WMS Documentation & Legal Requirements 3 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, an RIA managing $110 million in AUM is generally required to register with:
- FINRA
- State securities regulators only
- The SEC (Correct answer)
- Both the SEC and all 50 states simultaneously
Correct answer: The SEC
Advisers with $100 million or more in AUM are generally required to register with the SEC rather than individual states.
Question 2: A beneficiary designation on a retirement account will override conflicting instructions in a client's will. This illustrates which legal principle?
- The rule against perpetuities
- Contractual supersession of testamentary documents (Correct answer)
- The spendthrift clause doctrine
- Per stirpes distribution
Correct answer: Contractual supersession of testamentary documents
Beneficiary designations are contractual arrangements that supersede contradictory will provisions for assets that pass outside the probate estate.
Question 3: What is the primary legal difference between a revocable trust and an irrevocable trust regarding asset protection?
- Revocable trusts provide stronger creditor protection than irrevocable trusts
- Assets in an irrevocable trust are generally beyond the reach of the grantor's creditors (Correct answer)
- Both offer identical creditor protection under federal law
- Irrevocable trusts offer no creditor protection in community property states
Correct answer: Assets in an irrevocable trust are generally beyond the reach of the grantor's creditors
Because the grantor relinquishes control over assets in an irrevocable trust, those assets are generally protected from the grantor's future creditors.
Question 4: The SEC's 'books and records' rule (Rule 204-2) requires investment advisers to retain most client-related records for a minimum of:
- 3 years
- 5 years (Correct answer)
- 7 years
- 10 years
Correct answer: 5 years
Rule 204-2 requires RIAs to preserve most required records for at least five years from the end of the fiscal year in which records were created.
Question 5: A client signs a new account form that includes a pre-dispute arbitration clause. What does this clause typically waive?
- The client's right to file a complaint with FINRA
- The client's right to pursue claims through the court system (Correct answer)
- The advisor's obligation to act in a fiduciary capacity
- The client's right to receive account statements
Correct answer: The client's right to pursue claims through the court system
A pre-dispute arbitration clause requires disputes to be resolved through arbitration rather than in a court of law.
Question 6: Which type of legal entity document would a wealth manager request to verify the authority of a corporate officer opening a business account?
- Articles of incorporation only
- A corporate resolution authorizing the officer to act on the entity's behalf (Correct answer)
- The company's most recent annual report
- A personal financial statement from the CEO
Correct answer: A corporate resolution authorizing the officer to act on the entity's behalf
A corporate resolution is the governing document that explicitly authorizes specific individuals to enter into transactions on behalf of the corporation.
Question 7: Under ERISA, the duty of loyalty for a plan fiduciary requires that all investment decisions be made:
- To maximize returns regardless of risk
- Solely in the interest of plan participants and beneficiaries (Correct answer)
- With the primary goal of minimizing plan administrative costs
- Based on the employer's financial needs
Correct answer: Solely in the interest of plan participants and beneficiaries
ERISA's duty of loyalty mandates that fiduciaries act exclusively for the benefit of plan participants and beneficiaries, not the sponsor.
WMS Documentation & Legal Requirements 3
Under the Investment Advisers Act of 1940, an RIA managing $110 million in AUM is generally required to register with: