CIC Investment Adviser Regulations 4 — Questions and Answers
Question 1: Under the Investment Advisers Act, a 'solicitor' who refers clients to a registered investment adviser for compensation must:
- Also be registered as an investment adviser
- Provide clients with a disclosure document describing the referral arrangement and compensation (Correct answer)
- Be employed directly by the investment adviser
- Limit solicitation activities to institutional clients only
Correct answer: Provide clients with a disclosure document describing the referral arrangement and compensation
Rule 206(4)-3 requires that cash-paid solicitors provide clients with a written disclosure of the referral arrangement, including the nature of compensation received.
Question 2: Which statement about the 'books and records' requirements under Rule 204-2 is CORRECT?
- Records must be kept for a minimum of 3 years, with the first 2 years in an accessible location
- Only client contracts and fee schedules must be maintained; trade records are optional
- Records must be kept for a minimum of 5 years, with the first 2 years in an accessible location (Correct answer)
- Electronic records are prohibited and all records must be maintained in paper format
Correct answer: Records must be kept for a minimum of 5 years, with the first 2 years in an accessible location
Rule 204-2 requires investment advisers to maintain most records for at least 5 years from the end of the fiscal year in which they were created, with the first 2 years in an easily accessible place.
Question 3: An investment adviser charging performance fees to non-qualified clients would violate:
- Section 203 of the Advisers Act regarding registration
- Section 205 of the Advisers Act regarding performance compensation (Correct answer)
- Section 206 of the Advisers Act regarding anti-fraud
- SEC Rule 17a-4 regarding recordkeeping
Correct answer: Section 205 of the Advisers Act regarding performance compensation
Section 205 generally prohibits performance-based fees unless the client is a 'qualified client' with at least $1.1 million in AUM with the adviser or $2.2 million net worth.
Question 4: The 'investment adviser' definition under the Advisers Act requires which THREE elements to be present?
- Registration, fiduciary duty, and client consent
- Being in the business of advising, for compensation, and concerning securities (Correct answer)
- Discretionary authority, written contracts, and AUM over $25 million
- Licensing, bonding, and errors & omissions insurance
Correct answer: Being in the business of advising, for compensation, and concerning securities
The three-prong test for 'investment adviser' under the Act is: (1) provides advice concerning securities, (2) is in the business of doing so, and (3) receives compensation.
Question 5: An investment adviser that has custody of client funds must arrange for an annual 'surprise examination' by an independent public accountant UNLESS:
- The adviser's AUM is below $100 million
- A qualified custodian holds the assets and sends account statements directly to clients (Correct answer)
- The adviser has been registered for fewer than 3 years
- The adviser maintains fidelity bond coverage of at least $1 million
Correct answer: A qualified custodian holds the assets and sends account statements directly to clients
Under Rule 206(4)-2, the surprise examination requirement is satisfied if client assets are held by a qualified custodian that sends quarterly account statements directly to clients.
Question 6: Which regulatory action can the SEC take against a registered investment adviser that willfully violates the Advisers Act?
- Revocation of registration only; criminal penalties require DOJ action
- Civil monetary penalties, censure, suspension, or revocation of registration (Correct answer)
- Only referral to FINRA for disciplinary proceedings
- Imposition of fines up to $100 per violation with a maximum of $1,000 per year
Correct answer: Civil monetary penalties, censure, suspension, or revocation of registration
The SEC can impose civil monetary penalties, issue censures, and suspend or revoke registration; willful violations can also be referred for criminal prosecution.
Question 7: Under NASAA's Model Rule for investment adviser representatives, an IAR who works for a federal-covered adviser:
- Must register with the SEC and is exempt from state IAR registration
- Must register in each state where they have a place of business or exceed the de minimis threshold (Correct answer)
- Is exempt from all registration because the employing adviser is federally covered
- Need only register in their home state regardless of where clients are located
Correct answer: Must register in each state where they have a place of business or exceed the de minimis threshold
Even when the investment adviser is federally covered, individual IARs must still register in each state where they have a place of business or exceed the state's de minimis client limit.
CIC Investment Adviser Regulations 4
Under the Investment Advisers Act, a 'solicitor' who refers clients to a registered investment adviser for compensation must: