Series 63 – Uniform Securities Agent State Law Exam Investment Advisers and Investment Adviser Representatives 3 — Questions and Answers
Question 1: Under the USA, when must an investment adviser deliver the disclosure brochure to a prospective client?
- Within 48 hours of entering the advisory contract
- At least 48 hours before entering into the advisory contract, or at the time of entering the contract if the client has the right to cancel within five business days (Correct answer)
- Within 30 days after the advisory contract is signed
- Only when the client specifically requests it
Correct answer: At least 48 hours before entering into the advisory contract, or at the time of entering the contract if the client has the right to cancel within five business days
The brochure must be delivered at least 48 hours before contract execution, or at signing if the client retains a five-business-day right to cancel without penalty.
Question 2: Under the USA, 'discretionary authority' for investment advisers means what?
- The adviser can set their own fees without client approval
- The authority to make investment decisions—including which securities to buy or sell and in what amounts—on behalf of a client without prior client approval for each transaction (Correct answer)
- The ability to vote client proxies without consultation
- The authority to move client assets between different investment advisers
Correct answer: The authority to make investment decisions—including which securities to buy or sell and in what amounts—on behalf of a client without prior client approval for each transaction
Discretionary authority allows an investment adviser to make buy and sell decisions in a client's account without contacting the client for approval before each transaction.
Question 3: Under the USA, what is the 'solicitor's rule' in the context of investment adviser regulations?
- A rule requiring advisers to solicit new clients annually
- A requirement that cash compensation paid to persons who solicit clients for investment advisers must be disclosed to the clients being solicited (Correct answer)
- A prohibition on investment advisers using outside solicitors
- A rule requiring solicitors to be registered as investment adviser representatives
Correct answer: A requirement that cash compensation paid to persons who solicit clients for investment advisers must be disclosed to the clients being solicited
The solicitor's rule requires that when an investment adviser pays cash compensation to a third party for client referrals, this arrangement must be disclosed to the referred clients.
Question 4: Under the USA, 'cherry picking' in investment advisory fraud refers to which practice?
- Selecting only the best-performing securities for client portfolios
- Allocating profitable trades to the adviser's own account or favored clients after the trade direction is known (Correct answer)
- Selectively disclosing only positive investment performance to potential clients
- Choosing only established blue-chip companies for conservative client portfolios
Correct answer: Allocating profitable trades to the adviser's own account or favored clients after the trade direction is known
Cherry picking involves an adviser waiting to see if trades are profitable before allocating them to favored accounts or their own account, rather than allocating trades fairly at the time of execution.
Question 5: Under the USA, which of the following is true about investment adviser registration by an IAR who works for a state-registered adviser?
- IARs register only in the state where the advisory firm has its principal office
- IARs must register in each state in which they have a place of business and in states where they have more than five clients (Correct answer)
- IARs are automatically registered in all states when the firm registers
- IARs do not need to register separately from the advisory firm
Correct answer: IARs must register in each state in which they have a place of business and in states where they have more than five clients
IARs of state-registered investment advisers must register in each state where they maintain a place of business and in states where they serve more than five clients.
Question 6: Under the USA, investment advisers who have custody of client funds or securities are subject to which additional requirement?
- They must file a separate annual report with the SEC
- They are subject to higher net worth requirements and more frequent audits (Correct answer)
- They must use only exchange-listed securities for client accounts
- They must obtain client approval before any transaction
Correct answer: They are subject to higher net worth requirements and more frequent audits
Investment advisers with custody of client assets face stricter financial requirements including higher minimum net worth and are subject to surprise audits.
Series 63 – Uniform Securities Agent State Law Exam Investment Advisers and Investment Adviser Representatives 3
Under the USA, when must an investment adviser deliver the disclosure brochure to a prospective client?