CIC Investment Adviser Regulations 3 — Questions and Answers
Question 1: The SEC's Regulation Best Interest (Reg BI) primarily applies to:
- Investment advisers acting in a fiduciary capacity
- Broker-dealers making recommendations to retail customers (Correct answer)
- Registered investment companies
- Commodity trading advisers
Correct answer: Broker-dealers making recommendations to retail customers
Reg BI applies to broker-dealers and their associated persons when making securities recommendations to retail customers, establishing a 'best interest' standard.
Question 2: Under the Investment Advisers Act, which document must an investment adviser file to update material changes and deliver to existing clients annually?
- Form ADV Part 1A
- Form ADV Part 2A (Correct answer)
- Form CRS
- Form 13F
Correct answer: Form ADV Part 2A
Form ADV Part 2A (the brochure) must be updated annually within 90 days of the adviser's fiscal year end, and material changes must be delivered to existing clients.
Question 3: A state-registered investment adviser with clients in multiple states must register in each state where it:
- Has more than 10 clients regardless of physical presence
- Has a place of business OR more than the de minimis number of clients (Correct answer)
- Derives more than 10% of revenue from residents
- Employs at least one IAR who is physically located
Correct answer: Has a place of business OR more than the de minimis number of clients
Most states require registration if the adviser has a place of business in the state or exceeds the de minimis client threshold (typically 5 clients) for that state.
Question 4: Which of the following activities requires an investment adviser to obtain client consent before proceeding?
- Rebalancing a discretionary account within pre-agreed parameters
- Assigning the advisory contract to another adviser (Correct answer)
- Executing trades on a client's behalf under a discretionary agreement
- Publishing a general market outlook for all clients
Correct answer: Assigning the advisory contract to another adviser
Under Section 205(a)(2) of the Advisers Act, advisory contracts cannot be assigned without client consent because assignment changes the identity of the manager.
Question 5: The Investment Advisers Act of 1940 was primarily enacted to address concerns about:
- Excessive commissions charged by broker-dealers
- Conflicts of interest and fraudulent practices by investment counselors and advisers (Correct answer)
- Insider trading in the secondary markets
- Manipulation of mutual fund net asset values
Correct answer: Conflicts of interest and fraudulent practices by investment counselors and advisers
The Act was enacted following SEC studies revealing widespread conflicts of interest and abusive practices by investment counsel and advisory firms in the 1930s.
Question 6: An investment adviser is considered to have 'custody' of client assets when:
- It sends account statements to clients on behalf of a qualified custodian
- It has authority to withdraw funds from a client account or holds client securities or funds (Correct answer)
- It manages a discretionary account but cannot move funds outside the account
- $All client assets are held at a broker-dealer clearing firm
Correct answer: It has authority to withdraw funds from a client account or holds client securities or funds
Custody under Rule 206(4)-2 includes holding client funds or securities or having authority to obtain them, such as through direct fee deduction.
Question 7: Form CRS (Client Relationship Summary) is required to be delivered by:
- Investment advisers only
- Broker-dealers only
- Both investment advisers and broker-dealers that service retail investors (Correct answer)
- Only firms with AUM exceeding $1 billion
Correct answer: Both investment advisers and broker-dealers that service retail investors
Form CRS must be delivered by both SEC-registered investment advisers and broker-dealers to retail investors, summarizing services, fees, conflicts, and disciplinary history.
CIC Investment Adviser Regulations 3
The SEC's Regulation Best Interest (Reg BI) primarily applies to: