Module 1: Regulation of Investment Advisers and Investment Adviser Representatives

• Topic 01

  Regulation of Investment Advisers

  109 questions
• Topic 02

  Regulation of Investment Adviser Representatives (IARs)

  109 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What financial statements must state-registered investment advisers file with the state administrator?

   • A
     Audited or unaudited financial statements as required by the state, typically filed periodically or upon request
     Correct answer
   • B
     Financial statements must be filed within 10 days of each fiscal year-end and must be audited by a PCAOB-registered firm
   • C
     All state-registered advisers must file audited financial statements quarterly with the administrator
   • D
     State-registered advisers are not required to file financial statements with state administrators
   Explanation

   State-registered investment advisers are generally required to file financial statements with the state administrator. The frequency, form (audited vs. unaudited), and content vary by state. Advisers with custody of client assets or those subject to investigations may face more stringent financial reporting requirements than other state-registered advisers.

2. An IAR negotiates the sale of advisory services to a prospective client. Is this activity sufficient to require IAR registration?

   • A
     No. Negotiation activities are exempt from IAR registration because they are not investment advisory activities.
   • B
     Yes, but only if the negotiation involves more than 5 clients in a year.
   • C
     Yes, but only if the individual also has authority to enter into the advisory agreement on behalf of the firm.
   • D
     Yes. Negotiating for the sale of investment advisory services is one of the five activities that define an IAR under the USA. An individual who negotiates advisory contracts with prospective clients must register as an IAR.
     Correct answer
   Explanation

   The USA's IAR definition includes 'soliciting, offering, or negotiating for the sale of investment advisory services.' The word 'negotiating' specifically captures individuals who discuss and finalize the terms of advisory agreements with prospective clients. This broad definition prevents firms from having unregistered 'sales staff' who sign up clients without being registered as IARs.

3. What does 'temporarily present' mean for purposes of the snowbird exemption?

   • A
     'Temporarily present' means the client is visiting or residing in the other state for a limited period (e.g., wintering in Florida) with the intention of returning to their home state, and the IAR continues to be based in the client's home state.
     Correct answer
   • B
     'Temporarily present' refers to the IAR's presence, not the client's; the IAR may briefly visit clients in another state.
   • C
     'Temporarily present' means the client has been in the other state for fewer than 30 calendar days in the preceding year.
   • D
     There is no defined meaning; each state administrator determines what qualifies as 'temporary' for snowbird purposes.
   Explanation

   The snowbird exemption is designed for IARs who serve clients who have seasonal or temporary residences in another state. 'Temporarily present' describes a client who is there for a limited time and maintains their primary residence in the IAR's home state. The relationship must be pre-existing, and the IAR must remain based in the home state.