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22 Cards in this Set

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Which of the following represent rules that must be maintained by an Investment Advisor that has possession of client funds and securities under the Investment Advisors Act of 1940?
I. The IA must identify, segregate and place in safekeeping by client, client funds and securities.
II. The IA must arrange with an independent certified public accountant for an unannounced annual audit.
III. The IA must notify each client in writing of the location and manner in which funds and securities are maintained.
IV. The IA must establish one or more bank accounts which contain only client funds.
[A] I & IV
[B] II & III
[C] I,II & IV
[D] I, II, III, IV
d
All choices offered represent rules that must be followed by Investment Advisors that maintain custody of client funds and securities according to the Investment Advisors Act of 1940.
A person is currently registered with the SEC under the Investment Advisors Act of 1940. Their registration will remain effective until:
[A] such time as providing investment advisory services no longer constitutes a substantial part of her business
[B] the SEC revokes their registration or they have a notice of withdrawal accepted by the SEC
[C] they change their affiliation from one NASD member to another
[D] they have fewer than 15 clients during a period of one year
B

Registration with the SEC remains effective until the SEC revokes their registration or the investment advisor has a notice of withdrawal accepted by the SEC.
The Investment Advisors Act of 1940 states that an investment advisor must keep a copy of all communications to the public if it is circulated to

[A] 5 or more persons
[B] 10 or more persons
[C] 15 or more persons
[D] 25 or more persons
B

Under the recordkeeping rules of the Advisers Act of 1940 investment advisors must keep a copy of communications circulated to 10 or more persons including any offer or potential offer of any type of "free" service.
The Investment Advisors Act of 1940 states that an investment advisor must keep a copy of all communications to the public if it is circulated to

[A] 5 or more persons
[B] 10 or more persons
[C] 15 or more persons
[D] 25 or more persons
B

Under the recordkeeping rules of the Advisers Act of 1940 investment advisors must keep a copy of communications circulated to 10 or more persons including any offer or potential offer of any type of "free" service.
If an investment adviser representative (IAR) is also a licensed insurance agent and recommends that a client sells his/her mutual fund shares to buy life insurance, all of the following disclosures should be made EXCEPT:
[A] That the sale of mutual funds will be a taxable event
[B] That the IAR will receive a commission on the insurance sale
[C] That the investment advice will not be any less objective
[D] That the recommendation to buy life insurance is not connected to the services of the advisory firm
D

Remember that when an IAR sells both securities and non-securities related products, they continue to be regulated by the IA rules even when selling the non-securities products therefore the best answer is "D" since that advice would be connected to the advisory services.
An investment advisor representative intends to charge 5% per month based on assets managed. The IAR will disclose the fees in both form ADV and in the advisory contract. Are the advisor's actions appropriate?
[A] Yes, if complete disclosure is made.
[B] Yes, provided the client signs the contract.
[C] No, this is a violation of the Investment Advisors Act of 1940 even with full disclosure.
[D] No, advisory fees can only be charged quarterly, not monthly.
C

This fee, although disclosed, would be deemed to be excessive and therefore a violation.
A person is considered to be engaged in the business of giving investment advice under the Investment Advisors Act of 1940 if such person does which of the following:
I. receives special compensation
II. advertises as an investment advisor
III. spends a small part of total business activities giving investment advice
IV. gives general advice on securities incidental to a primary business as an insurance agent
[A] III, IV
[B] I, II, III
[C] I, II, IV
[D] I, II, III, and IV
B

Choices I, II, and III would be considered to be engaged in the business of giving investment advice. However, an individual who gives general advice on securities which are incidental to his primary business as an insurance agent would not be included in this definition.
Under SEC Release IA-1092, which of the following are included in the definition of an "investment advisor"?
I. Pension consultants
II. Advisors to entertainers
III. Advisors to athletes
IV. Advisors to issuers
[A] I only
[B] II and III only
[C] I, II, III
[D] I, II, III, IV
C

Under SEC release IA-1092 all of the following are included in the definition: Financial Planners, Pension Consultants, Advisors to Athletes and\or Entertainers, Advisors to Employee Benefit Plans, and Advisors to Clients regarding the selection or retention of an Investment Manager; NOT Advisors to issuers (underwriters).
Under the Investment Advisors Act of 1940, disclosure of which of the following is required to be made to customers?

Compensation paid to the advisor by the issuer for recommending their security.
Compensation paid to the advisor by a broker/dealer.
Compensation paid to the advisor by an insurance company.
The ability of the customer to use any broker/dealer to execute recommended portfolio transactions.

[A] I and III only
[B] II and IV only
[C] I, II, III
[D] I, II, III, IV
D

All four choices represent information which must be disclosed to customers of an Investment Advisor.
Amendments to Form ADV Part II must be provided to clients by advisers when? The Form must

[A] be provided to clients when the adviser receives the client's funds.
[B] be provided to clients annually.
[C] be provided to the clients one full day (24 hours) before the client enters into a contract with the adviser.
[D] be provided to the client when the contract is presented and signed and the client has a 5-day grace period during which the client can rescind the contract at any time for any reason.
B

Part II of Form ADV must be sent to or offered to existing clients on an annual basis.
Under the Investment Advisors Act of 1940, records must be retained for:
[A] 1 year
[B] 2 years
[C] 3 years
[D] 5 years
D

Under the Investment Advisor's Act of 1940, records must be retained for 5 years.
To enter into an investment advisory contract with a client permitting performance based fees, the IA must disclose all of the following EXCEPT:

[A] the period of time that will be used to measure investment performance
[B] the nature of the benchmark index that will be used for comparison.
[C] that a performance based fee may create an incentive for the IA to take greater risks
[D] that the IA may not be compensated for both realized capital gains and unrealized capital appreciation in the same portfolio
D

NASAA regulations do not expressly prohibit compensation based on realized capital gains AND unrealized capital appreciation in the same portfolio. However the rules do require full disclosure. Here, the statement in answer “D” prohibits both, which is incorrect, so this is not a disclosure that must be made.”
registered representative employed by ACE Investments, a broker/dealer which charges its clients separately for investment advice, offers investment advice to his clients even though it is not part of his job at ACE. According to the Investment Advisors Act of 1940, all of the following statements are true except:

[A] The registered representative must register as an investment advisor even if his only compensation is the commission he receives from the securities transactions he recommends.
[B] The registered representative must be registered as an investment advisor even if his firm is already registered as such.
[C] ACE Investments must be registered as an investment advisor.
[D] ACE Investments does not have to register as an investment advisor if only brokerage clients are charged for investment advice.
D

According to the Investment Advisor Act of 1940, an investment advisor is an individual who receives compensation for advising others about securities or about the advisability of investing in securities. If a broker/dealer's advisory services are incidental and they receive no compensation, then they could qualify for an exclusion from the definition. However, example "D" receives compensation and would not qualify.
With regard to the Investment Advisors Act of 1940, an investment advisor cannot use the term "Investment Counsel" unless which of the following conditions are met?
I. The advisor's principal business consists of being an investment advisor.
II. The advisor meets certain educational and experience requirements established by Securities and Exchange Commission rules.
III. A substantial part of the investment advisor business consists of providing investment supervisory services.
IV. The advisor is registered with the Securities and Exchange Commission.
[A] I, III, IV
[B] II, III, IV
[C] II, IV
[D] I, II, III, IV
A

The term "Investment Counsel" may not be used by an investment advisor unless the advisor's principal business consists of being an investment advisor, a substantial part of the investment advisor's business consists of providing supervisory services, and the advisor is registered with the SEC as an investment advisor.
When a performance based fee is charged to a client, which of the following must be disclosed in writing?

[A] fees that the advisor charges may increase in the future
[B] fees the advisor may charge may vary depending upon the investment return produced
[C] that the advisor may charge more than 20% on the assets under management
[D] that the advisor will not charge fees higher than the average of other advisor fees
B

Clients must be made to understand that with Performance Based Fees that the amount of fee charged to the client may change depending on the actual investment return on the portfolio.
A new IAR's first client opens an account by depositing $20,000,000. The client wants the portfolio invested aggressively in stocks. The IAR should:

[A] Recognize that he is not qualified to manage that portfolio without consulting outside expertise
[B] Begin aggressively researching stocks and put together a model portfolio for the client
[C] Use the firms buy list and create a model portfolio to present to the client
[D] Build a model portfolio that mirrors an aggressive index fund.
A

A new Investment Adviser Representative (IAR) should not attempt to manage a multi-million dollar portfolio for his first client who wants to invest aggressively. This new IAR should seek outside expertise. As a fiduciary, he must put his client’s interest first. Attempting to manage a portfolio beyond his expertise and experience would not be in the client’s best interest. He should not try to construct a model portfolio or simply use his firm’s “buy list”.
Mr. Smith, an investment advisor, determines that a stock that is suitable for a client is selling at a good price and the client should buy 100 shares. Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisors, what is the minimum the advisor must do before placing an order to buy the stock for the client's account?

[A] update the verbal authorization to exercise discretionary power over the client's account
[B] update verbal authorization for the specific transaction only
[C] update written authorization to exercise discretionary power over the client's account
[D] establish a fiduciary provisionship with the client
B

The minimum required by the Investment Advisor would be to obtain verbal authorization from the customer for that specific transaction.
According to the Securities Exchange Act of 1934 and NASAA Regulations, a person exercises discretion with respect to an account if:
I. the person is authorized to determine which securities will be purchased for the account.
II. the person purchases securities for the account at direction of the client.
III. the person is authorized by the client to purchase a security for the account if the price reaches a certain level.
[A] I only
[B] I, III
[C] II, III
[D] I, II, III
A

Discretionary authorization can only be used when the person given the authorization will be making all of the investment decisions in the customers account. Decisions as to time and price only or at the direction of the client would not require discretionary authorization.
.
The anti-fraud provisions of the Uniform Securities Act would deem that which of the following would be considered to be a violation?

[A] An agent recommends a new issue to an established client after providing the client with a copy of the prospectus for the new issue.
[B] An agent recommends a new issue to a new client after determining it is a suitable investment for the client and after delivering a copy of the prospectus for the new issue.
[C] An agent is asked to pre-date a confirmation by a client so that the client can defer tax consequences to the next tax year and the agent declines the request.
[D] n agent recommends a new issue to an established client after providing the client with a copy of the prospectus and advises the client that they will not lose money on this investment.
D

It is a violation of anti-fraud rules to guarantee a client against loss or to tell a client that they are not going to lose money on an investment. Any type of deceptive act is a violation of the anti-fraud provisions. If selling a new issue that is not exempt from prospectus delivery requirements, delivery of a prospectus to the client would be required.
If a violation of the Uniform Securities Act occurs, the Administrator has the ability to:
I. Seek a permanent injunction.
II. Appoint a receiver to protect the assets of customers held in custody of the investment advisor.
III. Arrest individuals for willful violations.
[A] I only
[B] II only
[C] I and II
[D] I, II, III
c

If a violation has occurred, the Administrator has the ability to seek a permanent injunction and to appoint a receiver to protect the assets of customers. However, the Administrator does NOT have the power to arrest anyone.
Under the Uniform Securities Act, which of the following statements would be true with regard to a security becoming registered using the Qualification method?
I. A registration must be filed with the State.
II. Distribution of a prospectus to each offeree before the sale of a security may be required by the Administrator.
III. Such registration becomes effective when the Administrator so orders.
[A] I only
[B] II only
[C] III only
[D] I, II, III
d

All choices offered represent true statements with regard to a security becoming registered using the Qualification method.
According to Uniform Securities Act, which of the following methods of registration at the state level is used for a established company which has already registered their securities under the Securities Act of 1933?


[A] coordination
[B] qualification
[C] filing
[D] description
C

When a issuer of securities has ALREADY been registered at the federal level, the issuing company would file (perform a notice filing) with the state to complete the registration process at the state level. Coordination would take place if the registration were being filed with the SEC and the state at the same time. Qualification is the form of registration used when the issue is only being filed at the state level.