IAR Laws, Regulations & Guidelines 2 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, which of the following transactions is exempt from the definition of 'investment advice'?
- Recommending specific securities based on a client's financial situation
- Publishing a bona fide financial publication of general and regular circulation (Correct answer)
- Providing personalized portfolio management services
- Charging a fee for analyzing a client's investment objectives
Correct answer: Publishing a bona fide financial publication of general and regular circulation
Publishers of bona fide financial publications of general and regular circulation are excluded from the definition of investment adviser under the 1940 Act.
Question 2: A state-registered investment adviser must register in a new state when it has how many clients in that state within a 12-month period?
- 1 client
- 3 clients
- 5 clients (Correct answer)
- 6 clients
Correct answer: 5 clients
Most states require an investment adviser to register when it has 5 or more clients residing in that state within a 12-month period.
Question 3: Which regulatory body has primary oversight responsibility for investment advisers managing more than $110 million in assets under management?
- FINRA
- State securities regulators
- SEC (Correct answer)
- MSRB
Correct answer: SEC
Investment advisers with $110 million or more in AUM must register with the SEC rather than state authorities.
Question 4: Under the Uniform Securities Act, which of the following is NOT considered a security?
- Variable annuity
- Commodity futures contract (Correct answer)
- Convertible debenture
- Preorganization certificate
Correct answer: Commodity futures contract
Commodity futures contracts are regulated by the CFTC under the Commodity Exchange Act, not as securities under the Uniform Securities Act.
Question 5: An IAR who receives a commission from a broker-dealer for recommending a client purchase a specific mutual fund has engaged in what type of conflict of interest?
- A permitted incentive under NASAA guidelines
- A disclosure-only issue under the suitability standard
- A violation of fiduciary duty if not disclosed to the client (Correct answer)
- An exempt transaction under SEC Rule 206(3)
Correct answer: A violation of fiduciary duty if not disclosed to the client
An IAR receiving undisclosed third-party compensation breaches the fiduciary duty owed to clients, as it represents an undisclosed material conflict of interest.
Question 6: Which of the following describes the 'brochure rule' under SEC rules for investment advisers?
- Requirement to deliver Form ADV Part 1 to prospective clients
- Requirement to deliver Form ADV Part 2A to clients before or at the time of entering an advisory contract (Correct answer)
- Requirement to provide a summary prospectus before recommending mutual funds
- Requirement to deliver a fee schedule only upon client request
Correct answer: Requirement to deliver Form ADV Part 2A to clients before or at the time of entering an advisory contract
The brochure rule (Rule 204-3) requires advisers to deliver Form ADV Part 2A to clients before or at the time of entering into an advisory contract.
Question 7: A state securities administrator may deny an investment adviser registration for which of the following reasons?
- The adviser charges fees that are above market average
- The adviser has been convicted of a misdemeanor involving financial crimes within the past 10 years (Correct answer)
- The adviser refuses to provide references from prior clients
- The adviser's principal office is located outside the state
Correct answer: The adviser has been convicted of a misdemeanor involving financial crimes within the past 10 years
A conviction for a misdemeanor involving securities, fraud, or financial crimes within the past 10 years is a statutory basis for denial of registration.
IAR Laws, Regulations & Guidelines 2
Under the Investment Advisers Act of 1940, which of the following transactions is exempt from the definition of 'investment advice'?