Chapter 1 Practice Question Answers
1. 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. Publishers, lawyers, teachers, and engineers are all exempt from registration as investment advisers as long as any advice they give is incidental to their primary job description.
2. Answer: D. While the publishers of general newspapers, newsletters, and magazines are not required to register as investment advisers, publishers of newsletters that focus specifically on security analysis and recommendations based on clients’ individual situations must register as investment advisers. The lawyer, professor, and personal finance author do not need to register since any investment advice they give is secondary to their primary role.
3. Answer: A. Investment adviser representatives register as such; they do not register as investment advisers. Investment advisers with more than $110 million in assets are required to register on the federal level, meaning they do not register with any state. On the other hand, financial planners who accept a fee for providing investment advice must register as investment advisers. The same is true for an individual who does not work for an IA but is compensated for giving investment advice on a regular basis.
4. Answer: C. If an adviser’s assets are under $100 million, it is 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 as long as they have no office in the state. Similarly, advisers with no office and that only work with institutional clients in a state do not need to register in that state.
5. Answer: C. NASAA recommends that states require advisers that have discretion (the right to execute transactions without a client’s specific consent) to demonstrate that they have net capit