FINRA Uniform Investment Adviser Law 3 — Questions and Answers
Question 1: Which of the following persons would be classified as an 'investment adviser representative' (IAR) under state law?
- A clerical employee who processes client account paperwork
- A supervised person who makes investment recommendations to clients (Correct answer)
- A data analyst who researches securities but has no client contact
- An administrator who schedules client meetings for advisers
Correct answer: A supervised person who makes investment recommendations to clients
An IAR is a supervised person of an investment adviser who makes investment recommendations, manages client accounts, or solicits advisory clients.
Question 2: An investment adviser charges a performance-based fee. Under the Uniform Securities Act, this fee arrangement is generally permissible only for:
- Any client who signs a written consent form
- Clients with at least $1 million under management or $2.1 million net worth (Correct answer)
- Clients who have been with the adviser for more than one year
- Institutional clients only, never individuals
Correct answer: Clients with at least $1 million under management or $2.1 million net worth
Performance-based fees are allowed only for 'qualified clients'—generally those with $1 million under the adviser's management or a net worth exceeding $2.1 million.
Question 3: Under the Investment Advisers Act of 1940, which document must SEC-registered advisers file that contains detailed information about their advisory business, ownership, and disciplinary history?
- Form U4
- Form ADV (Correct answer)
- Form BD
- Form 13F
Correct answer: Form ADV
Form ADV is the uniform registration document that SEC-registered investment advisers must file, covering business practices, ownership, fees, conflicts, and disciplinary history.
Question 4: An investment adviser wishes to use a client's name and performance results as a testimonial in advertising. Under the Uniform Securities Act, this practice is:
- Permitted if the client provides written consent
- Prohibited because client testimonials are misleading (Correct answer)
- Permitted only if it includes all clients' results, not just favorable ones
- Allowed only for institutional client testimonials
Correct answer: Prohibited because client testimonials are misleading
Traditional investment adviser advertising rules prohibited testimonials because they are inherently misleading and do not represent all clients' experiences; however, note that the SEC updated federal rules in 2021 to allow testimonials with conditions.
Question 5: A state-registered investment adviser must update its Form ADV at least:
- Every 90 days
- Annually within 90 days of fiscal year-end (Correct answer)
- Every six months
- Only when material changes occur
Correct answer: Annually within 90 days of fiscal year-end
State-registered investment advisers must file an annual updating amendment to Form ADV within 90 days after the end of their fiscal year.
Question 6: Under the Uniform Securities Act, which of the following would constitute 'custody' of client assets for an investment adviser?
- Receiving a client's check made payable to a third-party custodian
- Having written authority to withdraw funds from a client's account (Correct answer)
- Maintaining records of client account statements from a third party
- Sending investment recommendations directly to a client's custodian
Correct answer: Having written authority to withdraw funds from a client's account
An investment adviser has custody if it holds client funds or securities directly, or if it has the authority to withdraw client funds from an account.
Question 7: If an investment adviser discovers it has inadvertently violated a state securities law, the administrator may still take action even if the violation was:
- Intentional and fraudulent
- Willful and repeated
- Not willful or intentional (Correct answer)
- Committed with the client's consent
Correct answer: Not willful or intentional
State administrators can take regulatory action (such as revoking registration) for violations of securities laws even when the violation was not willful or intentional.
FINRA Uniform Investment Adviser Law 3
Which of the following persons would be classified as an 'investment adviser representative' (IAR) under state law?