IAR Laws, Regulations & Guidelines 3 — Questions and Answers
Question 1: Under NASAA Model Rules, an investment adviser is required to maintain its books and records for a minimum of how many years?
- 2 years
- 3 years
- 5 years (Correct answer)
- 7 years
Correct answer: 5 years
NASAA Model Rules generally require investment advisers to retain books and records for a minimum of 5 years.
Question 2: Which of the following advisory fee arrangements is considered presumptively unethical under NASAA guidelines?
- Flat annual retainer fee
- Fee based on percentage of assets under management
- Performance fee for non-qualified clients (Correct answer)
- Hourly fee for financial planning
Correct answer: Performance fee for non-qualified clients
Performance-based fees for non-qualified clients (those without sufficient net worth or income) are presumptively unethical under NASAA guidelines.
Question 3: Under the Investment Advisers Act of 1940, Section 206 prohibits investment advisers from doing all of the following EXCEPT:
- Employing any device or scheme to defraud clients
- Engaging in transactions as principal with clients without consent
- Charging fees based on a percentage of assets under management (Correct answer)
- Making untrue statements of material fact
Correct answer: Charging fees based on a percentage of assets under management
AUM-based percentage fees are a permissible and common compensation structure; Section 206 prohibits fraud, deception, and undisclosed principal transactions.
Question 4: An investment adviser representative (IAR) changes employment from one registered investment adviser to another. What must occur for the IAR to continue working legally?
- The IAR must re-take the Series 65 exam
- The new employer must file an amendment to its Form ADV and the IAR must be properly associated (Correct answer)
- The IAR must register as an independent adviser for 30 days
- The state administrator must approve the transfer before it becomes effective
Correct answer: The new employer must file an amendment to its Form ADV and the IAR must be properly associated
When an IAR changes firms, the new employer must amend its Form ADV to associate the IAR, and registration in applicable states must be updated before the IAR provides advisory services.
Question 5: Which of the following BEST describes the 'custody rule' for investment advisers under SEC Rule 206(4)-2?
- Advisers with custody must use only SEC-approved custodians
- Advisers with custody must notify the SEC and meet specific safekeeping requirements including surprise audits (Correct answer)
- Custody is prohibited for all state-registered investment advisers
- Advisers must transfer custody to a FINRA member firm within 30 days
Correct answer: Advisers with custody must notify the SEC and meet specific safekeeping requirements including surprise audits
Rule 206(4)-2 requires advisers with custody of client assets to notify the SEC, use qualified custodians, and submit to annual surprise audits by an independent public accountant.
Question 6: A wrap fee program must be disclosed using which specific disclosure document?
- Form ADV Part 1
- Form ADV Part 2A Appendix 1 (Correct answer)
- Form ADV Part 2B
- Form CRS only
Correct answer: Form ADV Part 2A Appendix 1
Wrap fee programs require a separate brochure — Form ADV Part 2A Appendix 1 — that details the wrap fee arrangement, services included, and conflicts of interest.
Question 7: Under the Dodd-Frank Act, which category of investment advisers was required to switch from SEC to state registration?
- Advisers to pension funds with over $50M in assets
- Mid-sized advisers with $25M–$100M in AUM (Correct answer)
- Advisers serving only institutional clients
- Advisers operating in more than 15 states
Correct answer: Mid-sized advisers with $25M–$100M in AUM
Dodd-Frank required mid-sized advisers ($25M–$100M AUM) who are not eligible for SEC registration to switch to state registration, except in states without investment adviser regulation.
IAR Laws, Regulations & Guidelines 3
Under NASAA Model Rules, an investment adviser is required to maintain its books and records for a minimum of how many years?