Chapter 1

Question 1

The SEC defines an Investment Adviser (IA) as a _____________ or ____________ that does each of the following:
1. Offers __________
2. Is in the business of offering such __________ (even if it is not the primary service offered)
3. Receives ________________

Answer 1

IA as a company or person
Offers Advice
Advice
Compensation

Question 2

In short, IA’s are businesses that ______ their investment advice for a _____.

Answer 2

Sell, Fee

Question 3

What is the general definition of an investment adviser?

Answer 3

An IA is a business that provides investment advice for a fee.

Question 4

True or False: A broker-dealer giving investment advice for no special compensation must register as an IA.

Answer 4

False: If advice is incidental to brokerage and no special compensation is received, the BD is not considered an IA.

Question 5

What is a federal covered adviser?

Answer 5

An IA registered with the SEC, exempt from state registration.

Question 6

When must an IA register with the SEC?

Answer 6

If it has over $110 million in AUM or meets specific federal criteria.

Question 7

True or False: An IA with $90 million in AUM must register with the SEC.

Answer 7

False: Typically an IA with less than $100 million in AUM must register with the states, unless it meets certain criteria that require it to register with the SEC instead.

Question 8

What are the two main state registration exceptions for IA’s

Answer 8

No office and only institutional clients; or no office and less than 5 non institutional clients in 12 months.

Question 9

What is the de minimis exemption?

Answer 9

IA has no office and less than 5 retail clients in a state over the past 12 months.

Question 10

What system do IAs use to register in multiple states?

Answer 10

The Investment Adviser Registration Depository (IARD)

Question 11

What information is included in Part 1 of Form ADV?

Answer 11

General information about the adviser such as: nature of the business, names of the principals involved, location of the main office and a list of any other offices used by the firm, types of service offered, whether the adviser has custody of customer assets, location of books and records, any relevant regulatory/disciplinary history.

Question 12

What is the primary purpose of Part 2A of Form ADV?

Answer 12

It acts as a “brochure” providing important information to potential clients, such as fee structure and investment analysis methods.

Question 13

What is the purpose of Part 2B of Form ADV?

Answer 13

To supplement the brochure in Part 2A by disclosing education, qualifications, disciplinary history, and compensation sources of supervised persons.

Question 14

True or False: A state may impose higher bonding requirements than those listed in the Investment Advisers Act of 1940.

Answer 14

False. States may not impose stricter requirements than those listed in the act. If the state where the IA has its principal place of business imposes lower requirements than those listed in the act, then no other state can impose stricter requirements than that state.

Question 15

What is the NASAA-recommended net capital requirements for IA’s with custody of assets?

Answer 15

35,000

Question 16

What are some disclosures required on Form U4?

Answer 16

Physical characteristics, residential history, employment history, and other businesses, criminal history, civil judicial proceedings, bankruptcy judgments and liens, customer complaints, prior terminations for improper behavior, financial disclosures (i.e., bankruptcy proceedings)

Question 17

Within how many days must an IAR amend their Form U4 for routine changes?

Answer 17

Within 30 calendar days.

Question 18

How soon must an IAR amend Form U4 for disciplinary events?

Answer 18

Within 10 calendar days.

Question 19

True or False: IARs working for federal covered advisers register with the SEC.

Answer 19

False: While IAs might register at the state or federal level, IARs always register at the state level. The exam may refer to state registration as registering with the “administrator.”

Question 20

What form is filed when an IAR is terminated?

Answer 20

Form U5

Question 21

True or False: An IAR for a federal covered advisers register in every state they have clients.

Answer 21

False: Only where they have a physical office.

Question 22

Who must register as a broker-dealer in a state?

Answer 22

Any firm with an office or that has retail clients in the state.

Question 23

True or False: There is a de minimis exemption for broker-dealers that have a few retail clients in a state.

Answer 23

False: There is no de minimis exemption for broker-dealers. A broker-dealer with any retail clients in a state must register.

Question 24

What exemptions apply to Canadian broker-dealers?

Answer 24

Selling only to institutional clients, Canadian residents temporarily in the U.S. or Canadian retirement plans.

Question 25

What form must be filed to register as a broker dealer federally?

Answer 25

Form BD.

Question 26

What organization must broker-dealers join after SEC registration?

Answer 26

The Securities Investor Protection Corporation (SIPC)

Question 27

Who qualifies as an agent under the USA?

Answer 27

Anyone who represents a broker-dealer or issuer in effecting securities transactions.

Question 28

True or False: Agents may give quotes or account info without registration.

Answer 28

True. But they may not accept orders or give advice.

Question 29

When must an agent register in a state?

Answer 29

If they effect sales in that state or have a physical office there.

Question 30

List three cases where agents of issuers are exempt from state registration.

Answer 30

Selling only exempt securities, engaging only in exempt transactions, or only to issuer employees without sales-based compensation.

Question 31

What form is used to report an agents termination from a broker dealer?

Answer 31

Form U5

Question 32

Part 2A of Form ADV includes

Answer 32

Fees Services Offered And Disciplinary Information relevant to clients

Question 33

By the terms of the Investment Advisers Act of 1940, An IA whose only clients consist of Insurance Companies ________ _______ need to register with the SEC.

Answer 33

Does not need to register with the SEC.

Question 34

De Minimis is Latin for “of minimum importance” As it relates to the USA, having _____ or fewer non-institutional clients in this state is considered to be of minimal importance for an out of state IA or IAR to be required to register in this state

Answer 34

5 or fewer.

Question 35

If a representative that transacts business in a State terminates employment with a federal covered adviser, the representative must

Answer 35

Notify the Administrator promptly

Question 36

If an investment advisor, for the first time, takes a $1200 prepaid advisory fee, more than 6 months in advance of services rendered:

Answer 36

An ADV Part 2A along with a balance sheet must be filed by the adviser promptly.

Question 37

True or False: Investment advisers with no place of business in the State who do not deal with the general public are exempt from registration.

Answer 37

True. Advisors with no office in the State who deal solely with other advisors, broker-dealers, and financial and institutional investors are exempt from registration in the State. Note that if an adviser has an office in the State, no matter who its clients are it must register in the State.

Question 38

To register as an investment advisor under the Investment Advisers Act of 1940, all of the following are required;

Answer 38

Payment of a filling fee Filing of a Form ADV Part 1 Filing of a Form ADV Part 2

Question 39

Which of the following individuals employed by a Federal Covered Adviser would be required to register in a state in which they have no office?

Answer 39

None There is no Federal registration of the representatives of Federal Covered Advisers - only the Adviser registers with the SEC.

Question 40

What amount of assets under management would require a firm to register as an investment advisor in the states in which it does business and has clients?

Answer 40

Less than $100 million When a firms assets under management are less than $100 million, the firm is required to register with the states in which it does business or has clients. If the firms assets are more than $110 million, it must register with the SEC. If firm is between 100 to 110, the firm can choose whether it would like to register with the state or the SEC.

Question 41

The Investment Advisers Act of 1940 states that no law of any State requiring registration or licensing shall apply to an investment advisor registered under the Investment Advisers Act of 1940.

Answer 41

Therefore, any State laws requiring registration do not apply to an IA registered with the SEC under the Investment Advisers Act of 1940.

Question 42

The minimum Net Worth requirement is only required in the State where the adviser has its principle place of business.

Answer 42

If the adviser has “out of state” branches, there is no additional Net Worth requirement based on those locations.

Question 43

Under the Investment Advisers Act of 1940, to determine if a person is “in the business” of giving investment advice The individual regularly gives advice on securities The advice is rendered about securities The individual receives compensation for giving advice on securities

Answer 43

To be “in the business” of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice.

Question 44

IARs, Broker-Dealers, and federal covered advisers are all specifically excluded from the definition of investment adviser in the USA.

Answer 44

Though an IA with no place of business in a state and only institutional clients there would be exempt from state registration requirements, it would still be defined as an investment adviser.

Question 45

If an investment adviser representative has her place of business in a state: then she must

Answer 45

Always register in the State. Any time an investment adviser representative has his or her place of business in a state, he or she must register in that state.

Question 46

An investment adviser without an office in this state may be exempt from registration and manage an employee benefit plan with what minimum amount of assets?

Answer 46

1 Million For the purpose of state registration, employee benefit plans with $1 Million or more are considered an institutional client. This is not to be confused with dollar amount associated with the capital requirements of broker-dealers or investment advisers.

Question 47

Under the provisions of the Uniform Securities Act, a “person” includes all of the following EXCEPT] Adult couple Minor Municipality Corporation

Answer 47

Minor A minor acting on his or her own is not a “person” since a minor has no legal authority to trade securities. An adult couple is a “person” (when they open a joint account) A municipality and a corporation is a person as well.

Question 48

Any firm that engages in effecting securities transactions and has an office in a given state must ____________ in that state as a broker-dealer.

Answer 48

Must register

Question 49

A broker-dealer with retail clients in three different states will most likely

Answer 49

Register with both the SEC and all three states.

Question 50

When a broker-dealer or investment advisory firm application is filed in a State, the officers of the firm are named in the application and are automatically _____________ at the same time.

Answer 50

Registered Thus, all officers are automatically registered with the BD or IA registration. If the officer has no sales responsibility, the firm can “turn off” that registration and avoid paying annual State registration fees for the individual. Since a marketing officer has sales responsibility, they would be required to maintain registration in the State as an IAR.

Question 51

SEC’s Release IA-1092 discusses a “three-pronged” test to assess whether someone fits the definition of investment adviser and therefore needs to register. The person __________ investment advice The person is in the business of ___________ investment advice The person receives ____________ for investment advice

Answer 51

Provides investment advice Giving investment advice Compensation for investment advice

Question 52

If a registered person leaves his job at a broker-dealer, how soon must the broker-dealer file a Form U5 with FINRA?

Answer 52

Within 30 days

Question 53

Partners, officers, and directors of an investment adviser are automatically _____________ as IAR’s.

Answer 53

Registered This automatic registration takes place regardless of whether or not the individual offers investment advice to customers.

Question 54

Advisers that manage $____________ 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.

Answer 54

110 Million

Question 55

Form U4 includes all officers the following information EXCEPT: Professional designation Criminal disclosure Internal review disclosure Examination requests

Answer 55

Internal review disclosure Internal review disclosure is not part of the Form U4 but rather is part of the Form U5

Question 57

In order to claim an exception from registration for Canadian broker-dealers they must Disclose to clients in the state that Canadian broker-dealers are not subject to the state’s full regulatory requirements. File a consent to service of process File a copy of the broker-dealer’s current registration as required by the Canadian province where the broker-dealer resides. File proof of membership in a self-regulatory organization or stock exchange in Canada.

Question 58

An investment adviser must ____________ employees, including investment adviser representatives, even if they are independent contractors.

Answer 58

Supervise

Question 59

Only pension consultants advising plans with at least $______ million are eligible to register with the SEC.

Answer 59

200 Million

Question 60

The ________ must notify the Administrator if his/her employment is terminated.

Answer 60

Investment Adviser Representative.

Question 61

As part of its registration with a state securities administrator, a broker-dealer must file a ____________ to service of process.

Answer 61

Consent to service of process.