Module 4: Laws, Regulations and Guidelines

• Topic 01

  Regulation of Investment Advisers

  51 questions
• Topic 02

  Regulation of Investment Adviser Representatives

  71 questions
• Topic 03

  Regulation of Broker-Dealers

  72 questions
• Topic 04

  Regulation of Broker-Dealer Agents

  111 questions
• Topic 05

  Regulation of Securities and Issuers

  58 questions
• Topic 06

  Administrative Provisions and Remedies

  230 questions
• Topic 07

  Client Communications and Disclosure

  92 questions
• Topic 08

  Fiduciary Obligations and Ethical Practices

  97 questions

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

1. An investment adviser pays a cash referral fee to a third-party solicitor. The solicitor failed to deliver the solicitor disclosure document to one referred client before that client signed the advisory contract. The client later claims the disclosure was required and was not delivered. Who bears responsibility?

   • A
     The solicitor bears full responsibility; the adviser can avoid liability by contractually requiring the solicitor to provide the disclosures.
   • B
     The client bears partial responsibility because they should have asked for the disclosure document before signing.
   • C
     The investment adviser bears ultimate responsibility because Rule 206(4)-3 requires the adviser to ensure that the solicitor complies with the disclosure requirements, and the adviser must obtain the client's signed acknowledgment of receipt; the adviser's failure to supervise the solicitor's compliance is itself a violation.
     Correct answer
   • D
     Only the solicitor bears responsibility because the rule imposes the disclosure obligation on the solicitor, not the adviser.
   Explanation

   Rule 206(4)-3 creates obligations for both the solicitor and the adviser. The adviser must enter a written agreement requiring the solicitor to provide disclosures, must ensure the solicitor actually delivers the disclosures, and must obtain signed client acknowledgments. The adviser's obligations are not purely contractual — simply requiring the solicitor to disclose is insufficient if the adviser does not verify and document actual compliance.

2. What personal securities transaction obligations apply to IARs who are access persons?

   • A
     Access persons must report personal securities transactions only when they involve securities held by at least three clients.
   • B
     Access persons must obtain pre-clearance before every personal securities transaction regardless of the security type.
   • C
     Access persons need only disclose transactions in securities that the firm has recommended to clients in the past 12 months.
   • D
     Access persons must report initial securities holdings within 10 days of becoming an access person, make quarterly transaction reports within 30 days of each quarter end, and file annual holdings reports.
     Correct answer
   Explanation

   Rule 204A-1 requires access persons to: (1) submit an initial holdings report within 10 days of becoming an access person, (2) file quarterly transaction reports within 30 days after the end of each calendar quarter, and (3) submit annual holdings reports within 45 days after each year-end. Firms may also require pre-clearance for certain transactions, particularly in securities the firm is actively recommending.

3. A seller makes a timely written rescission offer that fully complies with all Uniform Securities Act requirements. The buyer rejects the offer. Which statement BEST describes the buyer's legal options?

   • A
     The buyer may still sue within the normal statute of limitations because the offer was merely an offer, not a settlement
   • B
     The buyer may sue but is limited to recovering only attorneys' fees and costs
   • C
     The buyer cannot subsequently bring a civil action for that violation because the valid rescission offer extinguished the seller's civil liability
     Correct answer
   • D
     The buyer may appeal to the Administrator to override the effect of the rejected rescission offer
   Explanation

   Under the Uniform Securities Act, a valid rescission offer that meets all requirements (including the 30-day open period and correct amount) eliminates the seller's civil liability for that violation. If the buyer rejects the offer, the buyer loses the right to bring a civil action for that specific violation.