FINRA Uniform Investment Adviser Law 2 — Questions and Answers
Question 1: Under the Uniform Securities Act, which of the following is NOT considered an 'investment adviser'?
- A bank that provides investment advice as a primary service
- An attorney who renders investment advice incidental to their legal practice (Correct answer)
- A firm that publishes investment newsletters for a subscription fee
- A person who advises others on securities for compensation
Correct answer: An attorney who renders investment advice incidental to their legal practice
Attorneys, accountants, engineers, and teachers who provide investment advice solely incidental to their professional practice are excluded from the definition of investment adviser under the Uniform Securities Act.
Question 2: An investment adviser representative (IAR) who moves from one state-registered advisory firm to another must:
- File a new Form U4 with the state within 30 days
- Reapply for registration in every state where they do business
- Notify the state administrator and update Form U4 through IARD (Correct answer)
- Automatically transfer their registration without any filing
Correct answer: Notify the state administrator and update Form U4 through IARD
When an IAR changes firms, they must notify the state administrator and update their Form U4 through the IARD system to reflect the new employer.
Question 3: A state-registered investment adviser with 25 clients in a state is acquired by a firm that manages $120 million in assets. After the acquisition, registration must be:
- Maintained with the state because the client count is low
- Switched to SEC registration because AUM exceeds the federal threshold (Correct answer)
- Filed with both the SEC and all states where clients reside
- Kept with the state for two years before switching to the SEC
Correct answer: Switched to SEC registration because AUM exceeds the federal threshold
When an investment adviser's assets under management reach or exceed $110 million (the federal threshold), it must register with the SEC rather than state authorities.
Question 4: Which disclosure document must a state-registered investment adviser deliver to clients under the 'brochure rule'?
- Form ADV Part 1A
- Form ADV Part 2A (Correct answer)
- Form U4
- Form BD
Correct answer: Form ADV Part 2A
Form ADV Part 2A is the 'brochure' that investment advisers must deliver to clients, containing information about services, fees, conflicts of interest, and disciplinary history.
Question 5: Under state law, an investment adviser's contract with a client is VOID if it includes which of the following provisions?
- A flat annual fee based on the size of the account
- A clause waiving the adviser's fiduciary duty to the client (Correct answer)
- A performance fee for qualified clients meeting net worth thresholds
- A provision requiring 30 days' written notice to terminate
Correct answer: A clause waiving the adviser's fiduciary duty to the client
Investment adviser contracts cannot include provisions waiving any rights or remedies of the client, and any such waiver is void under the Uniform Securities Act.
Question 6: A state administrator may deny, suspend, or revoke an investment adviser's registration for all of the following reasons EXCEPT:
- The adviser has been convicted of a securities-related felony
- The adviser's business model generates lower returns than competitors (Correct answer)
- The adviser's financial condition makes it unable to meet client obligations
- The adviser has willfully violated state securities laws
Correct answer: The adviser's business model generates lower returns than competitors
State administrators can take action based on legal violations, financial impairment, or criminal history, but cannot penalize an adviser simply for underperforming competitors.
Question 7: The 'de minimis' exemption under the Uniform Securities Act allows an investment adviser to avoid state registration if it has no place of business in the state and has fewer than how many clients in that state during the preceding 12 months?
- 3
- 5 (Correct answer)
- 10
- 25
Correct answer: 5
The de minimis exemption under the Uniform Securities Act allows advisers with no in-state office and fewer than 5 clients in the state over the prior 12 months to avoid state registration.
FINRA Uniform Investment Adviser Law 2
Under the Uniform Securities Act, which of the following is NOT considered an 'investment adviser'?