Practice Exam #2 Answers and Explanations

1. B – Provides investment advice for a fee. Someone who assists customers with transactions or receives a commission for the purchase or sale of a security would be considered an agent. Someone who provides investment advice for a specified fee is an investment adviser.

2. C – Publishing a newsletter that includes recommendations based on an individual’s investment situation. Since this newsletter specifically advises clients based on their investment situations, it would likely constitute investment advice. The newsletter discussing the oil and gas industries does not appear to specifically recommend certain stocks. Money-saving tips and incidental investment advice do not constitute someone providing investment advice as part of his or her business.

3. C – Out-of-state advisers with fewer than 25 clients in the state. Out-of-state advisers may have no more than five non-institutional clients in a state to avoid registration, unless they meet another exemption.

4. D – Must be re-registered every year. Investment adviser representatives must be re-registered each year. They are not required to meet net capital requirements, may receive commissions if also registered as an agent, and must pass the appropriate licensing exams.

5. D – II, III, and IV. An adviser with custody over client assets must show a minimum net worth of $35,000, while an adviser with discretionary authority but without custody must show a net worth of $10,000. Investment advisers who accept prepayments of more than $500 per client and six or more months in advance must show a positive net worth.

6. B – They do not have an office in the state and do not provide investment advice for compensation. These employees are not giving investment advice for compensation in that state, so they would be exempt from registration. The de minimis number of clients for registration is 5, not 10. Investment-based newsletters may still requ