Series 66 Chapter 6 (pls don't let the 6's be some satanic curse I need to pass this)

According to State and Federal Regulations, an investment adviser who has custody of a client's funds or securities must:
[A]send the client an itemized statement of the funds and securities at least once every 3 months.****
[B]combine the funds of all cl

EXPLANATION
An IA with custody of a client's funds or securities must notify the Administrator of custody; notify the client of where and how funds and securities will be maintained; segregate the securities of all clients; deposit all funds in one or mor

According to the Securities Exchange Act of 1934, all of the following would be considered "securities information processors" except:
[A]NASDAQ
[B]Consolidated Quotations Service
[C]Bloomberg Service
[D]MSRB***

EXPLANATION
The MSRB (Municipal Securities Rulemaking Board) is a regulatory agency, does not disseminate securities quotations, and would not be considered a securities information processor. However, choices 'A', 'B', and 'C' do disseminate quotes on a

An investment adviser (IA) and an investment adviser representative (IAR) must use the utmost good faith in conducting business with clients and must fully disclose all material facts. Which of the following best defines this statement?
[A]This defines an

EXPLANATION
IAs and IARs act in a fiduciary capacity in their dealings with clients pursuant to the Investment Advisers Act of 1940. This means that they must act solely in the best interests of the client and must make full disclosure of all material fac

An investment adviser (IA) would like to charge certain clients a fee to be based on a percentage of the increase in the value of the client's portfolio for the year. Which of the following clients can legally be charged such fee?
[A]A client who has a ne

EXPLANATION
As a general rule, an IA may not be compensated on the basis of capital gains ("performance" fees). Two exceptions to this rule are: 1) Clients with more than $1,000,000 (previously $750,000) in assets under management 2) Clients with a minimu

Under the Securities Exchange Act of 1934, institutional investment managers who have investment discretion over accounts valued at over $100 million must file reports
[A]Monthly
[B]Quarterly***
[C]Semi-Annually
[D]Annually

EXPLANATION
Quarterly reports must be filed by institutional investment managers who exercise investment discretion over more than $100 million worth of securities.

All of the following can be specifically excluded from the definition of an investment adviser under the Investment Advisers Act of 1940 EXCEPT:
[A]lawyers
[B]accountants
[C]financial planners****
[D]engineers

EXPLANATION
Financial Planners would be required to be registered. All other choices could qualify for an exclusion if the advice they give is incidental to the practice of their profession and they do not receive compensation.

When a broker/dealer accepts an order for a trade from a customer, the order ticket must contain which of the following items?
The customer's account number
The time that the order was entered or cancelled
The terms and conditions of the handling of the o

EXPLANATION
The order tickets must include:
The customer's account number
The time at which the order was entered or cancelled
The terms and conditions of the order

A solicitor is paid a cash fee for attempting to sell advisory services for a Federal Covered Investment Advisor. Since the solicitor is not directly affiliated with the IA the solicitor is required to provide a separate written disclosure document that m

EXPLANATION
The solicitor's written disclosure must disclose the name of solicitor and advisor, the services that will be provided, and the nature of the relationship between the solicitor and advisor. It also must include the compensation arrangements, i

Under the Investment Advisers Act of 1940, who would not be defined to be "a person associated with" an investment advisory firm?
[A]a partner of the firm
[B]an account executive of the firm
[C]the head word processor for the firm****
[D]the Vice Presiden

EXPLANATION
Clerical workers, such as word processors, are excluded from the definition.

A research analyst has a personal position in ABC stock. The analyst is about to recommend a downgrade in ABC stock from "buy" to "hold." The analyst wants to sell his/her personal position before the announcement of the downgrade. Such a sale would:
[A]B

EXPLANATION
SEC Release 1A-1092 under the Investment Advisers Act of 1940 requires all investment advisers (including research analysts) to disclose any personal interest the adviser has with regard to recommendations made to clients. As well, analysts ar

All of the following sources of compensation must be disclosed by an IA to a client except:
[A]As part of the promotion of a new issue, the issuer pays the IA with airline tickets to Hawaii
[B]Market quotation systems paid for by a fund sponsor
[C]Commiss

EXPLANATION
Any compensation from sources other than client advisory fees that may be a potential conflict of interest must be disclosed. Lease payments are not a form of compensation.

Commercial paper is an exempt security under the Securities Act of 1933 if its maturity does not exceed:
[A]30 days
[B]90 days
[C]180 days
[D]270 days****

EXPLANATION
Commercial paper generally has a maximum maturity of 9 months which is 270 days.

All of the following would be considered "private funds" under Federal Securities Regulations, EXCEPT:
[A]Hedge Funds
[B]Private Equity Funds
[C]Regulated Mutual Funds***
[D]Venture Capital Funds

EXPLANATION
Regulated Mutual Funds are a form of open-end investment company that is NOT considered a private fund. Private funds are excluded from the definition of investment company under the Investment Company Act of 1940 and therefore are not require

Which of the following is accurate with regards to disclosures and availability of documentation under the Investment Advisers Act of 1940?
[A]All advertising brochures used by registered Investment Advisers must be filed with the SEC.
[B]The financial st

EXPLANATION
All financial statements and records of a registered investment adviser must be available for inspection by the SEC at any time. All other choices are untrue statements.

A mutual fund which includes common stock of domestic and foreign issuers is defined as which of the following?
[A]A World-wide Mutual Fund
[B]A Sector Mutual Fund
[C]A Global Mutual Fund****
[D]A Specialized Mutual Fund

EXPLANATION
By definition a mutual fund which includes common stock of domestic and foreign issues is defined as a Global Mutual Fund.

Which of the following items ARE NOT REQUIRED disclosures by an "associated person" according to SEC Rule 17a-3?
I. The associated person's religious affiliations and/or beliefs
II. Records related to arrest or indictment for any felony or misdemeanor rel

EXPLANATION
SEC Rules 17a-3 requires disclosure of a number of items by an associate person who is applying or filling out a questionnaire. Information requires is typically factual in nature, such as name, date of birth, address, affiliations, etc. As we

The required records of an Investment Adviser may be stored in electronic format if:
[A]the IA makes proper disclosure to clients as to how the records are stored
[B]the IA organizes the records so as immediate access to them is available***
[C]the IA mak

EXPLANATION
Records may be kept in electronic format as long as there is a means to access (read) them; there's a way to make copies of the records, as needed; and a duplicate copy is stored in a separate location.

According to the Investment Advisers Act of 1940, which of the following statements are true regarding the acceptance of prepaid advisory fees by an investment advisor?
I. The fees must be disclosed in writing in the advisory contract.
II. The fees cannot

EXPLANATION
Prepaid advisory fees in excess of $1200, six months in advanced require the advisor to disclose their Balance Sheet. All fees must be disclosed in writing in the advisory contract. Fees could be prepaid for more than six months if disclosure

All of the following events would result in an advisory contract being considered to have been transferred except:
[A]A majority partner in the advisory firm dies
[B]A minority partner in an advisory firm sells his interest to another individual***
[C]A c

EXPLANATION
If a minority partner in an advisory firm sells his interest to another individual, it would not be considered a transfer of an advisory contract. If the contract is pledged as collateral for a loan, that would be considered "hypothecation" an

Under the Investment Advisers Act of 1940, which of the following provisions would be permitted in an investment contract?
[A]Performance fees for clients with $2.1 million net worth or at least $1 million under management***
[B]Provisions which allow the

EXPLANATION
Choice A is the only choice offered which would be an allowable provision in an investment advisory contract.

All of the following are true with regard to custody of client funds under the Investment Advisors Act of 1940 EXCEPT?
[A]The IA must maintain records for each account and the amount of each client's beneficial interest.
[B]The IA must notify each client

EXPLANATION
All choices except "C" are true with regard to custody of client funds. "C" is incorrect because an IA is NOT required to also be registered as a broker-dealer, and either types of firm may or may not be deemed to have custody.

According to the Securities Act of 1933, a pooled investment fund will be classified as a federal covered security if it is
[A]offered in all states in the United States.
[B]managed by a federally registered investment adviser.[C]registered under the Inve

EXPLANATION
A mutual fund or "pooled investment fund" would be considered to be federally covered if it is registered as an investment company under the Investment Company Act of 1940. The Investment Company Act of 1940 is a Federal regulation recognized

According to the Investment Advisers Act of 1940, which of the following are true regarding persons who engage in the business of giving investment advice to clients?
I. Federal registration is not required if the person is registered in the state where t

EXPLANATION
According to the Investment Advisers Act of 1940, an individual who falls under the definition of an investment adviser must be registered either with the state or with the SEC depending upon the amount of money that they manage. There are som

Firms that maintain an inventory of OTC securities and stand ready and willing to buy and sell for or from their own accounts on a regular and continuous basis are known as:
[A]Exchanges
[B]ECN's
[C]Market-makers
[D]Floor brokers

EXPLANATION
Firms that maintain an inventory of OTC securities and stand ready and willing to buy and sell for or from their own accounts on a regular and continuous basis are known as Market-makers.

A Federally Registered Investment Advisor will be paid a fee based on performance. This service
[A]can only be offered to existing clients.
[B]can only be offered to new clients.
[C]can only be offered to Qualified Clients.***
[D]cannot be offered to any

EXPLANATION
In order for an Investment Advisor to charge a performance based fee to a client, the client would have to be a Qualified Client. This would be a natural person or company that has at least $1,000,000 (previously $750,000) under management or

Generally, the Investment Company Act of 1940 requires that:
[A]not more than 40% of a mutual fund's Board of Directors be from inside the company.
[B]not more than 60% of a mutual fund's Board of Directors be considered interested persons under the Act.*

EXPLANATION
The Investment Company Act of 1940 requires that at least 40% of the Board of Directors must be non-affiliated persons. That means that no more than 60% may be affiliates of the company.

According to the Investment Adviser's Act of 1940, the "Brochure Rule" states:
[A]that it is required that Part I of Form ADV must be given to all clients and potential clients of a registered IA
[B]that it is required that a registered IA provide written

EXPLANATION
Part II of Form ADV may be provided to satisfy the "brochure rule" requirement.

Which of the following acts deals most closely with IPOs and disclosure?
[A]The Securities Act of 1933**
[B]The Securities Exchange Act of 1934
[C]The Investment Advisor's Act fo 1940
[D]The investment Company Act of 1940

EXPLANATION
The Securities Act of 1933 deals mostly with New Issues of securities (IPOs) along with Full and Fair Disclosure. The 1933 Act is sometimes referred to as the "Paper Act" and requires registration and other paperwork. The 1933 Act deals with t

According to the Investment Company Act of 1940, which two of the following are prohibited unless the investment company files an application for an exemption with the SEC?
I. a change in the investment policy of a diversified open-end fund
II. a merger b

EXPLANATION
Choice II and III are prohibited by the Investment Company Act of 1940 unless an exemption from the SEC is obtained. Choice I is allowed if a majority of voting shareholders approve. Choice IV is not directly addressed in the Act.

An investment adviser handles a securities portfolio for a client. While traveling, the client gives the investment adviser authority to write checks on his personal checking account. It is assumed that the adviser will use authority only to pay quarterly

EXPLANATION
If a client is going to be out of town and gives the Investment Adviser authorization to write checks out of the client's personal checking account only to pay quarterly banking fees, it would be considered custody of client's funds. Under thi

Any person whose principal business is providing financial services other than investment advice, would not be regarded as "being in business" of giving investment advice if, as part of the services, the person does which of the following:
I. discusses in

EXPLANATION
Choices I, II and III would NOT be considered "in the business" since the information provided was either "general" or given on "rare and isolated instances." On the other hand, choice IV would give specific advice on market timing.

Willful violations of the Investment Advisers Act of 1940 are punishable by:
I. a fine up to $10,000
II. imprisonment for up to 5 years
III. a bar from associating with any investment adviser
[A]I, II***[B]I, III[C]II, III[D]I, II, III

EXPLANATION
According to the Investment Advisers Act of 1940, willful violations of the act can be punished by a fine of up to $10,000 and imprisonment for up to 5 years or both. The Act does not address the barring of an investment adviser.

If an investment adviser representative (IAR) is also a licensed insurance agent and recommends that a client sells his/her mutual fund shares to buy life insurance, all of the following disclosures should be made EXCEPT:
[A]That the sale of mutual funds

EXPLANATION
Remember that when an IAR sells both securities and non-securities related products, they continue to be regulated by the IA rules even when selling the non-securities products therefore the best answer is "D" since that advice would be connec

According to the Investment Company Act of 1940, which of the following may purchase mutual fund shares at a discount from the public offering price:
I. a plan company
II. a qualified retirement plan
III. an officer of the fund's investment adviser
[A]I,

EXPLANATION
According to the Investment Company Act of 1940, all three choices offered represent situations where the purchaser may qualify for a discount from the public offering price, either due to a quantity discount or prior written agreement. Plan C

Under the Investment Company Act of 1940, which of the following would the shareholders in a mutual fund not have a right to?
[A]receive notice from the investment adviser of the changes in the fund's portfolio as they occur***
[B]elect the fund's Board o

EXPLANATION
Shareholders would NOT be advised of changes in the funds portfolio as they OCCUR. That would impossible for the fund to disseminate on an ongoing basis.

All of the following concerning the anti-fraud provisions of the Investment Advisers Act of 1940 are true except:
[A]Unlike other general anti-fraud provisions in federal securities laws which apply to conduct "in the offer or sale of any security", they

EXPLANATION
Investment Advisers can never effect transactions where their own interests may be put ahead of a client's interest

According to Federal Securities Law, once a registration statement has been filed with the SEC and has become effective it means that:
[A]The security has been approved by the SEC
[B]The security has been disapproved by the SEC
[C]The security can be sold

EXPLANATION
Once a security has been filed with the SEC and has become effective the security may be offered for sale to the public by means of a final prospectus. The SEC does NOT approve or disapprove of securities under any circumstances.

According to SEC Release IA-1092, what information must IAs disclose to clients?
I. IAs must disclose that they take positions consistent with those recommended to clients
II. IAs must disclose that they take positions inconsistent with those recommended

EXPLANATION
The Investment Advisers Act, including SEC Release IA-1092, specifies that IAs must make full disclosure including potential conflicts of interest as well as how they personally invest, whether it is consistent or inconsistent with the positio

According to the Investment Company Act of 1940, a mutual fund is a type of
[A]Face amount certificate company
[B]Unit investment trust
[C]Management company****
[D]Closed-end investment company

EXPLANATION
According to the Investment Company Act of 1940, a mutual fund is operated by an investment company and is professionally managed.

The maximum amount of investors allowed in "private funds" of all types is limited to which of the following numbers by the SEC?
[A]Up to 99
[B]No more than 100
[C]Up to 499***
[D]No more than 500

EXPLANATION
The SEC sets the limits at no more than 100 investors for one category of private fund and no more than 499 for another, making the maximum number of investors regardless of type of private fund 499.

Under the Investment Advisers Act of 1940, if a person gets a cash fee for soliciting advisory business, what requirements must be met?
I. Written disclosure must be made to the clients.
II. The Solicitor must be affiliated with the company.
III. The soli

EXPLANATION
Solicitors are required to make disclosures to clients and are not permitted to be under any regulatory suspensions or limitations while soliciting advisory business. Under the Investment Advisers Act of 1940, solicitors are not required to be

In which of the following scenarios is an investment advisory firm REQUIRED to register with the SEC as a Federal Covered Adviser?
[A]The firm has clients in 13 states.
[B]The firm only provides advice related to federal covered securities.
[C]The firm ma

EXPLANATION
The only item listed that would require the firm to register at the federal level would be managing $150 million in assets. An investment manager with over $100 million in assets under management has the option of registering with the states o

Which of the following would be included in the duties of an IA as a fiduciary?
[A]The manner in which all client accounts are managed must be identical
[B]An IA must settle all disputes with clients using arbitration
[C]An IA must render impartial and di

EXPLANATION
As a fiduciary, an IA has a duty to put the best interests of its clients first. This does not mean treating all clients the same way or settling all disputes by arbitration. Sometimes it may be in the best interest of clients to combine order

An investment adviser representative (IAR) is engaged in options trading. The IAR decides that a fair charge for his services would be 7% per month of the assets under management. In order to do so, the IAR will disclose all fees and charges in both the a

EXPLANATION
Even when disclosure has taken place, IARs cannot act inappropriately or in violation of the Investment Advisers Act of 1940. The fees charged for this IAR's services are excessive and beyond what is acceptable by the Act of 1940. Taking a rea

Which of the following best defines an investment company according to the Investment Company Act of 1940? An investment company is:
[A]a business organized for the mutual support and protection of its shareholder members.
[B]an issuer of securities engag

EXPLANATION
The primary business of an investment company is investing and reinvesting in a portfolio of securities.

An investment adviser is selling a Wrap Account where the assets are held in custody of the advisory firm. The Wrap Fee Brochure must include:
I. information on investment advisory fees
II. information on participation or interest in client transactions
I

EXPLANATION
The Brochure which describes the Wrap Account must include information on the investment advisory fees, participation or interest in client transactions, and the adviser's balance sheet .

Under the Investment Advisers Act of 1940 which of the following persons would NOT have been considered to have received compensation for the giving of advice?
I. An annual management fee based on assets under management
II. A commission charge for the ex

EXPLANATION
Choices II & III would not be considered forms by which compensation could be paid for providing investment advice. Charging a commission for securities transactions executed would be acting as an Agent. Charging a fee for establishment of tru

The sale of securities within a state is considered an:
[A]Exclusive transaction.
[B]Inclusive transaction.
[C]Interstate transaction.
[D]Intrastate transaction.***

EXPLANATION
Securities sold within a single state are referred to as "Intra-State" transactions. The prefix "intra" means within whereas "inter" means between.

The Brochure Rules and Form ADV Part 2A require an IA to disclose to prospective and existing clients all of the following information about the IA, except:
[A]business practices
[B]investment strategies
[C]conflicts of interest
[D]profitability***

EXPLANATION
The IA's business practices, investment strategies, and any conflicts of interest must be disclosed in the brochure that must be delivered to prospective and existing clients. The profitability of the IA need not be disclosed.

According to the Investment Advisers Act of 1940, the anti-fraud provisions:
[A]are substantially different from the anti-fraud provisions relating to advisory activities in regard to the Securities Act of 1933.[B]prohibit any type of deceptive acts and m

EXPLANATION
Under the Investment Advisers Act of 1940 anti-fraud provisions, investment advisers are prohibited from using any type of deceptive practice, whether related to a securities transaction or not.