- Under the Uniform Securities Act, which statement is true regarding an investment adviser representative of a federal covered investment adviser who has a place of business in the state, more than five natural-person clients, and natural-person clients comprising more than 10% of the individual's clients, excluding qualified clients?
Answer: The IAR must register with the state before providing advisory services, and the IAR — not the adviser — must promptly notify the Administrator when the association begins or ends.
Governing authority: Uniform Securities Act § 201 and SEC Rule 203A-3. A state may require an IAR of a federal covered adviser to register if the IAR has a place of business in the state and has more than five natural-person clients, with natural persons comprising more than 10% of the individual's clients (qualified clients excluded from each count). The IAR — not the adviser — must promptly notify the Administrator when the association begins or ends. The statement that the IAR must register with the state before providing services, and that the IAR gives the notice, is correct. The statement that the adviser's notice filing registers the IAR is wrong: the federal covered adviser notice-files, but that filing does not register the IAR. The statement that registration is required only when the IAR has more than five natural-person clients drops the 10% natural-person client test and ignores that qualified clients are excluded from the count. The statement that a state may not require registration of a federal covered adviser's IAR is wrong: the state may require it when the IAR has a place of business in the state and meets the Rule 203A-3 tests.
- Under the Uniform Securities Act, all of the following are obligations of a state-registered investment adviser with respect to its investment adviser representatives EXCEPT:
Answer: Maintaining a place of business in the state for each investment adviser representative who provides advice to the adviser's clients.
Governing authority: Uniform Securities Act §§ 201 and 410. A state-registered adviser must ensure that each individual who gives advice on its behalf is registered, must promptly notify the Administrator when an IAR's association begins or ends, and is responsible for its IARs' advisory conduct as a control person. The statement that the adviser must maintain a place of business in the state for each IAR is not an obligation under the Act: the place-of-business test limits a state's authority over IARs of federal covered advisers, and the Act does not require every IAR of a state-registered adviser to maintain an office in the state. The other three statements are genuine obligations: pre-registration of IARs, prompt notice of association changes, and responsibility for the IARs' conduct.
A state-registered adviser's written supervisory procedures require its designated principal to review all client account statements and trade confirmations within 10 business days after each month-end. The principal takes a medical leave of absence, and the firm designates no one to perform the reviews for two months. During that period, an IAR churns a client's account. The adviser had no actual knowledge of the churning.
Under the Uniform Securities Act, which of the following is correct regarding the adviser's supervision of the IAR? Answer: The adviser's supervision was unreasonable because the firm failed to carry out its own procedures and made no substitute arrangements during the principal's absence.
Uniform Securities Act § 204(a)(2): failure reasonably to supervise its employees is a ground for sanctioning an adviser's registration, and supervision must be reasonable with a view to preventing violations, and procedures that exist only on paper are not enough. The firm did not perform the required monthly reviews and designated no substitute while the principal was on leave, so its supervision was unreasonable. The medical leave does not excuse the firm, and actual knowledge is not an element of a failure-to-supervise finding. Procedures that would have detected the churning had they been followed do not make the supervision reasonable, because they were not followed. The IAR's willfulness is relevant to the IAR's own liability, not to whether the firm's supervision was reasonable.
A federal covered investment adviser maintains a branch office in State X staffed by two IARs, each with a place of business in State X and each registered there, and a branch manager whose only duties are to review the IARs' recommendations and client correspondence. The branch manager has no clients, gives no advice, and does not solicit business.
Which of the following is correct regarding the branch manager's registration in State X? Answer: The branch manager need not register in State X as an IAR because the manager has no clients and does not provide advisory services to clients.
Under Investment Advisers Act § 203A and SEC Rule 203A-3, a state may require registration of an IAR of a federal covered adviser only if the individual has a place of business in the state and meets the rule's definition: a supervised person who has more than five natural-person clients and for whom natural persons are more than 10% of clients, excluding qualified clients. A person who does not regularly solicit, meet, or communicate with clients is not an IAR. Because the branch manager has no clients and gives no advice, State X may not require him to register. The Uniform Securities Act's broader definition would treat a supervisor of IARs as an IAR, but that does not expand state authority to register IARs of a federal covered adviser; Rule 203A-3 supplies the governing client test. A place of business alone is insufficient. The statement that the manager's limited review duties mean he is not supervising is incorrect: reviewing IARs' recommendations and client correspondence is a supervisory function, and the decisive reason he is not registrable is that he has no clients under Rule 203A-3.
A state-registered investment adviser with 20 IARs contracts with an outside compliance consulting firm to perform all reviews of the IARs' client accounts, trade activity, and outside business activities. The adviser's own employees perform no supervisory reviews. The consulting firm's reviews are negligent, and an IAR's fraudulent activity continues undetected for more than a year. The adviser had no actual knowledge of the fraud.
Under the Uniform Securities Act, which of the following is correct regarding the adviser's responsibility? Answer: The adviser is liable because the duty to supervise its IARs is the adviser's own obligation and cannot be delegated to an outside firm.
Uniform Securities Act § 204(a)(2) (failure reasonably to supervise) and § 410(c) (control-person liability). The duty to supervise its IARs is the adviser's own, and an adviser that performs no reviews of its own and relies on a contractor whose reviews are negligent has not supervised reasonably; as a control person it cannot show that it could not reasonably have known of the fraud. An adviser may use outside compliance assistance, but it remains responsible for the adequacy of the supervision; here, the adviser's employees performed no reviews, and the consultant's negligence is the adviser's responsibility. The adviser may have contractual remedies against the consultant, but that does not defeat liability to clients or the Administrator. The consultant's knowledge is not the test, and an independent-contractor arrangement does not transfer the adviser's regulatory duty.
- Under the Uniform Securities Act, which individual associated with a federal covered investment adviser may a state require to register as an investment adviser representative?
Answer: An individual with a place of business in the state who supervises three IARs, regularly meets with clients, and has 7 non-qualified natural-person clients, and natural persons (not counting qualified clients) make up more than 10% of the individual's own clients.
Governing authority: SEC Rule 203A-3 and Uniform Securities Act § 401. A state may require registration of an individual associated with a federal covered adviser only if the individual has a place of business in the state and meets the Rule 203A-3 IAR definition: more than 5 natural-person clients (not counting qualified clients), natural persons (not counting qualified clients) making up more than 10% of the individual's own clients, and no exclusion, such as providing only impersonal advice or not regularly soliciting, meeting with, or communicating with clients. The individual who supervises three IARs, regularly meets with clients, and has 7 non-qualified natural-person clients that are more than 10% of the individual's clients has a place of business and satisfies both client thresholds; supervising IARs is itself an IAR activity under the Act. The individual who provides only impersonal investment advice and never meets with clients is not an IAR because Rule 203A-3 excludes persons who provide only impersonal advice. The individual who manages exactly 5 non-qualified natural-person clients fails the requirement of more than 5 clients. The individual with no place of business in the state cannot be required to register, even if the client-count tests are otherwise met.
- Under the Uniform Securities Act, which statement is true regarding an investment adviser representative whose association with a state-registered investment adviser has terminated?
Answer: The IAR's registration is not effective while the IAR is not associated with a registered investment adviser, and the IAR may not provide advisory services until re-associated with a registered adviser.
Governing authority: Uniform Securities Act § 201. An IAR's registration is not effective during any period when the IAR is not associated with a registered investment adviser, so a terminated IAR may not provide advisory services until re-associated with a registered investment adviser. The statement that the registration continues to the end of the calendar year confuses the December 31 expiration rule with the association requirement. The statement that the registration is not effective while unassociated but still permits a 30-day service period invents a grace period the Act does not provide. The statement that the registration remains effective but the IAR may not accept new clients is wrong because the registration is not effective at all while the IAR is unassociated.
An IAR of a state-registered adviser privately sells interests in a real estate partnership to several of the adviser's clients, telling the clients the adviser approved the investment. The adviser's written procedures require each IAR to file an annual outside-business-activity disclosure and prohibit undisclosed private securities transactions. The IAR's disclosures stated "none," and nothing else alerted the adviser to the sales. The partnership fails, and the clients sue the adviser, claiming it failed to supervise the IAR.
Under the Uniform Securities Act, which of the following is correct regarding the adviser's liability? Answer: The adviser is not liable because its supervisory procedures were reasonable, were enforced, and gave it no reason to know of the sales.
Uniform Securities Act § 204(a)(2) (failure reasonably to supervise) and § 410(c) (control-person liability). An adviser that fails reasonably to supervise its IARs may be sanctioned, and as a control person it is jointly liable to clients unless it did not know and, in the exercise of reasonable care, could not have known of the conduct. The adviser required annual outside-business-activity disclosures, prohibited undisclosed private securities transactions, collected the disclosures, and had no red flags, so its supervision was reasonable and the control-person defense applies. The IAR's own statement that the adviser approved the sales does not create apparent authority, because the adviser did not hold the IAR out as authorized to sell the partnership. The reasonableness standard does not require auditing every disclosure, and private securities transactions are within the adviser's supervisory responsibility — but the adviser satisfied that responsibility here.
- Under the Uniform Securities Act, which statement is true regarding a state-registered investment adviser's liability for a violation of the Act committed by one of its investment adviser representatives?
Answer: The adviser and the IAR are jointly liable, unless the adviser proves it did not know and could not reasonably have known of the conduct.
Governing authority: Uniform Securities Act § 410 (civil liability of control persons and aiders). A state-registered adviser that controls an IAR is jointly liable for the IAR's violation unless the adviser did not know and could not reasonably have known of the conduct. Liability is not conditioned on written authorization or later ratification; a control person may be liable without either. The statement that only the IAR is liable ignores the adviser's separate control-person liability. The statement limiting liability to registered or exempt securities is wrong because the antifraud provisions apply to every offer, sale, or purchase regardless of registration status.
A state-registered adviser hires an IAR who, two years earlier, was fined by another state's Administrator for unsuitable recommendations. The adviser's written procedures require complaints against IARs to be investigated within 30 days. During the IAR's first six months, two clients file written complaints alleging unauthorized trading. The adviser's principal logs the complaints but does not investigate them or review the IAR's accounts until the next scheduled annual review, eight months later.
Under the Uniform Securities Act, which of the following is correct regarding the adviser's supervision? Answer: The adviser's supervision was unreasonable because the IAR's disciplinary history and the complaints were warning signs requiring prompt investigation.
Uniform Securities Act § 204(a)(2) makes an adviser's failure reasonably to supervise its employees a ground for sanction, and the reasonableness of supervision is judged by the circumstances, including what the adviser knows about the IAR. A prior disciplinary sanction for unsuitable recommendations and two written complaints alleging unauthorized trading are red flags that require prompt investigation, and the adviser's own procedures required investigation within 30 days. Logging the complaints and waiting for the next annual review was not reasonable supervision. Actual knowledge is not required — ignoring the red flags is the failure — and the procedures were not followed in all material respects because the required investigation never occurred.
- Under the Uniform Securities Act, a partner of a state-registered investment adviser who, on the adviser's behalf, supervises the adviser's investment adviser representatives and manages client accounts:
Answer: Is automatically registered as an investment adviser representative because the adviser's registration covers its partners who act as investment adviser representatives.
Governing authority: Uniform Securities Act § 202(a). Registration of a state investment adviser automatically registers its partners, officers, and directors who act as IARs. The partner who supervises IARs and manages client accounts acts as an IAR and is therefore covered by the adviser's registration without a separate application. The statement requiring a separate application ignores the automatic registration. The statement that partners are not IARs unless they receive special compensation confuses the broker-dealer exclusion from the definition of investment adviser with the IAR definition. The statement imposing a five-client threshold is wrong because no five-client threshold applies here: the § 201(c) de minimis exemption, which covers both investment advisers and IARs, requires having no place of business in the state, and it does not exempt a partner of a registered adviser who acts as an IAR; that partner is automatically registered.
- Under the Uniform Securities Act, which statement is true regarding a non-partner employee of a state-registered investment adviser who is assigned to give investment advice to the adviser's clients?
Answer: The employee must be registered as an investment adviser representative before giving the advice, and the adviser's registration does not register the employee.
Governing authority: Uniform Securities Act § 201. It is unlawful for an investment adviser to employ an individual to give advice on its behalf unless the individual is registered as an IAR, and the automatic registration of partners, officers, and directors does not extend to a non-partner employee. The statement that the employee must register before giving advice and that the adviser's registration does not register the employee is correct. The statement that the adviser's registration registers all employees is wrong: only partners, officers, and directors who act as IARs are automatically covered. The statement permitting a 30-day delay before filing is wrong: the individual must be registered before transacting business and there is no grace period. The statement that a registered IAR's review and approval substitutes for registration is wrong: supervision by a registered IAR does not make an unregistered individual's advisory activity lawful.
A state-registered investment adviser with 12 IARs promotes its head of operations to supervise the IARs' recommendations, client correspondence, and account activity. The head of operations has a place of business in the state, has never given investment advice, has no client contact, and is not a partner, officer, or director of the adviser.
Under the Uniform Securities Act, which of the following is correct regarding the head of operations? Answer: The head of operations must register as an IAR because supervising persons who give investment advice is an IAR function.
Under Uniform Securities Act § 401, an IAR includes an individual associated with a state-registered adviser who supervises persons who give advice, manage accounts, or solicit clients; a supervisor need not have client contact. Because the head of operations has a place of business in the state and is not a partner, officer, or director, the automatic-registration rule of § 202(a) does not apply, so an IAR application must be filed. The claim that the position involves no advice misreads the IAR definition, which reaches supervisors. The claim that the adviser's registration automatically covers employees misstates the scope of the automatic-registration rule. The five-client threshold is part of the de minimis exemption for advisers and IARs with no place of business in the state; it is not a condition for a supervisor's IAR registration.
A federal covered investment adviser has its principal office in State A and a branch office in State B, where two IARs have their places of business and are registered. The State B Administrator finds that one IAR has willfully made unsuitable recommendations to State B clients and that the adviser's supervision of that IAR has been lax. The Administrator has no evidence that the adviser itself committed fraud.
Under the Uniform Securities Act, which action may the Administrator of State B take? Answer: Suspend the IAR's State B registration for the unsuitable recommendations made to State B clients.
Under Uniform Securities Act § 204, the State B Administrator may suspend or revoke the IAR's State B registration because the IAR willfully violated the Act and the action is in the public interest. The adviser is federal covered and does not register in the state; it files a notice, and the SEC has authority under Investment Advisers Act § 203 to sanction an adviser that fails to supervise its supervised persons. The Administrator's authority over the federal covered adviser is limited to notice filing, fees, and antifraud matters, and the facts show no fraud by the adviser itself. A federal covered adviser is not required to register with the state because of its office or its registered IARs, and the Administrator may not issue orders directing how the adviser supervises its IARs.
A client of a state-registered adviser sues the adviser under the Uniform Securities Act after an IAR made a fraudulent recommendation that caused a loss. The client claims the adviser is liable as a control person of the IAR. The adviser's written supervisory procedures were reasonable and were followed, and the adviser did not know and could not reasonably have known of the IAR's fraud.
Under the Uniform Securities Act, which statement best describes the adviser's civil liability? Answer: The adviser is liable unless it proves it did not know and could not reasonably have known of the underlying violation.
Under Uniform Securities Act § 410, a person who controls an IAR is jointly liable with the IAR unless the control person proves it did not know, and in the exercise of reasonable care could not have known, of the facts underlying the violation. The burden is on the adviser, not the client. Because the facts show reasonable procedures were followed and the adviser had no knowledge, the adviser can satisfy the defense. The Act does not impose strict liability on control persons, and an adviser can be liable for an IAR's acts when the defense cannot be proved; the IAR's having made the recommendation alone does not eliminate control-person liability.
