviser in each State where customers complete the questionnaire D. Joe Jones Financial Planning Inc.'s current New York State registration is the only requirement |
The best answer is B. Since this is a State registered investment adviser, the firm is "small" and is not a federal covered adviser - therefore federal registration does not apply. Registration only occurs at the State level. If an investment adviser or broker-dealer uses a website to induce potential customers to buy "personalized services" (as is the case here) or to effect securities transactions, then an "offer" is being made to that person and the investment adviser, broker-dealer, and their agents, would be required to be registered in the State where the customer received the Internet Communication. |
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If a representative that transacts business in a State terminates employment with an investment adviser:
A. notice must be given to the Administrator by the representative only B. notice must be given to the Administrator by the investment adviser only C. notice must be given to the Administrator by both the investment adviser and the representative D. no notice is required to be given to the Administrator |
The best answer is B. If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. Notice that this is different than the requirement for a broker-dealer, where both the terminated agent and the broker-dealer must notify the Administrator. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator. |
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Which of the following is an accredited investor under Regulation D?
A. A trust with over $5 million under management B. An individual with $2 million in securities C. An investment adviser with over $40 million under management D. A limited partnership with over $5 million to invest formed of individuals where each has a net worth of $500,000 |
The best answer is A. This question is not immediately obvious! An individual with $2 million of securities does not mean that he or she has a net worth of $1,000,000 (the minimum requirement to be accredited). He or she may have a margin loan against the securities, with the loan amount in excess of $1,000,000! For an investment adviser to be "accredited," each of the customers whose monies are being invested in the private placement would need to be accredited, making Choice C wrong. For a limited partnership to be accredited, each of the limited partners must meet the minimum $1,000,000 net worth test. However, employee benefit plans and trusts that have over $5,000,000 under management are accredited investors under Regulation D! |
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ADAP Advisors is a State-registered adviser with 7 IARs. One of the IARs, Mark, leaves the employ of ADAP to join another advisory firm. His accounts are assigned by ADAP to the remaining 6 IARs at ADAP. By taking this action, ADAP:
A. is required to notify each of Mark's customers of the change of IAR and get the customer's approval B. is required to send a negative consent letter to each of Mark's clients and if no response is received, the assignment is permitted C. has violated the Investment Advisers Act of 1940 because advisory contracts cannot be assigned D. is not required to take any further action |
The best answer is D. The transfer of an investment adviser account to another investment adviser must be approved by the customer. However, this situation is different. The advisory client's account is being transferred to another IAR at the same firm. This is not an assignment of the account to another adviser. The customer's contract is with the advisory firm; not the IAR. The firm can reassign customer accounts to any IAR at the same firm without notifying the customer. |
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A Chinese Wall must be maintained by a broker-dealer between investment banking and which of the following departments? I Research II Trading III Retail Sales IV Mergers and Acquisitions |
I, II, III. The best answer is C. Chinese Walls to stop information flow must be maintained between: * Investment Banking and Trading;* Investment Banking and Research; and * Investment Banking and Sales (Retail and Institutional). The intent is to stop the flow of information on upcoming underwritings, mergers or takeover deals being done by the underwriting department to others that might trade on the information for a profit before the public knows about the upcoming deal. Regarding the Chinese Wall required between investment banking and research, the intent is to make sure that research is truly independent and not influenced by the investment bankers at that firm that might demand a "favorable" research report on an issuer so that they can curry favor with that issuer to get future underwriting business. The M & A (Mergers and Acquisitions) department and the underwriting department are usually one and the same at investment banking firms. There are no barriers required between these two groups. |
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If a representative that transacts business in a State terminates employment with an investment adviser:
A. the representative must notify the Administrator promptly B. the investment adviser must notify the Administrator promptly C. both the representative and the investment adviser must notify the Administrator promptly D. both the representative and the investment adviser must notify the Administrator within 30 days |
The best answer is B. If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. Notice that this is different than the requirement for a broker-dealer, where both the terminated agent and the broker-dealer must notify the Administrator. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator. |
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Under the provisions of Regulation D, which of the following are accredited investors? I Bank II Individual with a $100,000 annual income III Individual with $1,000,000 net worth exclusive of residence IV Investment company |
The best answer is C. Under Regulation D of the Securities Act of 1933, and accredited investor in a private placement is a person who earns at least $200,000 per year; or who has a net worth of at least $1,000,000 exclusive of residence; or is an institution; or is an officer or director of the issuer. A private placement may be sold to an unlimited number of accredited investors under Federal law; but can only be sold to 35 non-accredited investors (also, please note that the State definition of a private placement is very different). |
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An accountant has a wealthy client base and has developed the trust of his customers over many years by providing tax preparation services and sound tax advice. The accountant has been requested by many of these customers to make suitable securities recommendations. The accountant has decided to offer such services, billing the customers at his regular hourly rate. Under the Uniform Securities Act, the accountant is:
A. excluded from the definition of an investment adviser since he is a "professional" that is only giving incidental advice B. excluded from the definition of an investment adviser since he is not charging an advisory fee based on a percentage of assets under management C. included under the definition of an adviser because he is receiving separate compensation for giving advice about securities D. included under the definition of an investment adviser, since "professionals" are not offered an exclusion from the definition of an investment adviser |
The best answer is C. "Professionals" such as lawyers, accountants, engineers, and teachers who only give incidental advice about investing in securities; and who do not separately charge for giving advice; are excluded from the definition of an investment adviser. This accountant is charging for advice; and it is a regular part of his business; thus he falls under the definition and must register with the State. |
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All of the following are "federal covered" advisers EXCEPT an adviser:
A. with $400,000,000 of assets under management B. with $40,000,000 of assets under management C. to an investment company with $400,000,000 of assets D. to an investment company with $40,000,000 of assets |
The best answer is B. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. The smaller advisers are only required to be registered at the State level. Thus, the adviser with $400,000,000 of assets under management need only register with the SEC; and is exempt from registration in the State (Choice A). The adviser to an investment company (Choices C and D) need only register with the SEC and is exempt from registration in the State. In contrast, the adviser with $40,000,000 of assets under management need only register with the State; and is not required to be SEC registered. |
