CIC Investment Adviser Regulations 5 — Questions and Answers
Question 1: The 'Pay-to-Play' rule (Rule 206(4)-5) under the Advisers Act is designed to prevent investment advisers from:
- Paying excessive commissions to broker-dealers for client referrals
- Making political contributions to government officials in exchange for managing public pension fund assets (Correct answer)
- Charging performance fees to government-sponsored retirement plans
- Advertising advisory services on political campaign websites
Correct answer: Making political contributions to government officials in exchange for managing public pension fund assets
Rule 206(4)-5 prohibits investment advisers from providing advisory services for compensation to a government entity within 2 years after the adviser or covered associates make political contributions to officials who can influence the hiring of advisers.
Question 2: An investment adviser who provides advice solely about U.S. government securities is:
- Subject to full Advisers Act registration because government securities are 'securities'
- Excluded from the definition of investment adviser under the Advisers Act (Correct answer)
- Required to register only with the Treasury Department
- Subject to CFTC oversight rather than SEC oversight
Correct answer: Excluded from the definition of investment adviser under the Advisers Act
Advisers who provide advice exclusively about U.S. government securities are excluded from the investment adviser definition under the Advisers Act.
Question 3: Under the Investment Advisers Act, which of the following is a permissible advisory fee arrangement?
- A fee based on a percentage of capital gains only, charged to all retail clients
- A flat fee charged quarterly, based on assets under management (Correct answer)
- A fee arrangement where the adviser receives undisclosed compensation from third parties for recommending their products
- A performance fee charged to clients with less than $1 million in assets under advisement
Correct answer: A flat fee charged quarterly, based on assets under management
Asset-based fees charged as a percentage of AUM are a standard, permissible compensation structure that aligns adviser and client interests without violating the Act.
Question 4: Which of the following disclosures is required in Form ADV Part 2A regarding disciplinary history?
- Only criminal convictions within the past 5 years
- All material legal or disciplinary events that would be material to a client's evaluation of the adviser's integrity (Correct answer)
- Only events that resulted in registration revocation or suspension
- No disciplinary history is required; clients must check FINRA BrokerCheck separately
Correct answer: All material legal or disciplinary events that would be material to a client's evaluation of the adviser's integrity
Form ADV Part 2A requires disclosure of all material legal and disciplinary events involving the adviser or its management persons that would be material to a client's evaluation of the firm's integrity.
Question 5: An investment adviser that uses social media to promote its services must ensure that:
- All social media accounts are maintained by third-party compliance vendors only
- Posts constitute advertising subject to the Advisers Act Marketing Rule (Rule 206(4)-1) (Correct answer)
- Only the CCO may post on behalf of the firm
- Social media is limited to factual statements with no mention of performance
Correct answer: Posts constitute advertising subject to the Advisers Act Marketing Rule (Rule 206(4)-1)
Under the updated Marketing Rule (Rule 206(4)-1), social media posts that promote advisory services are considered advertisements subject to the rule's standards for fair, balanced, and non-misleading content.
Question 6: The 'qualified client' standard for performance fee eligibility under Section 205 of the Advisers Act is based on:
- The client's annual income exceeding $200,000 for two consecutive years
- The client having at least $1.1 million in AUM with the adviser OR a net worth of at least $2.2 million (Correct answer)
- The client being an institutional investor with assets over $5 million
- The client being an accredited investor under Regulation D
Correct answer: The client having at least $1.1 million in AUM with the adviser OR a net worth of at least $2.2 million
A 'qualified client' under Rule 205-3 must have at least $1.1 million under management with the adviser after entering the contract, or a net worth exceeding $2.2 million (subject to SEC inflation adjustments).
Question 7: An investment adviser registered with the SEC that merges with another firm is required to:
- File a new Form ADV within 30 days and obtain client consent for the assignment of advisory contracts (Correct answer)
- Continue operating under the acquired firm's registration without any filing for up to 6 months
- Notify clients by email within 5 business days; no SEC filing is needed for mergers
- Automatically transfer all registrations via FINRA's CRD system within 90 days
Correct answer: File a new Form ADV within 30 days and obtain client consent for the assignment of advisory contracts
A merger typically constitutes an assignment requiring client consent under Section 205(a)(2), and the surviving entity must promptly update its Form ADV to reflect the change in business.
CIC Investment Adviser Regulations 5
The 'Pay-to-Play' rule (Rule 206(4)-5) under the Advisers Act is designed to prevent investment advisers from: