IAR Laws, Regulations & Guidelines 5 — Questions and Answers
Question 1: Under SEC rules, investment advisers must deliver Form CRS (Client Relationship Summary) to retail investors at which point in the relationship?
- Within 30 days after entering into an advisory agreement
- Before or at the time of entering into an advisory contract (Correct answer)
- Annually, at the time of the Form ADV brochure delivery
- Only upon written request from the client
Correct answer: Before or at the time of entering into an advisory contract
Form CRS must be delivered to retail investors before or at the time of entering into an advisory agreement, ensuring they understand the relationship upfront.
Question 2: Under the Investment Advisers Act, which of the following is an example of 'scalping' as a prohibited manipulative practice?
- Charging excessive fees relative to services provided
- An adviser recommending a security to clients immediately after purchasing it personally to benefit from the anticipated price increase (Correct answer)
- Trading against client orders to improve the adviser's own execution price
- Failing to disclose a personal holding in a recommended security
Correct answer: An adviser recommending a security to clients immediately after purchasing it personally to benefit from the anticipated price increase
Scalping occurs when an adviser buys a security and then recommends it to clients, profiting from the price increase caused by client buying — a violation of fiduciary duty.
Question 3: An investment adviser representative who has been convicted of a felony involving fraud is subject to which consequence under the Uniform Securities Act?
- A mandatory 2-year suspension from registration
- An automatic bar from association with any investment adviser (Correct answer)
- A civil penalty only, not denial of registration
- Disqualification only if the conviction occurred in the state of registration
Correct answer: An automatic bar from association with any investment adviser
A felony conviction for fraud is a statutory disqualification under the Uniform Securities Act, barring the individual from association with a registered investment adviser.
Question 4: Which of the following describes the 'pay-to-play' rules applicable to investment advisers under SEC Rule 206(4)-5?
- Advisers are prohibited from making any political contributions
- Advisers are prohibited from managing government funds for 2 years after making contributions to certain government officials who can influence the hiring decision (Correct answer)
- Advisers must disclose all political contributions in Form ADV Part 2A
- Only contributions over $5,000 trigger a reporting obligation to the SEC
Correct answer: Advisers are prohibited from managing government funds for 2 years after making contributions to certain government officials who can influence the hiring decision
SEC Rule 206(4)-5 imposes a 2-year 'time-out' on receiving compensation for managing government entity assets after certain political contributions are made to officials in a position to influence adviser selection.
Question 5: Under the Uniform Securities Act, a state securities administrator has the authority to conduct which of the following actions against an investment adviser without advance notice?
- Permanently revoke a registration
- Impose a civil monetary penalty exceeding $10,000
- Issue a summary stop order or summary suspension pending a hearing (Correct answer)
- Bar an individual from the securities industry permanently
Correct answer: Issue a summary stop order or summary suspension pending a hearing
State administrators may issue summary stop orders or emergency suspensions without prior notice when necessary to protect the public, subject to a prompt post-action hearing.
Question 6: Which of the following is a required element of a written investment advisory contract under SEC rules?
- A guaranteed minimum return benchmark for the adviser's performance
- A provision prohibiting assignment of the contract without client consent (Correct answer)
- A binding arbitration clause for all client disputes
- A waiver of the client's right to bring regulatory complaints
Correct answer: A provision prohibiting assignment of the contract without client consent
Section 205 of the Investment Advisers Act requires that advisory contracts include a provision prohibiting assignment without client consent, protecting clients from unauthorized transfers of their accounts.
Question 7: Under NASAA's model rules, an investment adviser that inadvertently takes custody of client funds (e.g., receives a client check not yet forwarded to a custodian) must:
- Retain the funds until the next quarterly account statement
- Return the funds or forward them to the custodian within 3 business days (Correct answer)
- Deposit the funds in the firm's operating account pending client instructions
- Notify the state administrator within 24 hours before taking any action
Correct answer: Return the funds or forward them to the custodian within 3 business days
NASAA Model Rules require advisers that inadvertently receive client funds to return or forward them to the appropriate party within 3 business days to avoid triggering full custody obligations.
IAR Laws, Regulations & Guidelines 5
Under SEC rules, investment advisers must deliver Form CRS (Client Relationship Summary) to retail investors at which point in the relationship?