CIC CIC - Certified Investment Counselor Securities Law and Regulatory Compliance Questions and Answers 2 — Questions and Answers
Question 1: Which SEC rule requires investment advisers to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act?
- Rule 204A-1
- Rule 206(4)-7 (Correct answer)
- Rule 17a-3
- Rule 10b-5
Correct answer: Rule 206(4)-7
SEC Rule 206(4)-7 requires registered investment advisers to adopt and implement written compliance policies and procedures and to review them annually.
Question 2: The SEC's Regulation Best Interest (Reg BI) applies primarily to:
- Investment advisers providing ongoing portfolio management
- Broker-dealers making recommendations to retail customers (Correct answer)
- Hedge fund managers with accredited investors only
- Municipal advisers recommending bond issuance strategies
Correct answer: Broker-dealers making recommendations to retail customers
Reg BI requires broker-dealers to act in the best interest of retail customers when making investment recommendations, establishing a standard higher than suitability.
Question 3: Under the Investment Advisers Act, an investment adviser is prohibited from charging a performance fee to a client unless the client is a:
- Registered investment company
- Qualified client meeting net worth or AUM thresholds (Correct answer)
- Institutional investor only
- Non-U.S. person
Correct answer: Qualified client meeting net worth or AUM thresholds
Performance-based fees under the Advisers Act are only permitted with 'qualified clients' who meet minimum net worth or AUM thresholds set by SEC rules.
Question 4: The Investment Advisers Act's 'custody rule' (Rule 206(4)-2) requires advisers with custody of client assets to:
- Hold client funds in money market accounts only
- Maintain assets at a qualified custodian and in most cases undergo a surprise annual audit (Correct answer)
- Provide daily account statements to all clients
- Segregate proprietary and client funds in the same account
Correct answer: Maintain assets at a qualified custodian and in most cases undergo a surprise annual audit
Rule 206(4)-2 requires that client assets be held at qualified custodians and that advisers with custody undergo surprise examinations by an independent public accountant.
Question 5: An investment adviser who receives soft dollars (research and brokerage services) in exchange for client commissions must:
- Immediately disclose each transaction to regulators
- Disclose the arrangement to clients and ensure it falls within the Section 28(e) safe harbor (Correct answer)
- Prohibit the practice entirely under SEC rules
- Offset the cost against management fees charged
Correct answer: Disclose the arrangement to clients and ensure it falls within the Section 28(e) safe harbor
Section 28(e) of the Securities Exchange Act provides a safe harbor for soft dollar arrangements if the products or services received assist in investment decision-making and are properly disclosed.
Question 6: ERISA fiduciary standards apply to investment advisers who manage assets in:
- Individual taxable brokerage accounts
- Qualified retirement plans such as 401(k) and pension funds (Correct answer)
- 529 college savings plans only
- Municipal bond portfolios for government entities
Correct answer: Qualified retirement plans such as 401(k) and pension funds
ERISA imposes strict fiduciary duties—including prudent investor and exclusive benefit rules—on advisers managing assets in covered employee benefit plans.
CIC CIC - Certified Investment Counselor Securities Law and Regulatory Compliance Questions and Answers 2
Which SEC rule requires investment advisers to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act?