Chapter 7 Practice Question Answers
- 1. Answer: C. The Securities Exchange Act of 1934 was designed to regulate individuals selling securities on behalf of broker-dealers, the broker-dealers themselves, and the exchanges the trades take place on. Issuers of securities are primarily regulated under the Securities Act of 1933. Investment companies are primarily regulated under the Investment Company Act of 1940. Investment advisers are primarily regulated under the Investment Advisers Act of 1940.
- 2. Answer: A. Broker-dealers are regulated under the Securities Exchange Act of 1934 and are exempt under the Investment Advisers Act as long as they do not charge a fee for giving investment advice that is incidental to the provision of their commission- or markup-based services. Publishers, lawyers, teachers, and engineers are all exempt if their advice is incidental to their primary job description.
- 3. Answer: D. All choices are considered exceptions to who must register at the state level as an investment adviser. Investment adviser representatives register as such, not as an investment adviser. Investment advisers with more than $110 million are required to register on a federal level. The publisher of a general interest magazine is not considered an investment adviser. Banks and savings institutions are not required to register as investment advisers.
- 4. Answer: C. If an adviser’s assets are under $100 million, they are mostly likely required to register on a state level. The de minimis rule allows advisers with no more than five clients in a state to avoid registration. Advisers working with only institutional clients are not required to register as investment advisers.
- 5. Answer: C. Advisers who have discretion (the right to execute transactions without a client’s specific consent) are required to demonstrate net capital (assets minus liabilities) of $10,000. This requirement is raised to $35,000 if the investment adviser actually has