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22 January, 21:21

An investment adviser that manages a portfolio for a client has not taken custody. The customer informs the adviser that he will be traveling overseas for 1 year on a round-the-world cruise and gives the adviser authority to write checks on his personal bank account to pay the quarterly custodian bank fees. Under the provisions of the Investment Advisers Act of 1940, the adviser:

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  1. 22 January, 23:01
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    Answer: C. has taken custody of customer funds and must comply with the additional requirements of the custody rule

    Explanation:

    The options for the question are:

    A. can follow the customer's instructions without additional action taken, since this is a service to the customer

    B. has not taken custody of client funds, unless the custodian bank and the investment adviser are under common ownership

    C. has taken custody of customer funds and must comply with the additional requirements of the custody rule

    D. has a conflict of interest that must be disclosed in writing to the customer

    The Investment Advisers Act is a law which was enacted in order to regulate the investment advisers. It requires that firms that receive compensation when they advise others about their securities investments will have to register with Securities Exchange Commission and also abide with the regulations which are in place to protect the investors.

    In the Act, it was said that an investment adviser has had a custody of the client assets, and should therefore comply and abide with the rule since the adviser is in possession of the client funds. Therefore, option C is the correct answer.
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