Chapter 05: Federal Regulations Governing Investment Advisers

Does a solicitor for an IA provide securities recommendations?

No. Solicitors only solicit new clients; they do not recommend or approve transactions.

If employed by a federal covered IA, is an IAR required to register in all states in which she is conducting business?

No. If the IAR has no place of business in the state, no state registration is required.

For how long does the registration of an adviser that is registered with the SEC remain in effect?

Until it has been withdrawn, cancelled, or revoked by the SEC.

Identify the acronym: RIA

Registered Investment Adviser

An investment adviser with more than $___ under management must register with the SEC.

An investment adviser with more than $110 million under management must register with the SEC.

When assigning an IA contract to another IA, must be obtained from the client prior to assignment.

When assigning an IA contract to another IA, written consent must be obtained from the client prior to assignment.

The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to .

The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than one person.

True or False: An IA maintaining custody of client assets need not notify the Administrator.

False. The Administrator must be notified in writing using Form ADV.

An IA manages more than $110 million in assets and has only insurance companies as clients. Is SEC registration required?

No. An SEC exemption is provided to IAs whose only clients are insurance companies.

Define solicitor.

Any person who, directly or indirectly, solicits any client for, or refers any client to, an IA.

Define "assignment" as it relates to IA contracts.

The transfer of ownership of a client's account from one advisory firm to another. Client consent is required.

If an IA is in possession of checks drawn by its client and made payable to third parties, how may custody be avoided?

By ensuring that it forwards the check within three business days

If an IA maintains custody of a client's funds or securities, how often must account statements be provided to clients?

Statements must be sent quarterly.

May a solicitor receive compensation from an IA?

Yes, if the IA is registered, a written agreement exists, and a court has not limited the solicitor's activities.

Is an exculpatory provision in an advisory contract permitted?

No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited.

If an IA maintains custody of client funds, are unannounced audits required?

Yes. IAs must arrange for unannounced audits on an annual basis.

An newly hired investment adviser representative wants to put the initials "IAR" on her business card. Is this allowed?

No. However, she may spell out "Investment Adviser Representative."

Is an IAR who is employed by a federal covered adviser required to register in the state?

Yes. IARs of federal covered advisers must register in any state in which they have a place of business.

What is required of an IA if the firm goes through a majority change in ownership?

The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided.

The program where a single fee is charged in lieu of commissions and advisory fees is generally called a program.

The program where a single fee is charged in lieu of commissions and advisory fees is generally called a wrap program.

Before an IA may assign a client's contract to another advisory firm, it must obtain the .

Before an IA may assign a client's contract to another advisory firm, it must obtain the client's consent.

True or False: A person soliciting for an IA must annually provide a disclosure regarding the IA's performance.

False. However, at the time of contact, the solicitor must provide clients with a solicitor disclosure document.

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $_ under management.

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $1,100,000 under management.

If a pension consultant advises a plan regarding the law firm it should hire, must the consultant register as an IA?

No. IA registration is not required since the consultant is providing incidental advice that is not securities-related.

Define the local exemption from SEC registration for an IA.

The IA's clients reside in the state in which its office is located and its advice is not related to exchange-listed securities

May investment adviser's advertising refer to testimonials?

Yes. Provided the testimonial is not misleading and certain disclosures are made.

An IA inadvertently receives client funds/securities and doesn't return them within three business days. Is this custody?

Yes

True or False: Bank holding companies are not considered IAs under the USA.

False. They are excluded from the definition under the IA Act of 1940, not under the USA.

True or False: A pension consultant being paid to create an asset allocation program for a plan must register as an IA.

True. The consultant must register as an IA since it is providing securities-related advice for compensation.

Identify the acronym: NRSRO

Nationally Recognized Statistical Ratings Organization

An IA is established as a partnership and two of its five partners retire. Is this considered an assignment?

No, since it is only a minority change of partners. A majority must retire for it to be considered an assignment.

True or False: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts.

False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500.

True or False: An IA that has full discretion over a client's account at a separate BD is considered to have custody.

True

What is required of an IA to assign an advisory contract to another adviser?

Written permission of the client

Define testimonial.

An advertisement in which an individual recommends the IA's services based on personal experiences with the firm.

If a firm provides advice solely based on U.S. government securities, is it required to register as an IA with the SEC?

No. U.S. government securities advisers are excluded from the IA definition under the IA Act of 1940.

When is a pension consultant required to register as an investment adviser?

When it is being paid to provide securities-related investment advice

Regardless of assets under management, IAs must register with the SEC if any client is a __.

Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.

An IA is created as a sole proprietorship is then converted to a partnership. This is considered client contract __.

An IA is created as a sole proprietorship is then converted to a partnership. This is considered client contract assignment.

True or False: According to the USA, investment advisers may generally charge performance-based fees.

False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.

Define impersonal advisory services.

Services costing less than $500 per year that are not tailored to meet the investment objectives of a specific client

True or False: A pension consultant that advises a plan regarding the accountant it should hire must register as an IA.

False. IA registration is not required if a consultant provides incidental advice that is not securities-related.

Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $.

Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $2,200,000

Due to SEC Release 1092, what other candidates are included in the expanded IA definition?

Sports and entertainment reps, pension consultants and financial planners

Under the IA Act of 1940, are banks and bank holding companies excluded from the IA definition?

Yes

True or False: If an adviser's only clients are insurance companies, it is exempt from SEC registration.

True

True or False: Notification to existing clients is required for a minority change in ownership of an IA.

True. However, if a majority change occurs, client consent is required since this would be considered an assignment.

True or False: Bank holding companies are excluded from the IA definition under the USA.

False

Define the term custody.

The legal responsibility for, or control over, another person's assets

A client has just learned that his account will now be handled by another IAR. Is this considered an assignment?

No. Control of the account has not changed simply based on an IAR leaving the firm.

What must a federal covered adviser do if its assets under management fall below $90 million?

Withdraw its federal registration and register with a state Administrator(s)

If ABC Advisers has $112 million under management, it must register with .

If ABC Advisers has $112 million under management, it must register with the SEC.

An adviser is registered with the SEC under the Investment Advisers Act of 1940. What is the firm considered?

A federal covered adviser

If an IA has $20 million under management and advises an investment company, with whom must it register?

Any IA that advises an investment company must register with the SEC (regardless of its AUM).

An IA has custody if it inadvertently receives client securities and hasn't returned them within ____ business days.

An IA has custody if it inadvertently receives client securities and hasn't returned them within 3 business days.

For an IA to act as both an adviser and broker-dealer, what must be disclosed to clients before trades are effected?

The fact that the IA may be collecting both advisory fees and commissions

True or False: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the U.S.

True

The IA Act of 1940 considers any communication that is directed to more than ___ person(s) to be advertising.

The IA Act of 1940 considers any communication that is directed to more than one person to be advertising.

Will a client always pay lower fees in a wrap account?

No. Depending on the frequency of the client's trading, he may ultimately pay more than if the fees are paid separately.

True or False: IAs are permitted to charge different fees to different clients for the same service.

True. Provided proper disclosure is made, charging clients different fees is permitted.

True or False: Bank holding companies are not considered IAs under the Investment Advisers Act of 1940.

True

If an adviser exercises full discretionary control over a client's account, does this constitute custody?

Yes. Full discretionary control (having the ability to remove funds from the client's account) is considered custody.

When an adviser files Form ADV with the SEC, when does registration become effective?

Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings.

Define investment supervisory services.

The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client.

True or False: An IA may offer discounted fees to clients if proper disclosure is made in its brochure and Form ADV.

True

Is an IA permitted to use testimonials in its promotional material?

Yes. Provided the testimonial is not misleading and certain disclosures are made.

When an IA has custody, with whom are the assets held?

Assets are held by a qualified custodian. Clients must be notified of custodian's name, address, and manner of holding.

True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA's services separately.

True

According to the USA, all investment advisory contracts must be in __ form.

According to the USA, all investment advisory contracts must be in written form.

What is the federal law that governs investment advisers?

The Investment Advisers Act of 1940

Define assignment.

The transfer of an advisory contract by the adviser or any change in the overall management of the advisory firm.

Is registration with the SEC required of an adviser that manages $87 million of assets?

No. An established FCA must register with the state Administrator if the AUM falls below $90 million.

The rule governing the disclosure requirement of an IA to its clients is referred to as the __ Rule.

The rule governing the disclosure requirement of an IA to its clients is referred to as the Brochure Rule.

An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?

No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.

Is an organization that provides ratings of securities and is nationally known considered an IA under the USA?

No