Certified Government Financial Manager (CGFM)

Correct: The NYSE is fundamentally an auction market. On the NYSE, each listed security is assigned a single Designated Market Maker (DMM), who is responsible for maintaining a fair and orderly market and acting as a buyer or seller of last resort. Nasdaq, on the other hand, is a negotiated (or dealer) market where multiple market makers compete with each other by posting bid and ask quotes to attract order flow for the same security.

Incorrect: The other options mischaracterize the fundamental nature of these exchanges. One option incorrectly suggests that the NYSE uses multiple market makers while Nasdaq uses a single specialist, which is the reverse of the actual structure. Another option incorrectly claims Nasdaq has a physical trading floor and the NYSE is a decentralized ECN; in reality, the NYSE has a physical floor while Nasdaq is entirely electronic. The final incorrect option misidentifies the NYSE as a dealer-to-dealer network and Nasdaq as a floor-based auction, which contradicts the regulatory definitions of these markets.

Takeaway: The NYSE is an auction market with a single Designated Market Maker per security, while Nasdaq is a negotiated market featuring multiple competing market makers.

Correct: Under NASAA guidelines and general best practices for state-registered advisers, firms must create and maintain a written Business Continuity Plan. While the internal plan is a detailed technical document, the adviser is required to disclose a summary of the plan to clients at the inception of the relationship (account opening). Furthermore, the summary should be available on the firm’s website and provided to any client who requests it. This ensures clients understand how the firm will respond to significant business disruptions without compromising sensitive internal security details.

Incorrect: Filing the full, unredacted plan with the Administrator for every change is not a standard requirement, as the Administrator typically reviews the plan during routine examinations rather than through constant filings. Delivering the full technical document to all clients via certified mail is unnecessary and potentially a security risk; a summary is the accepted standard. The requirement to have and disclose a BCP applies to all clients to ensure equitable protection, not just institutional or high-net-worth individuals.

Takeaway: Investment advisers must provide a summary of their business continuity plan to clients at account opening and upon request to ensure clients are informed of disruption procedures.

Correct: Under NASAA guidelines and general fiduciary principles, investment advisers should provide clients with a summary of their business continuity plan. This disclosure ensures that clients know how to reach the firm and access their funds or securities during a disaster. Providing this at account opening and maintaining it on a website are effective controls for ensuring clients are informed without compromising the granular, sensitive details of the internal plan.

Incorrect: Filing the full internal manual with the Administrator is not a standard requirement and does not satisfy the need for client-facing disclosure. Verbal agreements are insufficient under the Model Rule, which requires business continuity and succession plans to be in writing. Restricting the plan to only senior management is a failure of internal control, as relevant staff must be trained on the plan to execute it, and clients must be informed of the firm’s general response strategy.

Takeaway: Investment advisers must maintain written business continuity plans and provide clients with a summary of how the firm will respond to significant business disruptions.

Correct: Under NASAA guidance and general regulatory expectations, investment advisers should provide a summary of their business continuity and succession plan to clients at the start of the advisory relationship. This ensures clients know how to contact the firm or access their funds during an emergency. Posting the summary on the firm’s website is a recommended way to ensure the information remains accessible during a disruption.

Incorrect: Including the full internal plan in the Form ADV Part 2A is incorrect because the internal plan often contains sensitive security and operational details that should not be public. Restricting the plan to internal staff only fails to meet the disclosure obligations to clients who need to know how to act during a crisis. Waiting until after a disruption occurs to disclose the plan is reactive and fails to provide the transparency required for clients to make informed decisions about the safety of their investments.

Takeaway: Investment advisers must proactively provide clients with a summary of their business continuity plan at account opening to ensure clients understand how to access their accounts during a significant business disruption.

Correct: For an Initial Public Offering (IPO) of a security that will be listed on a national exchange such as Nasdaq or the NYSE, the Securities Act of 1933 (and by extension, state regulations following these standards) requires that all dealers must deliver a prospectus in the secondary market for 25 days following the effective date.

Incorrect: The 90-day delivery requirement applies to IPOs of securities that are not listed on an exchange and are not ‘reporting’ companies (e.g., OTCBB or Pink Sheets). The 40-day requirement applies to follow-on offerings of securities that are not listed on an exchange. The claim that no delivery is required for secondary market transactions is incorrect, as the ‘quiet period’ and prospectus delivery rules are designed to protect investors during the initial period of price discovery following an IPO.

Takeaway: For IPOs of exchange-listed securities, the mandatory prospectus delivery period for secondary market trades is 25 days from the effective date.

Correct: NASAA Model Rules and regulatory guidance emphasize that Investment Advisers (IAs) must not only have a written Business Continuity and Succession Plan but also ensure that clients are informed of how the firm will respond to significant disruptions. Providing a summary of the BCP at the time of contract inception and making it available on the firm’s website are standard practices to meet the disclosure obligations regarding the protection of client interests during emergencies.

Incorrect: Providing the plan only to regulators is insufficient because clients have a right to know how their accounts will be handled during a disaster. Delivering a complete internal succession plan is not required and often involves sensitive internal personnel data that is not appropriate for general client distribution. Maintaining a secondary data center is a critical operational control, but it does not remove the legal requirement to disclose the existence and nature of the BCP to the clients.

Takeaway: Investment Advisers are required to disclose a summary of their business continuity and succession plans to clients at the start of the advisory relationship to ensure transparency regarding operational risks.

Correct: SIPC provides protection for ‘securities’ and cash held at a failed broker-dealer. Under the Securities Investor Protection Act of 1970, the definition of securities includes stocks, bonds, and mutual funds (including money market mutual funds). However, the Act specifically excludes commodities and futures contracts from coverage. In this scenario, the $400,000 in securities (equities and mutual fund) would be eligible for coverage under the $500,000 per-customer limit, but the $150,000 gold futures contract would receive no protection from SIPC.

Incorrect: The suggestion that all assets are covered is incorrect because SIPC specifically excludes commodities and futures contracts, regardless of whether they are held in a brokerage account. The idea that futures are covered under the cash sub-limit is also incorrect; cash coverage (up to $250,000) applies to uninvested cash awaiting reinvestment, not to the value of excluded commodity contracts. Finally, SIPC does not provide unlimited replacement of assets; it is subject to statutory limits of $500,000 per separate customer and does not act as a general insurer for data integrity or market losses.

Takeaway: SIPC coverage is limited to $500,000 per separate customer for securities and cash, but it specifically excludes commodities and futures contracts from its protection.

Correct: Under the Uniform Securities Act, the Administrator has the authority to issue administrative orders, such as a Cease and Desist order. However, the Administrator does not have the power to issue an injunction. To obtain an injunction (whether temporary or permanent), the Administrator must apply to a court of competent jurisdiction. The court, not the Administrator, determines if the evidence warrants such a legal remedy.

Incorrect: The suggestion that the Administrator can issue a summary injunction is incorrect because injunctions are judicial remedies, whereas the Administrator’s summary powers are limited to administrative orders like Cease and Desist or registrations. The claim that a prior conviction is required is false; an injunction can be sought if a person is ‘about to’ engage in a violation, regardless of their criminal history. Finally, failing to respond to a subpoena may lead to a court order compelling compliance (contempt of court), but it does not grant the Administrator the power to issue a permanent injunction directly.

Takeaway: While an Administrator can issue administrative Cease and Desist orders, they must petition a court of competent jurisdiction to obtain an injunction.

Correct: Under the NASAA Model Rule on Recordkeeping Requirements for Investment Advisers (which aligns with SEC Rule 204-2), certain ‘permanent’ records such as articles of incorporation, minute books, and partnership agreements must be preserved in the investment adviser’s office for the life of the enterprise and then kept for an additional three years after the firm has been terminated or dissolved.

Incorrect: The requirement to keep records for five years from the end of the fiscal year applies to standard business records like journals, ledgers, and bank statements, but not to organizational documents. The six-year retention period is a requirement for specific broker-dealer records under SEC Rule 17a-4, such as blotters and ledgers, rather than investment adviser organizational documents. Retention until the next regulatory examination is not a standard defined by NASAA or the SEC for record preservation.

Takeaway: While most investment adviser records require a five-year retention period, organizational documents must be kept for the life of the firm plus three years after dissolution.

Correct: A secondary offering is a transaction where one or more major stockholders (such as a founder or executive) sell their holdings to the public. The defining characteristic of a secondary offering is that the proceeds of the sale go to the selling shareholders, not to the issuing corporation itself. This distinguishes it from a primary offering (including IPOs and follow-on offerings), where the issuer receives the capital to fund operations or growth.

Incorrect: A primary follow-on offering involves the issuer creating and selling new shares to raise capital for the company, which is not the case here since the proceeds went to an executive. While the shares were previously outstanding, a large-scale distribution by a control person (an executive) typically requires registration or a specific exemption and is not automatically exempt just because of a prior registration. A private placement involves a sale to a limited number of sophisticated investors and typically lacks a broad public distribution or a standard prospectus, which does not fit the scenario of a client purchasing through a general distribution.

Takeaway: The fundamental distinction of a secondary offering is that the proceeds of the sale benefit the selling shareholders rather than the issuing company.