Series 63 – Uniform Securities Agent State Law Exam Investment Advisers and Investment Adviser Representatives 2 — Questions and Answers
Question 1: Under the USA, which of the following persons is excluded from the definition of 'investment adviser representative'?
- An employee who solicits new advisory clients
- An employee who performs only clerical or administrative functions (Correct answer)
- An employee who provides investment analysis for the firm
- An employee who manages individual client portfolios
Correct answer: An employee who performs only clerical or administrative functions
Persons who perform purely clerical or ministerial functions are excluded from the definition of investment adviser representative.
Question 2: Under the USA, what is a 'wrap fee' program offered by investment advisers?
- A fee program that bundles investment advice, brokerage, and administration services for a single all-inclusive fee (Correct answer)
- A fee charged to clients who exceed a specified number of trades per year
- A fee structure based on investment performance relative to a benchmark
- A fee charged when clients terminate their advisory relationship
Correct answer: A fee program that bundles investment advice, brokerage, and administration services for a single all-inclusive fee
A wrap fee program bundles investment management, brokerage execution, and administrative services into a single comprehensive fee, typically charged as a percentage of assets.
Question 3: Under the USA, the 'pay-to-play' rule generally prohibits investment advisers from doing what?
- Charging performance-based fees to retail clients
- Making political contributions to government officials who influence the selection of investment advisers for public pension funds (Correct answer)
- Advertising on radio or television without prior approval
- Sharing client information with affiliated companies
Correct answer: Making political contributions to government officials who influence the selection of investment advisers for public pension funds
Pay-to-play rules prohibit investment advisers from making political contributions to government officials who have influence over the selection of advisers for public pension plans.
Question 4: Under the USA, which type of fee arrangement for investment advisers is generally prohibited without meeting specific conditions?
- Flat annual fees based on assets under management
- Performance-based fees that give the adviser a share of capital gains (Correct answer)
- Hourly fees for specific investment advice
- Fixed fees for financial planning services
Correct answer: Performance-based fees that give the adviser a share of capital gains
Performance-based fees (sharing in client gains) are generally prohibited unless the client is a 'qualified client' meeting specific net worth or AUM thresholds.
Question 5: Under the USA, what must an investment adviser disclose regarding compensation received from third parties for recommending securities?
- Nothing, as long as the recommendation is suitable
- Full disclosure of the compensation arrangement to clients before or at the time of the recommendation (Correct answer)
- Only the name of the third party, not the amount of compensation
- Disclosure is only required if compensation exceeds $1,000
Correct answer: Full disclosure of the compensation arrangement to clients before or at the time of the recommendation
Investment advisers must fully disclose any compensation received from third parties for recommending securities to clients, as this creates a material conflict of interest.
Question 6: Under the USA, which of the following is a requirement for investment adviser contracts?
- They must be approved by the state Administrator before taking effect
- They must not contain a provision allowing the adviser to be assigned without client consent (Correct answer)
- They must specify minimum investment performance guarantees
- They must be renewed annually by both parties
Correct answer: They must not contain a provision allowing the adviser to be assigned without client consent
Investment adviser contracts under the USA must not include any provision that allows assignment of the contract without client consent, protecting clients from unwanted changes in adviser.
Series 63 – Uniform Securities Agent State Law Exam Investment Advisers and Investment Adviser Representatives 2
Under the USA, which of the following persons is excluded from the definition of 'investment adviser representative'?