Stock Advisor Regulatory Compliance and Ethics 1 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, which of the following best describes a 'registered investment adviser'?
- Any person who receives compensation for providing securities trading services
- Any person who, for compensation, advises others on investing in securities as part of a regular business (Correct answer)
- Any broker-dealer registered with FINRA who manages client portfolios
- Any individual who holds a Series 65 license and charges flat fees
Correct answer: Any person who, for compensation, advises others on investing in securities as part of a regular business
The Investment Advisers Act of 1940 defines an investment adviser as any person who, for compensation, engages in the business of advising others on securities investments.
Question 2: A stock advisor's fiduciary duty primarily requires the advisor to:
- Maximize commissions earned on every client transaction
- Act in the best interest of the client and disclose all material conflicts of interest (Correct answer)
- Follow the client's instructions regardless of their financial suitability
- Prioritize the firm's proprietary products when making recommendations
Correct answer: Act in the best interest of the client and disclose all material conflicts of interest
A fiduciary duty requires advisors to put their clients' interests first and to fully disclose any conflicts of interest that could affect their advice.
Question 3: Which federal agency has primary regulatory authority over registered investment advisers with $100 million or more in assets under management?
- FINRA
- CFTC
- SEC (Correct answer)
- OCC
Correct answer: SEC
The SEC (Securities and Exchange Commission) oversees investment advisers managing $100 million or more in AUM; those below that threshold are typically regulated by state securities regulators.
Question 4: The 'suitability' standard requires a stock advisor to recommend investments that are:
- The highest-returning options available in the current market
- Appropriate for a client based on their financial situation, risk tolerance, and investment objectives (Correct answer)
- Approved by the SEC for retail investor use
- Listed on a major exchange such as the NYSE or NASDAQ
Correct answer: Appropriate for a client based on their financial situation, risk tolerance, and investment objectives
Suitability requires that investment recommendations align with the client's specific financial profile, including income, risk tolerance, time horizon, and investment goals.
Question 5: Insider trading is best defined as buying or selling securities based on:
- Publicly released quarterly earnings reports
- Material, non-public information obtained through a position of trust or confidence (Correct answer)
- Analyst ratings published in mainstream financial media
- Historical price trends identified through technical analysis
Correct answer: Material, non-public information obtained through a position of trust or confidence
Insider trading involves trading securities using material, non-public information, which gives an unfair advantage over other market participants and is illegal under SEC Rule 10b-5.
Question 6: Form ADV is the registration document required by the SEC for investment advisers. Part 2A of Form ADV is commonly called the:
- Prospectus
- Brochure (Correct answer)
- Annual Report
- Disclosure Statement
Correct answer: Brochure
Part 2A of Form ADV is called the 'Brochure' and must be provided to clients; it describes the adviser's services, fees, strategies, and any conflicts of interest.
Question 7: Know Your Customer (KYC) regulations require stock advisors to gather which type of information from new clients?
- Social media profiles and online investment forum activity
- Personal financial details, investment experience, risk tolerance, and investment objectives (Correct answer)
- Employment history for the past 10 years and tax returns
- References from at least three existing advisory clients
Correct answer: Personal financial details, investment experience, risk tolerance, and investment objectives
KYC rules require advisors to collect information on a client's financial situation, investment experience, risk tolerance, and objectives to ensure appropriate advice and prevent financial crimes.
Stock Advisor Regulatory Compliance and Ethics 1
Under the Investment Advisers Act of 1940, which of the following best describes a 'registered investment adviser'?