Series 66 Questions 1

If an investment adviser's only clients are insurance companies, it's:

• Considered a federal covered adviser and must register with the SEC

• 
  Considered an exempt reporting adviser (ERA)

• 
  Required to File Form ADV Part 2A

• Exempt from registration with the SEC

Answer explanation

Advisers that only advise insurance companies are exempt from registration under the Investment Advisers Act of 1940 and are not required to register with the SEC. Exempt reporting advisers (ERAs) manage either private funds or venture capital funds. Form ADV Part 2A is used by registered investment advisers and contains the information in the adviser's brochure. (25511)

The maximum criminal penalty for violating the Investment Advisers Act of 1940 is:

• 
  A fine of $10,000 and imprisonment of five years

• A fine of $5 million and imprisonment of 20 years

• 
  A fine of $5,000 and imprisonment of three years

• Three times the amount gained or loss avoided

Answer explanation

Under the Investment Advisers Act of 1940, the maximum criminal penalty is a fine of $10,000 and imprisonment of five years. The maximum criminal penalty for violating the Uniform Securities Act is a fine of $5,000 and imprisonment of three years. A fine of $5 million and imprisonment of 20 years is the criminal penalty for insider trading. Three times (i.e., treble damages) any gain realized or loss avoided is the maximum civil penalty for insider trading violations. (25512)

All of the following are considered forms of compensation for providing investment advice, EXCEPT:

• 
  An hourly fee for writing a financial plan

• 
  A fee based on the average value of the assets held in an account

•   Receiving a fee that increases based on performance of a portfolio

• Commissions for executing securities transactions

Answer explanation

Investment advisers can be compensated based on hourly fees or based on a percentage of assets under management. Although performance-based fees are only permitted for qualified clients, they are still considered advisory fees. If a business only receives compensation (e.g., commission) for executing securities trades, the business is acting as a broker-dealer and is excluded from the definition of an investment adviser. (25506)

According to the Investment Advisers Act of 1940, which of the following persons would NOT be considered an investment adviser

• A firm that prepares research reports regarding current trends in the Treasury bond market

• A firm that prepares research reports about trends in the U.S. corporate bond market

• A financial planner advising clients of the advantages of purchasing mutual funds as compared to purchasing real estate

• A person who prepares a selective list of U.S. government bond funds, but does not recommend specific funds

Answer explanation

According to the Investment Advisers Act, if a firm prepares reports or renders investment advice solely on U.S. government securities or securities in which the U.S. government has direct or indirect interest, the firm does not fall within the definition of an investment adviser. (62029)

All of the following advisory clients may pay a performance-based fee, EXCEPT:

• 
  A section 3(c)(7) hedge fund

• A registered investment company

•  An accredited investor

• 
  Individuals who are not U.S. residents

Answer explanation

Investment advisers may charge performance-based fees to qualified clients, registered investment companies, Section 3(c)(7) hedge funds, and non U.S. residents. Accredited investors may purchase private placements under Regulation D Rule 506, but are not included in the rules related to performance-based fees. (25505)

An investment adviser has created a written contract for new advisory clients. One of the clauses in the contract limits the adviser's liability for potential fraud. The clause also forces the client to use arbitration for the resolution of any future dispute. Which of the following statements is TRUE regarding the adviser's contract?

• 
  As long as the client has read and signed the contract, the clause is enforceable.

• 
  The Investment Advisers Act of 1940 prohibits written advisory contracts.

• Rule 204A-1 requires advisers to have mandatory arbitration clauses, but prohibits advisers from limiting damages in fraud cases.

• 
  Both exculpatory and mandatory arbitration clauses are prohibited in advisory contracts.

Answer explanation

Investment advisers are prohibited from using hedge clauses to waive their liability for criminal or civil fraud liabilities. In addition, advisers are prohibited from using mandatory arbitration clauses. Advisory clients may sign predispute arbitration clauses, but they must do so voluntarily. Rule 204A-1 requires advisers to create a written code of ethics and prohibits advisers from using clauses which limit damages (i.e., exculpatory). (25508)

What federal law removed some of the duplication of regulations that applied to investment advisers and securities?

• 
  The Securities Exchange Act of 1934

• 
  The Securities Act of 1933

• The Uniform Securities Act

• 
  The National Securities Markets Improvement Act of 1996 (NSMIA)

Answer explanation

Congress enacted the National Securities Markets Improvement Act (NSMIA) to eliminate the duplication of state and federal regulation of securities and investment advisers. Specifically, NSMIA created two definitions - federal covered securities and federal covered advisers - which eliminated the need to simultaneously register with the SEC and state Administrator. Note that broker-dealers were not included in NSMIA and are generally required to register with both the SEC and state Administrator. (25550)

An individual who represents a company by selling its stock to residents of a state is defined as a(n):

• Agent of an issuer

• 
  Investment adviser representative (IAR)

• Agent of a broker-dealer

• Transactor

Answer explanation

An agent of an issuer is a non-clerical individual who represents an issuer in effecting securities transactions with the public involving the issuer’s securities. In this question, if the individual represented a broker-dealer, he would be an agent of the broker-dealer. Investment adviser representatives solicit advisory services, rather than securities, to clients and potential clients of an investment adviser. (25547)

A non-exempt security:

•  Needs to be registered with the state Administrator

• 
  Is generally excluded from all securities laws

• Is not required to be registered with the state Administrator

• Is defined differently by each state Administrator

Answer explanation

Non-exempt securities must be registered with the state Administrator before being sold in a state. On the other hand, exempt securities are not required to be registered with the state Administrator. However, exempt securities are still subject to the anti-fraud provisions of the Uniform Securities Act (USA). Exemptions are established in the USA and not defined by the state Administrator. (25543)

Which of the following activities is NOT performed by a person who's defined as an investment adviser representative (IAR)?

• Supervising other IARs

• 
  Providing investment advice regarding securities

• 
  Executing securities transactions on behalf the adviser's customers

• 
  Soliciting the sale of investment advisory services

Answer explanation

Investment adviser representatives (IARs) either provide advice or solicit advisory services for an investment adviser (IA). In addition, IA employees that supervise other IARs are also defined as IARs. Executing transactions is an activity of a broker-dealer and its agents. (25549)